SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549







FORM
10-Q







For
the quarterly period ended March 31, 2009




of





COMPUCREDIT CORPORATION


a
Georgia Corporation


___________________________




IRS
Employer Identification No. 58-2336689




SEC
File Number 0-25751




Five
Concourse Parkway, Suite 400


Atlanta,
Georgia 30328


(770) 828-2000







CompuCredit
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 is not yet required to file Interactive
Data Files.




CompuCredit
is an accelerated filer and is not a shell company.




As of
April 30, 2009, 48,167,504 shares of Common Stock, no par value, of CompuCredit
were outstanding. (This excludes 3,651,069 loaned shares to be
returned.)


Table of Contents


COMPUCREDIT
CORPORATION


FORM 10-Q


TABLE OF CONTENTS







PagePART I.
      FINANCIAL INFORMATIONItem 1.
              Financial Statements (Unaudited)Condensed Consolidated Balance Sheets
              1Condensed Consolidated Statements of
    Operations
              2Condensed Consolidated Statement
      of  Equity
              3Condensed Consolidated Statements of Comprehensive (Loss)
      Income
              4Condensed Consolidated Statements of Cash
    Flows
              5Notes to Condensed Consolidated Financial
      Statements
              6Item
      2.
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
              26Item
      3.
              Quantitative and Qualitative Disclosures About Market
      Risk
              47Item
      4.
              Controls and Procedures
              49PART II. OTHER INFORMATIONItem
      1.
              Legal Proceedings
              50Item 1A.
              Risk Factors
              51Item
      6.
              Exhibits
              64Signatures














Table of Contents


CompuCredit
Corporation and Subsidiaries


Condensed Consolidated Balance Sheets (Unaudited)


(Dollars
in thousands)




March
      31,
                        2009
                      
                      
                      December
      31,
                        2008(as
      adjusted)AssetsCash
      and cash equivalents (including restricted cash of $18,355 at March 31,
      2009 and $19,913 at December 31, 2008)
                      
                      $
                      96,429
                      
                      
                      $
                      94,428Securitized
      earning assets
                      
                      
                      621,834
                      
                      
                      
                      813,793Non-securitized
      earning assets, net:Loans
      and fees receivable, net (of $22,585 and $24,757 in deferred revenue and
      $53,530 and $55,753 in allowances for uncollectible loans and fees
      receivable at March 31, 2009 and December 31, 2008,
      respectively)
                      
                      
                      319,352
                      
                      
                      
                      340,734Investments
      in previously charged-off receivables
                      
                      
                      55,488
                      
                      
                      
                      47,676Investments
      in securities
                      
                      
                      4,005
                      
                      
                      
                      4,678Deferred
      costs, net
                      
                      
                      5,833
                      
                      
                      
                      6,161Property
      at cost, net of depreciation
                      
                      
                      43,265
                      
                      
                      
                      48,297Investments
      in equity-method investees
                      
                      
                      44,774
                      
                      
                      
                      53,093Intangibles,
      net
                      
                      
                      4,041
                      
                      
                      
                      4,547Goodwill
                      
                      
                      64,355
                      
                      
                      
                      59,129Prepaid
      expenses and other assets
                      
                      
                      45,501
                      
                      
                      
                      52,575Total
      assets
                      
                      $
                      1,304,877
                      
                      
                      $
                      1,525,111LiabilitiesAccounts
      payable and accrued expenses
                      
                      $
                      87,748
                      
                      
                      $
                      120,235Notes
      payable and other borrowings
                      
                      
                      182,988
                      
                      
                      
                      199,939Convertible
      senior notes (Note 9)
                      
                      
                      302,048
                      
                      
                      
                      299,834Deferred
      revenue primarily from forward flow agreement
                      
                      
                      23,377
                      
                      
                      
                      23,492Current
      and deferred income tax liabilities
                      
                      
                      74,378
                      
                      
                      
                      134,754Total
      liabilities
                      
                      
                      670,539
                      
                      
                      
                      778,254Commitments
      and contingencies (Note 11)EquityCommon
      stock, no par value, 150,000,000 shares authorized: 60,478,232 shares
      issued and 51,818,573 shares outstanding at March 31, 2009 (including
      3,651,069 loaned shares to be returned); and 60,379,613 shares issued and
      51,645,697 shares outstanding at December 31, 2008 (including
      3,651,069 loaned shares to be returned)
                      
                      
                      —
                      
                      
                      
                      —Additional
      paid-in capital
                      
                      
                      520,001
                      
                      
                      
                      522,571Treasury
      stock, at cost, 8,659,659 and 8,733,916 shares at March 31, 2009 and
      December 31, 2008,  respectively
                      
                      
                      (220,564
                      )
                      
                      
                      (222,310
                      )Accumulated
      other comprehensive loss
                      
                      
                      (32,772
                      )
                      
                      
                      (31,431
                      )Retained
      earnings
                      
                      
                      340,632
                      
                      
                      
                      453,149Total
      shareholders’ equity (Note 2)
                      
                      
                      607,297
                      
                      
                      
                      721,979Noncontrolling
      interests (Note 2)
                      
                      
                      27,041
                      
                      
                      
                      24,878Total
      equity
                      
                      
                      634,338
                      
                      
                      
                      746,857Total
      liabilities and equity (Note 2)
                      
                      $
                      1,304,877
                      
                      
                      $
                      1,525,111




See
accompanying notes.


1
 Table of Contents




CompuCredit
Corporation and Subsidiaries


Condensed Consolidated Statements of Operations
(Unaudited)


(Dollars
in thousands, except per share data)




For
      the Three Months Ended March 31,2009
                  
                  
                  2008(as adjusted)Interest
      income:Consumer
      loans, including past due fees
                  
                  $
                  19,801
                  
                  
                  $
                  22,916Other
                  
                  
                  329
                  
                  
                  
                  2,083Total
      interest income
                  
                  
                  20,130
                  
                  
                  
                  24,999Interest
      expense
                  
                  
                  (10,192
                  )
                  
                  
                  (13,990
                  )Net
      interest income before fees and related income on non-securitized earning
      assets and provision for loan losses
                  
                  
                  9,938
                  
                  
                  
                  11,009Fees
      and related income on non-securitized earning assets
                  
                  
                  44,465
                  
                  
                  
                  56,264Provision
      for loan losses
                  
                  
                  (12,763
                  )
                  
                  
                  (20,406
                  )Net
      interest income, fees and related income on non-securitized earning
      assets
                  
                  
                  41,640
                  
                  
                  
                  46,867Other
      operating (loss) income:Fees
      and related (loss) income on securitized earning assets
                  
                  
                  (152,026
                  )
                  
                  
                  42,593Servicing
      income
                  
                  
                  39,404
                  
                  
                  
                  48,286Ancillary
      and interchange revenues
                  
                  
                  5,998
                  
                  
                  
                  15,421Gain
      on repurchase of convertible senior notes
                  
                  
                  160
                  
                  
                  
                  —Equity
      in (loss) income of equity-method investees
                  
                  
                  (2,182
                  )
                  
                  
                  8,474Total
      other operating (loss) income
                  
                  
                  (108,646
                  )
                  
                  
                  114,774Other
      operating expense:Salaries
      and benefits
                  
                  
                  14,232
                  
                  
                  
                  18,779Card
      and loan servicing
                  
                  
                  58,233
                  
                  
                  
                  77,413Marketing
      and solicitation
                  
                  
                  4,182
                  
                  
                  
                  15,859Depreciation
                  
                  
                  6,357
                  
                  
                  
                  9,954Other
                  
                  
                  25,682
                  
                  
                  
                  29,131Total
      other operating expense
                  
                  
                  108,686
                  
                  
                  
                  151,136(Loss)
      income from continuing operations before income taxes
                  
                  
                  (175,692
                  )
                  
                  
                  10,505Income
      tax benefit (expense)
                  
                  
                  60,586
                  
                  
                  
                  (4,518
                  )(Loss)
      income from continuing operations
                  
                  
                  (115,106
                  )
                  
                  
                  5,987Discontinued
      operations:Loss
      from discontinued operations before income taxes
                  
                  
                  —
                  
                  
                  
                  (4,685
                  )Income
      tax benefit
                  
                  
                  —
                  
                  
                  
                  1,640Loss
      from discontinued operations
                  
                  
                  —
                  
                  
                  
                  (3,045
                  )Net
      (loss) income
                  
                  
                  (115,106
                  )
                  
                  
                  2,942Net
      loss (income) attributable to noncontrolling interests
                  
                  
                  2,589
                  
                  
                  
                  (2,019
                  )Net
      (loss) income attributable to controlling interests
                  
                  $
                  (112,517
                  )
                  
                  $
                  923(Loss)
      income from continuing operations attributable to controlling interests
      per common share—basic
                  
                  $
                  (2.37
                  )
                  
                  $
                  0.08(Loss)
      income from continuing operations attributable to controlling interests
      per common share—diluted
                  
                  $
                  (2.37
                  )
                  
                  $
                  0.08Loss
      from discontinued operations attributable to controlling interests per
      common share—basic
                  
                  $
                  —
                  
                  
                  $
                  (0.07
                  )Loss
      from discontinued operations attributable to controlling interests per
      common share—diluted
                  
                  $
                  —
                  
                  
                  $
                  (0.07
                  )Net
      (loss) income attributable to controlling interests per common
      share—basic
                  
                  $
                  (2.37
                  )
                  
                  $
                  0.01Net
      (loss) income attributable to controlling interests per common
      share—diluted
                  
                  $
                  (2.37
                  )
                  
                  $
                  0.01




See
accompanying notes.


2
 Table of Contents




CompuCredit
Corporation and Subsidiaries


Condensed Consolidated Statement of Equity (Unaudited)


For
the three months ended March 31, 2009


(Dollars
in thousands)




Common
      StockShares
      Issued
                          
                          
                          Amount
                          
                          
                          Additional
      Paid-In Capital
                          
                          
                          Treasury
      Stock
                          
                          
                          Accumulated
      Other Comprehensive Income
                          
                          
                          Retained
      Earnings
                          
                          
                          Noncontrolling
      Interests
                          
                          
                          Comprehensive
      Loss
                          
                          
                          Total
      EquityBalance
      at December 31, 2008 (as adjusted)
                          
                          
                          60,379,613
                          
                          
                          $
                          —
                          
                          
                          $
                          522,571
                          
                          
                          $
                          (222,310
                          )
                          
                          $
                          (31,431
                          )
                          
                          $
                          453,149
                          
                          
                          $
                          24,878
                          
                          
                          $
                          —
                          
                          
                          $
                          746,857Use
      of treasury stock for stock-based compensation plans
                          
                          
                          (108,206
                          )
                          
                          
                          —
                          
                          
                          
                          (1,853
                          )
                          
                          
                          1,853
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Issuance
      of restricted stock
                          
                          
                          206,825
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Amortization
      of deferred stock-based compensation costs
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          2,100
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          2,100Purchase
      of treasury stock
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (107
                          )
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (107
                          )Tax
      effects of stock-based compensation plans
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (1,225
                          )
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (1,225
                          )Settlement
      of contingent earn-out as referenced in Note 10, “Goodwill and Intangible
      Assets”
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (1,592
                          )
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          5,431
                          
                          
                          
                          —
                          
                          
                          
                          3,839Distributions
      to owners of noncontrolling interests
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (632
                          )
                          
                          
                          —
                          
                          
                          
                          (632
                          )Comprehensive
      loss:Net
      loss
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (112,517
                          )
                          
                          
                          (2,589
                          )
                          
                          
                          (115,106
                          )
                          
                          
                          (115,106
                          )Foreign
      currency translation adjustment, net of tax
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (1,341
                          )
                          
                          
                          —
                          
                          
                          
                          (47
                          )
                          
                          
                          (1,388
                          )
                          
                          
                          (1,388
                          )Comprehensive
      loss
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (116,494
                          )
                          
                          
                          —Balance
      at March 31, 2009
                          
                          
                          60,478,232
                          
                          
                          $
                          —
                          
                          
                          $
                          520,001
                          
                          
                          $
                          (220,564
                          )
                          
                          $
                          (32,772
                          )
                          
                          $
                          340,632
                          
                          
                          $
                          27,041
                          
                          
                          
                          
                          
                          
                          $
                          634,338




See
accompanying notes.




3
 Table of Contents




CompuCredit Corporation and
Subsidiaries  Condensed Consolidated Statements of Comprehensive (Loss) Income
(Unaudited)


(Dollars
in thousands)







For the Three
      Months Ended March 31,2009
                          
                          
                          2008(as
      adjusted)Net
      (loss) income
                          
                          $
                          (115,106
                          )
                          
                          $
                          2,942Other
      comprehensive loss:Foreign
      currency translation adjustment
                          
                          
                          (1,828
                          )
                          
                          
                          (312
                          )Income
      tax benefit related to other comprehensive loss
                          
                          
                          440
                          
                          
                          
                          96Comprehensive
      (loss) income
                          
                          
                          (116,494
                          )
                          
                          
                          2,726Comprehensive
      loss (income) attributable to noncontrolling interests
                          
                          
                          2,636
                          
                          
                          
                          (2,023
                          )Comprehensive
      (loss) income attributable to controlling interests
                          
                          $
                          (113,858
                          )
                          
                          $
                          703







See
accompanying notes.




4
 Table of Contents


CompuCredit
Corporation and Subsidiaries


Condensed Consolidated Statements of Cash Flows
(Unaudited)


(Dollars
in thousands)


For
      the Three Months Ended
                    March 31,2009
                
                
                2008(as
      adjusted)Operating
      activitiesNet
      (loss) income
                
                $
                (115,106
                )
                
                $
                2,942Adjustments
      to reconcile net (loss) income to net cash provided by operating
      activities:Depreciation
      expense
                
                
                6,357
                
                
                
                10,117Impairment
      of goodwill
                
                
                —
                
                
                
                1,132Provision
      for loan losses
                
                
                12,763
                
                
                
                22,421Amortization
      of intangibles
                
                
                507
                
                
                
                615Accretion
      of deferred revenue
                
                
                (115
                )
                
                
                (6,770
                )Stock-based
      compensation expense
                
                
                2,100
                
                
                
                2,335Retained
      interests adjustments, net
                
                
                220,794
                
                
                
                102,773Unrealized
      loss on debt and equity securities classified as trading
      securities
                
                
                —
                
                
                
                4,123Gain
      on repurchase of convertible senior notes
                
                
                (160
                )
                
                
                —Income
      in excess of distributions from equity-method investments
                
                
                —
                
                
                
                (97
                )Changes
      in assets and liabilities, exclusive of business
    acquisitions:Net
      (increase) decrease in debt, equity and U.S. government securities
      classified as trading securities
                
                
                (77
                )
                
                
                1,038Decrease
      in uncollected fees on non-securitized earning assets
                
                
                5,902
                
                
                
                7,383Decrease
      in deferred costs
                
                
                328
                
                
                
                874(Decrease)
      increase in income tax liability
                
                
                (61,166
                )
                
                
                90,243Decrease
      (increase) in prepaid expenses
                
                
                5,720
                
                
                
                (14,125
                )Decrease
      in accounts payable and accrued expenses
                
                
                (29,149
                )
                
                
                (32,930
                )Other
                
                
                922
                
                
                
                6,226Net
      cash provided by operating activities
                
                
                49,620
                
                
                
                198,300Investing
      activitiesProceeds
      from equity-method investees
                
                
                8,319
                
                
                
                1,547Investments
      in securitized earning assets
                
                
                (113,379
                )
                
                
                (457,708
                )Proceeds
      from securitized earning assets
                
                
                84,022
                
                
                
                371,081Investments
      in non-securitized earning assets
                
                
                (227,168
                )
                
                
                (320,111
                )Proceeds
      from non-securitized earning assets
                
                
                222,031
                
                
                
                277,887Acquisition
      of assets
                
                
                (628
                )
                
                
                —Purchases
      and development of buildings, software, furniture, fixtures and equipment,
      net of disposals
                
                
                (1,211
                )
                
                
                (7,968
                )Net
      cash used in investing activities
                
                
                (28,014
                )
                
                
                (135,272
                )Financing
      activitiesNoncontrolling
      interests distributions, net
                
                
                (632
                )
                
                
                (1,918
                )Proceeds
      from exercise of stock options
                
                
                —
                
                
                
                69Purchase
      of treasury stock
                
                
                (107
                )
                
                
                (488
                )Purchase
      of noncontrolling interest
                
                
                (1,096
                )
                
                
                —Proceeds
      from borrowings
                
                
                23,919
                
                
                
                40,476Repayment
      of borrowings
                
                
                (41,622
                )
                
                
                (26,653
                )Net
      cash (used in) provided by financing activities
                
                
                (19,538
                )
                
                
                11,486Effect
      of exchange rate changes on cash
                
                
                (67
                )
                
                
                (139
                )Net
      increase in cash
                
                
                2,001
                
                
                
                74,375Cash
      and cash equivalents at beginning of period
                
                
                94,428
                
                
                
                137,526Cash
      and cash equivalents at end of period
                
                $
                96,429
                
                
                $
                211,901Supplemental
      cash flow informationCash
      paid for interest
                
                $
                8,823
                
                
                $
                13,635Net
      cash paid for (refunds of) income taxes
                
                $
                592
                
                
                $
                (87,360
                )Supplemental
      non-cash informationNotes
      payable associated with capital leases
                
                $
                2,291
                
                
                $
                9,019Notes
      payable associated with investments in securities
                
                $
                —
                
                
                $
                13,487Issuance
      of stock options and restricted stock
                
                $
                1,129
                
                
                $
                5,762


See
accompanying notes.


5
 Table of Contents




CompuCredit
Corporation and Subsidiaries


Notes to Condensed Consolidated Financial Statements


March
31, 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
gains on securitizations and income from retained interests in credit card
receivables securitized (both of which are components of fees and related (loss)
income 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 months ended March 31, 2009 are
not necessarily indicative of what our results will be for the year ending
December 31, 2009. Our condensed consolidated financial statements should
be read in conjunction with our consolidated financial statements and notes for
the year ended December 31, 2008 contained in our Annual Report on
Form 10-K filed with the SEC.




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 consolidated financial statements for the three months ended March 31,
2009—specifically, Statement of Financial Accounting Standards No. 160,
“Noncontrolling Interests in
Consolidated Financial Statements—An Amendment of ARB No. 51”
(“Statement No. 160”), which resulted in the reclassification of our prior
liability for minority interests to a new noncontrolling interests component of
total equity, and FASB Staff Position APB 14-1, “Accounting for Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion” (“FSP APB
14-1”), which resulted in reclassifications of consolidated balance sheet
balances from deferred loan costs and convertible senior notes to additional
paid-in capital and associated reclassifications among retained earnings and
deferred tax liabilities. Retrospective application of FSP APB 14-1 also had the
effect of increasing interest expense and, accordingly, decreasing net income
within our condensed consolidated statement of operations for the three months
ended March 31, 2008.




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 March 31, 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 note holders 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 believed we earned after that date but that Encore has not released
from the escrowed funds.


6
 Table of Contents


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 Statement of Financial Accounting Standards
No. 91, “Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Receivables and Initial Direct Costs of Leases.”




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 the guidance of
Statement of Position 03-3, “Accounting for Certain Loans or Debt
Securities Acquired in a Transfer,” (“SOP 03-3”), which limits 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 SOP 03-3, as well as the
carrying amounts of and gross loans and fees receivable balances of our loans
for which we apply SOP 03-3.




For
      the Three Months Ended March 31,2009
                
                
                2008Roll-forward
      of accretable yield:Balance
      at beginning of period
                
                $
                (15,934
                )
                
                $
                (28,737
                )Accretion
      of yield
                
                
                2,867
                
                
                
                4,423Balance
      at end of period
                
                $
                (13,067
                )
                
                $
                (24,314
                )




SOP
      03-3 loans and fees receivable:Carrying
      amount of loans and fees receivable at acquisition date
                    
                    $
                    160,592Carrying
      amount of loans and fees receivable at March 31, 2009
                    
                    $
                    55,849Gross
      loans and fees receivable balance at acquisition date
                    
                    $
                    191,976Gross
      loans and fees receivable balance at March 31, 2009
                    
                    $
                    65,007




A
roll-forward of the components of loans and fees receivable, net (in millions)
between our December 31, 2008 and March 31, 2009 consolidated balance sheet
dates is as follows:




Balance
      at
                                        December 31,
                                        2008
                                      
                                      
                                      Additions
                                      
                                      
                                      Subtractions
                                      
                                      
                                      Balance
      atMarch 31,
                                        2009Loans and fees receivable, gross
                                      
                                      $
                                      421.3
                                      
                                      
                                      $
                                      235.1
                                      
                                      
                                      $
                                      (260.9
                                      )
                                      
                                      $
                                      395.5Deferred
      revenue
                                      
                                      
                                      (24.8
                                      )
                                      
                                      
                                      (13.1
                                      )
                                      
                                      
                                      15.3
                                      
                                      
                                      
                                      (22.6
                                      )Allowance
      for uncollectible loans and fees receivable
                                      
                                      
                                      (55.8
                                      )
                                      
                                      
                                      (12.8
                                      )
                                      
                                      
                                      15.1
                                      
                                      
                                      
                                      (53.5
                                      )Loans
      and fees receivable, net
                                      
                                      $
                                      340.7
                                      
                                      
                                      $
                                      209.2
                                      
                                      
                                      $
                                      (230.5
                                      )
                                      
                                      $
                                      319.4







7
 Table of Contents




As of
March 31, 2009, the weighted average remaining accretion period for the
$22.6 million of deferred revenue reflected in the above table was 28.4
months.




A
roll-forward of our allowance for uncollectible loans and fees receivable (in
millions) during each of the three months ended March 31, 2009 and 2008,
respectively, is as follows:




For the Three
      Months Ended March 31,2009
                        
                        
                        2008Balance
      at beginning of period
                        
                        $
                        (55.8
                        )
                        
                        $
                        (51.5
                        )Provision
      for loan losses
                        
                        
                        (12.8
                        )
                        
                        
                        (20.4
                        )Charge
      offs
                        
                        
                        16.7
                        
                        
                        
                        19.9Recoveries
                        
                        
                        (1.6
                        )
                        
                        
                        (2.5
                        )Balance
      at end of period
                        
                        $
                        (53.5
                        )
                        
                        $
                        (54.5
                        )




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
                          March 31, 2009Unrecovered
      balance at beginning of period
                      
                      $
                      47,676Acquisitions
      of defaulted accounts
                      
                      
                      17,373Cash
      collections
                      
                      
                      (13,880
                      )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)
                      
                      
                      4,319Unrecovered
      balance at end of period
                      
                      $
                      55,488Estimated
      remaining collections (“ERC”)
                      
                      $
                      124,636




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 44.3% 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 Statement No. 115. 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
                      March
      31,2009
                    
                    
                    As
      of
                      December
      31, 2008Held
      to maturity:Investments
      in debt securities of equity-method investees
                    
                    $
                    3,635
                    
                    
                    $
                    4,385Trading:Investments
      in equity securities
                    
                    
                    370
                    
                    
                    
                    293Total
      investments in debt and equity securities
                    
                    $
                    4,005
                    
                    
                    $
                    4,678






8
 Table of Contents


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 $21.9 million as of March 31, 2009) required to be maintained
with our third-party issuing bank partners and retail electronic payment network
providers (including $6.2 million as of March 31, 2009 associated with our
ongoing origination and servicing efforts in the United Kingdom) and
(2) vehicle inventory held by our buy-here, pay-here auto dealerships which
we expense as cost of goods sold (within fees and related income on
non-securitized earning assets on our condensed 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 FSP APB 14-1. The adoption of this
pronouncement 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 FSP APB 14-1 had applied in
financial reporting periods prior to the January 1, 2009 effective date of this
pronouncement. See Note 9, “Convertible Senior Notes, Notes Payable and Other
Borrowings,” for additional effects of our adoption of FSP APB
14-1.




Income
Taxes




We
account for income taxes based on the liability method required by Statement of
Financial Accounting Standards No. 109, “Accounting for Income
Taxes.” 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. Under FASB Interpretation Number 48, “Accounting for Uncertainty in Income
Taxes,” 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.




Our
overall effective tax rates (computed considering both continuing and
discontinued operations before income taxes in the aggregate) were 34.5% and
49.5% for the three months ended March 31, 2009 and 2008, respectively. 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 variation in effective tax rates between these periods are substantially
related to differing expectations in these periods as to the ratio of our
permanent differences to pre-tax income or loss levels calculated in accordance
with GAAP.




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 $0.7 million in
potential interest and penalties associated with uncertain tax positions during
the three months ended March 31, 2009 and 2008, respectively.  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.




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.


9
 Table of Contents




The
components (in thousands) of our fees and related income on non-securitized
earning assets are as follows:




For
      the Three Months
                        Ended
      March 31,2009
                      
                      
                      2008Retail
      micro-loan fees
                      
                      $
                      18,495
                      
                      
                      $
                      20,549Internet
      micro-loan fees
                      
                      
                      11,788
                      
                      
                      
                      7,718Fees
      on lower-tier credit card receivables while held on balance
      sheet
                      
                      
                      —
                      
                      
                      
                      2,642Income
      on investments in previously charged-off receivables
                      
                      
                      4,319
                      
                      
                      
                      18,797Gross
      profit on auto sales
                      
                      
                      8,471
                      
                      
                      
                      9,098Gains
      (losses) on investments in securities
                      
                      
                      77
                      
                      
                      
                      (5,161
                      )Other
                      
                      
                      1,315
                      
                      
                      
                      2,621Total
      fees and related income on non-securitized earning assets
                      
                      $
                      44,465
                      
                      
                      $
                      56,264




Fees
and Related (Loss) Income on Securitized Earning Assets




Fees and
related (loss) income on securitized earning assets include
(1) securitization gains, (2) income from retained interests in credit
card receivables securitized and (3) returned-check, cash advance and
certain other fees associated with our securitized credit card receivables, each
of which is detailed (in thousands) in the following table.




For
      the Three Months
                                Ended
      March 31,2009
                              
                              
                              2008(Loss)
      income from retained interests in credit card receivables
      securitized
                              
                              $
                              (158,255
                              )
                              
                              $
                              34,322Fees
      on securitized receivables
                              
                              
                              6,229
                              
                              
                              
                              8,271Total
      fees and related (loss) income on securitized earning
    assets
                              
                              $
                              (152,026
                              )
                              
                              $
                              42,593




Recent Accounting
Pronouncements




In April
2009, the FASB issued a FASB Staff Position, “Recognition and Presentation of Other-Than-Temporary
Impairments,” No. FAS 115-2 and FAS 124-2.  This guidance
amends the other-than-temporary impairment guidance under GAAP 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 guidance also calls for additional disclosure and is
effective for periods ending after June 15, 2009.  As of March 31,
2009, our investments in securities totaled only $4.0 million.  We do
not expect the adoption of this guidance to have a material impact on our
financial statements.




In March
2009, 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
December 2008, the FASB issued a FASB Staff Position, “Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities,” No. FAS 140-4 and FIN 46(R)-8. Pursuant to this
guidance, we have provided additional disclosures in Note 7, “Securitizations
and Structured Financings,” with respect to both our off-balance-sheet
qualifying special purpose entities (“QSPE”s) and our on-balance-sheet
structured financing transactions.


10
 Table of Contents




In
September 2008, the FASB issued for exposure a Proposed Statement of Financial
Accounting Standards, “Accounting
for Transfers of Financial Assets, an Amendment to FASB Statement No.
140,” that among other things would eliminate QSPEs from the guidance in
Statement No. 140. Also in September 2008, the FASB issued for exposure a
Proposed Statement of Financial Accounting Standards, “Amendments
to FASB Interpretation No. 46(R),” that among other things would change
the criteria for determining whether to consolidate variable interest entities
under FASB Interpretation No. 46 (revised December 2003), “Consolidation
of Variable Interest Entities—An Interpretation of ARB No. 51,”
(“FIN 46R”). If ultimately finalized as proposed, these proposed statements
would be effective for us at the beginning of our 2010 calendar year financial
reporting period, with earlier application prohibited. While the ultimate
changes remain uncertain, our preliminary assessment is that we could be
required to change our accounting for our securitized credit card receivables
and consolidate some or all of the QSPEs and variable interest entities
associated with our securitizations. We currently treat our transfers to QSPEs
as sales, remove the receivables from our consolidated balance sheets, and reflect only our
retained interests in the securitization trusts on our consolidated balance
sheets. The changes in the proposed FASB statements may require us to reflect
the gross amount of the transferred receivables as well as the liabilities of
the QSPE securitization trusts on our consolidated balance sheets. We are unable
to determine the ultimate potential effects of these proposed statements on our
consolidated financial statements until the FASB issues them in final form.
However, because we carry our retained interests in securitized credit card
receivables at fair value under Statement No. 115 and Statement No. 159
and because we anticipate carrying such underlying credit card receivables upon
any potential consolidation of our QSPEs at fair value pursuant to our Statement
159 election made in 2008, we do not anticipate that these proposed statements,
if adopted as proposed, would have a materially adverse effect on our
consolidated results of operations, financial position or cash flows. We believe
this in part because we have no debt covenants based on leverage ratios or
on-balance-sheet debt levels.




In June
2008, the FASB ratified the consensus reached in Emerging Issues Task Force
Issue 07-5, “Determining
whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own
Stock,” (“EITF 07-5”). This EITF provided additional guidance on
determining whether an equity-linked financial instrument (or embedded feature)
is indexed to an entity's own stock. After considering EITF 07-5, 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 senior
convertible notes.




In June
2008, the FASB issued FASB Staff Position No. EITF 03-6-1, "Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities,"(“FSP EITF 03-6-1”).  This EITF addresses 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 FASB Statement No. 128, "Earnings per
Share."  FSP EITF 03-6-1 was effective for us January 1, 2009.
All prior period earnings per share data presented in financial statements have
been adjusted retrospectively to conform to the new guidance.  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 FSP APB 14-1, addressing convertible instruments that may
be settled in cash upon conversion (including partial cash settlement). FSP APB
14-1 addresses instruments commonly referred to as Instrument C from EITF Issue
No. 90-19, “Convertible
Bonds with Issuer Option to Settle for Cash upon Conversion.” 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. FSP
APB 14-1 is effective for fiscal periods beginning after December 15, 2008,
does not permit early application, and is to be applied retrospectively to all
periods presented pursuant to the guidance in FASB Statement No. 154,
“Accounting
Changes and Error Corrections.” Our January 1, 2009, adoption of FSP APB
14-1 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 this pronouncement.




In December 2007, the FASB
issued Statement of Financial Accounting Standards No. 141 (Revised 2007),
“Business
Combinations,” (“Statement No. 141R”). Statement No. 141R will
significantly change the accounting for business combinations. Under Statement
No. 141R, an acquiring entity will be required, with limited exceptions, to
recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value. Statement 141R will change the accounting
treatment for certain specific items, including:




•
            Acquisition
      costs will be generally expensed as
incurred;




•
            Noncontrolling
      interests (formerly known as minority interests) will be valued at fair
      value at the acquisition date;


11
 Table of Contents




•
            Acquired
      contingent liabilities will be recorded at fair value at the acquisition
      date and subsequently measured at either the higher of such amount or the
      amount determined under existing guidance for non-acquired
      contingencies;




•
            In-process
      research and development will be recorded at fair value as an
      indefinite-lived intangible asset at the acquisition
  date;




•
            Restructuring
      costs associated with a business combination will be generally expensed
      subsequent to the acquisition date;
and




•
            Changes
      in deferred tax asset valuation allowances and income tax uncertainties
      after the acquisition date generally will affect income tax
      expense.




Statement
No. 141R also includes a substantial number of new disclosure requirements.
Statement 141R applies 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. Earlier adoption is
prohibited. While Statement No. 141R will significantly affect the way that
we account for future acquisitions, we adopted this statement 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 Statement of Financial Accounting Standards
No. 160, “Noncontrolling
Interests in Consolidated Financial Statements—An Amendment of ARB
No. 51,” (“Statement No. 160”). Statement No. 160
establishes new accounting and reporting standards for the noncontrolling
interests in a subsidiary and for the deconsolidation of a subsidiary.
Specifically, this statement requires the recognition of a 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 will be included in consolidated
net income on the face of the income statement. Statement No. 160 clarifies
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, this statement requires that a parent recognize
a gain or loss in net income when a subsidiary is deconsolidated. Such gain or
loss will be measured using the fair value of the noncontrolling equity
investment on the deconsolidation date. Statement No. 160 also includes
expanded disclosure requirements regarding the interests of the parent and its
noncontrolling interests. Statement 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008, and earlier adoption is prohibited. We adopted this
statement 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 FSP APB 14-1 and Statement No. 160:




As
      originally reported
                        
                        
                        Retrospective
      application of FSP APB 14-1
                        
                        
                        Retrospective
      application of Statement No. 160
                        
                        
                        As adjustedAdditional
      paid-in capital (as of December 31, 2008)
                        
                        $
                        413,857
                        
                        
                        $
                        108,714
                        
                        
                        $
                        —
                        
                        
                        $
                        522,571Retained
      earnings (as of December 31, 2008)
                        
                        $
                        505,728
                        
                        
                        $
                        (52,579
                        )
                        
                        $
                        —
                        
                        
                        $
                        453,149Total
      equity (as of December 31,2008)
                        
                        $
                        665,844
                        
                        
                        $
                        56,135
                        
                        
                        $
                        24,878
                        
                        
                        $
                        746,857Income
      from continuing operations (for the three months ended March 31,
      2008)
                        
                        $
                        5,513
                        
                        
                        $
                        (1,545
                        )
                        
                        $
                        2,019
                        
                        
                        $
                        5,987Net
      income (for the three months ended March 31, 2008)
                        
                        $
                        2,468
                        
                        
                        $
                        (1,545
                        )
                        
                        $
                        2,019
                        
                        
                        $
                        2,942Income
      from continuing operations attributable to controlling interests per
      common share (for the three months ended March 31,
    2008)—basic
                        
                        $
                        0.12
                        
                        
                        $
                        (0.04
                        )
                        
                        $
                        —
                        
                        
                        $
                        0.08Income from
      continuing operations attributable to controlling interests per common
      share (for the three months ended March 31, 2008)—diluted
                        
                        $
                        0.12
                        
                        
                        $
                        (0.04
                        )
                        
                        $
                        —
                        
                        
                        $
                        0.08Net
      income attributable to controlling interests per common share (for the
      three months ended March 31, 2008)—basic
                        
                        $
                        0.05
                        
                        
                        $
                        (0.04
                        )
                        
                        $
                        —
                        
                        
                        $
                        0.01Net income
      attributable to controlling interests per common share(for the three
      months ended March 31, 2008)—diluted
                        
                        $
                        0.05
                        
                        
                        $
                        (0.04
                        )
                        
                        $
                        —
                        
                        
                        $
                        0.01









3.      Discontinued
Operations




The
components (in thousands) of our discontinued operations are as
follows:




For
      the Three Months Ended March 31,2009
                
                
                2008Net
      interest income, fees and related income on non-securitized earning
      assets
                
                $
                —
                
                
                $
                2,631Other
      operating expense
                
                
                —
                
                
                
                6,184Goodwill
      impairment
                
                
                —
                
                
                
                1,132Loss
      before income taxes
                
                
                —
                
                
                
                (4,685
                )Income
      tax benefit
                
                
                —
                
                
                
                1,640Net
      loss
                
                $
                —
                
                
                $
                (3,045
                )




12
 Table of Contents




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 March 31, 2009
                                  
                                  Credit Cards
                                  
                                  
                                  Investments in
                                    Previously
                                    Charged-Off
                                    Receivables
                                  
                                  
                                  Retail
                                    Micro-Loans
                                  
                                  
                                  Auto Finance
                                  
                                  
                                  Other
                                  
                                  
                                  TotalNet
      interest income, fees and related income (loss) on non-securitized earning
      assets
                                  
                                  $
                                  (5,616
                                  )
                                  
                                  $
                                  4,205
                                  
                                  
                                  $
                                  15,683
                                  
                                  
                                  $
                                  18,584
                                  
                                  
                                  $
                                  8,784
                                  
                                  
                                  $
                                  41,640Total
      other operating (loss) income
                                  
                                  $
                                  (108,987
                                  )
                                  
                                  $
                                  28
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  313
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  (108,646
                                  )(Loss)
      income from continuing operations before income taxes
                                  
                                  $
                                  (178,025
                                  )
                                  
                                  $
                                  (2,328
                                  )
                                  
                                  $
                                  (927
                                  )
                                  
                                  $
                                  2,030
                                  
                                  
                                  $
                                  3,558
                                  
                                  
                                  $
                                  (175,692
                                  )Loss
      from discontinued operations before income taxes
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —Loans
      and fees receivable, gross
                                  
                                  $
                                  1,064
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  32,870
                                  
                                  
                                  $
                                  340,548
                                  
                                  
                                  $
                                  20,985
                                  
                                  
                                  $
                                  395,467Loans
      and fees receivable, net
                                  
                                  $
                                  797
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  26,898
                                  
                                  
                                  $
                                  276,726
                                  
                                  
                                  $
                                  14,931
                                  
                                  
                                  $
                                  319,352Total
      assets
                                  
                                  $
                                  796,490
                                  
                                  
                                  $
                                  65,100
                                  
                                  
                                  $
                                  41,670
                                  
                                  
                                  $
                                  329,713
                                  
                                  
                                  $
                                  71,904
                                  
                                  
                                  $
                                  1,304,877Three Months
      Ended March 31, 2008
                                  
                                  Credit Cards
                                  
                                  
                                  Investments in
                                    Previously
                                    Charged-Off
                                    Receivables
                                  
                                  
                                  Retail
                                    Micro-Loans
                                  
                                  
                                  Auto Finance
                                  
                                  
                                  Other
                                  
                                  
                                  TotalNet
      interest income, fees and related income (loss) on non-securitized earning
      assets
                                  
                                  $
                                  (7,928
                                  )
                                  
                                  $
                                  18,937
                                  
                                  
                                  $
                                  17,860
                                  
                                  
                                  $
                                  15,812
                                  
                                  
                                  $
                                  2,186
                                  
                                  
                                  $
                                  46,867Total
      other operating income
                                  
                                  $
                                  114,365
                                  
                                  
                                  $
                                  213
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  196
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  114,774Income
      (loss) from continuing operations before income taxes
                                  
                                  $
                                  (1,783
                                  )
                                  
                                  $
                                  13,573
                                  
                                  
                                  $
                                  4,432
                                  
                                  
                                  $
                                  (2,924
                                  )
                                  
                                  $
                                  (2,793
                                  )
                                  
                                  $
                                  10,505Loss
      from discontinued operations before income taxes
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  (4,185
                                  )
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  (500
                                  )
                                  
                                  $
                                  (4,685
                                  )Loans
      and fees receivable, gross
                                  
                                  $
                                  28,395
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  33,472
                                  
                                  
                                  $
                                  370,939
                                  
                                  
                                  $
                                  14,943
                                  
                                  
                                  $
                                  447,749Loans
      and fees receivable, net
                                  
                                  $
                                  23,282
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  28,088
                                  
                                  
                                  $
                                  303,744
                                  
                                  
                                  $
                                  9,455
                                  
                                  
                                  $
                                  364,569Total
      assets
                                  
                                  $
                                  1,352,723
                                  
                                  
                                  $
                                  36,058
                                  
                                  
                                  $
                                  98,222
                                  
                                  
                                  $
                                  390,547
                                  
                                  
                                  $
                                  59,871
                                  
                                  
                                  $
                                  1,937,421




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
108,206 during the three months ended March 31, 2009 at gross costs of $1.9
million in satisfaction of restricted stock vestings. We also effectively
purchased shares totaling 33,949 during the three months ended March 31, 2009 at
a gross cost of $0.1 million, 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.




13
 Table of Contents




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 March
      31, 2009
                    
                    
                    As of December
      31, 2008Securitized
      earning assets
                    
                    $
                    96,970
                    
                    
                    $
                    116,510Total
      assets
                    
                    $
                    98,768
                    
                    
                    $
                    118,962Total
      liabilities
                    
                    $
                    1,781
                    
                    
                    $
                    1,967Members’
      capital
                    
                    $
                    96,987
                    
                    
                    $
                    116,995







For
      the Three Months
                        Ended March
      31,2009
                      
                      
                      2008Net
      interest income, fees and related income on non-securitized earning
      assets
                      
                      $
                      —
                      
                      
                      $
                      1Fees
      and related (loss) income on securitized earning assets
                      
                      $
                      (8,170
                      )
                      
                      $
                      17,302Total
      other operating (loss) income
                      
                      $
                      (6,860
                      )
                      
                      $
                      19,656Net
      (loss) income
                      
                      $
                      (7,641
                      )
                      
                      $
                      18,594




7.
    Securitizations and Structured Financings




As of
March 31, 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


14
 Table of Contents


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
      March 31,2009
                
                
                2008Gross
      amount of receivables securitized at period end
                
                $
                2,228,896
                
                
                $
                3,226,753Proceeds
      from new transfers of financial assets to securitization
      trusts
                
                $
                91,626
                
                
                $
                386,987Proceeds
      from collections reinvested in revolving-period
      securitizations
                
                $
                97,566
                
                
                $
                418,417Excess
      cash flows received on retained interests
                
                $
                30,658
                
                
                $
                52,662(Loss)
      income from retained interests in credit card receivables
      securitized
                
                $
                (158,255
                )
                
                $
                34,220Fees
      on securitized receivables
                
                
                6,229
                
                
                
                8,271Total
      fees and related (loss) income on securitized earning
    assets
                
                $
                (152,026
                )
                
                $
                42,491




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 under Statement No. 159
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.




15
 Table of Contents




Our
retained interests in credit card receivables securitized (labeled as
securitized earning assets on our consolidated balance sheets) include the
following (in thousands):




March
      31,
                        2009
                      
                      
                      December
      31,
                        2008I/O
      strip
                      
                      $
                      113,717
                      
                      
                      $
                      132,360Accrued
      interest and fees
                      
                      
                      17,516
                      
                      
                      
                      22,723Net
      servicing liability
                      
                      
                      (13,711
                      )
                      
                      
                      (10,670
                      )Amounts
      due from securitization
                      
                      
                      62,940
                      
                      
                      
                      12,369Fair
      value of retained interests
                      
                      
                      443,817
                      
                      
                      
                      659,156Issuing
      bank partner continuing interests
                      
                      
                      (2,445
                      )
                      
                      
                      (2,145
                      )Securitized
      earning assets
                      
                      $
                      621,834
                      
                      
                      $
                      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 fees and related (loss) income on securitized earning assets
on our consolidated statements of operations (and more specifically as a
component of income from 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
$39.4 million and $48.3 million for the three months ended March 31, 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 EndedMarch
      31,
                    2009
                  
                  
                  December
      31,
                    2008
                  
                  
                  March
      31,
                    2008Net
      servicing liability at beginning of period
                  
                  $
                  10.7
                  
                  
                  $
                  6.4
                  
                  
                  $
                  23.8Changes
      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)
                  
                  
                  3.0
                  
                  
                  
                  4.3
                  
                  
                  
                  (2.5
                  )Balance
      at end of period
                  
                  $
                  13.6
                  
                  
                  $
                  10.7
                  
                  
                  $
                  21.3







16
 Table of Contents




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
                      March
      31,
                      2009
                    
                    
                    As
      of
                      December 31,
      2008
                    
                    
                    As
      of
                      March
      31,
                      2008Net
      collected yield (annualized)
                    
                    
                    36.8
                    %
                    
                    
                    38.7
                    %
                    
                    
                    39.0
                    %Principal
      payment rate (monthly)
                    
                    
                    3.8
                    %
                    
                    
                    4.2
                    %
                    
                    
                    5.5
                    %Expected
      principal credit loss rate (annualized)
                    
                    
                    19.7
                    %
                    
                    
                    20.8
                    %
                    
                    
                    17.5
                    %Residual
      cash flows discount rate
                    
                    
                    23.0
                    %
                    
                    
                    22.6
                    %
                    
                    
                    25.1
                    %Servicing
      liability discount rate
                    
                    
                    14.0
                    %
                    
                    
                    14.0
                    %
                    
                    
                    14.0
                    %Life
      (in months) of securitized credit card receivables
                    
                    
                    26.3
                    
                    
                    
                    23.8
                    
                    
                    
                    18.2




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 fee credit programs that 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 March 31, 2009 relative to December 31, 2008 reflects the first quarter 2009
charge off 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 are charging off fairly rapidly as anticipated leaving a mix at
March 31, 2009 of better quality account relationships). The decrease in March
31, 2009 residual cash flows discount rate relative to March 31, 2008 is a
result of (1) significant central bank interest rate reductions, which have
significantly reduced the base one-month LIBOR interest rate index applicable in
most of our securitizations and (2) increased collateral enhancement levels
within our lower-tier originated portfolio master trust because a securitization
facility with a very high advance rate within that trust is amortizing and the
collateral balances underlying that facility are now supporting draws at a much
lower advance rate under the other facility within that trust—both of these
factors being offset by a general and significant widening of market spreads
above the one-month LIBOR interest rate index applicable in most of our
securitizations due to ongoing turbulence in the global liquidity markets. Our
Statement No. 140 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 March 31, 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
                      theretoNet
      collected yield (annualized)
                    
                    
                    36.8
                    %Impact on fair value of 10%
      adverse change
                    
                    $
                    (53,214
                    )Impact
      on fair value of 20% adverse change
                    
                    $
                    (106,309
                    )Payment
      rate (monthly)
                    
                    
                    3.8
                    %Impact
      on fair value of 10% adverse change
                    
                    $
                    (12,663
                    )Impact
      on fair value of 20% adverse change
                    
                    $
                    (24,615
                    )Expected
      principal credit loss rate (annualized)
                    
                    
                    19.7
                    %Impact
      on fair value of 10% adverse change
                    
                    $
                    (33,409
                    )Impact
      on fair value of 20% adverse change
                    
                    $
                    (60,235
                    )Residual
      cash flows discount rate
                    
                    
                    23.0
                    %Impact
      on fair value of 10% adverse change
                    
                    $
                    (8,408
                    )Impact
      on fair value of 20% adverse change
                    
                    $
                    (16,451
                    )Servicing
      liability discount rate
                    
                    
                    14.0
                    %Impact
      on fair value of 10% adverse change
                    
                    $
                    (888
                    )Impact
      on fair value of 20% adverse change
                    
                    $
                    (1,482
                    )




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.




17
 Table of Contents


March
      31,
                        2009
                      
                      
                      December
      31,
                        2008Total
      managed principal balance
                      
                      $
                      1,853,322
                      
                      
                      $
                      2,157,626Total
      managed finance charge and fee balance
                      
                      
                      375,574
                      
                      
                      
                      485,453Total
      managed receivables
                      
                      
                      2,228,896
                      
                      
                      
                      2,643,079Cash
      collateral at trust and amounts due from QSPEs
                      
                      
                      302,799
                      
                      
                      
                      125,051Total
      assets held by QSPEs
                      
                      
                      2,531,695
                      
                      
                      
                      2,768,130QSPE-issued
      notes to which we are subordinated (1)
                      
                      
                      (1,709,094
                      )
                      
                      
                      (1,728,996
                      )Face
      amount of residual interests in securitizations
                      
                      $
                      822,601
                      
                      
                      $
                      1,039,134Receivables
      delinquent—60 or more days
                      
                      $
                      418,665
                      
                      
                      $
                      458,795Net
      charge offs during each respective three-month period
    ending
                      
                      $
                      125,499
                      
                      
                      $
                      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:




March 31,
                        2009
                      
                      
                      December 31,
      2008Six-year
      term securitization facility (expiring October 2010) issued out of our
      upper-tier originated portfolio master trust:
                      
                      $
                      264.0
                      
                      
                      $
                      264.0Two-year
      variable funding securitization facility with renewal options (expiring
      January 2010) issued out of our upper-tier originated portfolio master
      trust
                      
                      
                      475.0
                      
                      
                      
                      370.0Five-year
      term securitization facility (expiring October 2009) issued out of our
      upper-tier originated portfolio master trust
                      
                      
                      286.6
                      
                      
                      
                      286.6Two-year
      variable funding securitization facility (expiring October 2010) issued
      out of our lower-tier originated portfolio master trust
                      
                      
                      214.2
                      
                      
                      
                      260.5Two-year
      amortizing securitization facility (expiring December 2009) issued out of
      our lower-tier originated portfolio master trust
                      
                      
                      100.0
                      
                      
                      
                      137.5Multi-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
                      
                      
                      14.1
                      
                      
                      
                      16.4Amortizing
      term securitization facility (denominated and referenced in U.K. sterling
      and expiring April 2014) issued out of our U.K. Portfolio securitization
      trust
                      
                      
                      285.7
                      
                      
                      
                      310.3Ten-year
      amortizing term securitization facility issued out of our Embarcadero
      Trust, including our subsidiary’s ownership in the Class B notes (expiring
      January 2014)
                      
                      
                      69.5
                      
                      
                      
                      83.7Total
      QSPE-issued notes to which we are subordinated
                      
                      $
                      1,709.1
                      
                      
                      $
                      1,729.0




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).




18
 Table of Contents




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 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 criteria
within Statement No. 140 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 recourse only to the specific
auto finance receivables underlying each respective facility and cannot look to
our general credit for repayment), and the maximum exposure to loss (which
represents the carrying amount of the auto finance receivables minus the
non-recourse notes) are scheduled (in millions) as follows:




March
      31,
                          2009
                        
                        
                        December 31,
      2008Carrying amount of auto finance
      receivables underlying structured financings
                        
                        $
                        214.8
                        
                        
                        $
                        235.1Structured financing notes
      outstanding, average rate 5.5% as of March 31, 2009, payable 2009 through
      2013 ($97.5 of March 31, 2009 balance payable in September 2009 and $36.8
      of March 31, 2009 balance amortizing with liquidation of underlying
      purchased auto finance receivables pool from 2009 through
      2013)
                        
                        
                        (134.3
                        )
                        
                        
                        (152.1
                        )Maximum
      exposure to loss under structured financings
                        
                        $
                        80.5
                        
                        
                        $
                        83.0




Much like
with our credit card securitizations, there is a waterfall within these
structured financings that provides for a priority distribution of cash flows to
us to service the underlying auto finance receivables (cash flows that we
consider adequate to meet our costs of servicing the receivables), a
distribution of cash flows to pay interest and principal due on the notes, and a
distribution of all excess cash flows to us. Our failure at any time to meet the
various covenants within the structured financings could cause early
amortization of the facilities, and when two of these structured financings with
an aggregate outstanding balance of $97.5 million mature in September 2009,
there can be no assurance that lenders will renew the debt facilities under
attractive terms and conditions or at all. Beyond our role as servicer of the
underlying assets within these structured financings, we have provided no other
financial or other support to the structures, and we have no explicit or
implicit arrangements that could require us to provide financial support to the
structures. See Note 9, “Convertible Senior Notes, Notes Payable and Other
Borrowings,” for a detail of all notes payable and other borrowings, including
these structured financings.




8.      Fair
Values of Assets




Valuations
and Techniques for Assets Measured at Fair Value on a Recurring
Basis




Our
assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment and considers factors specific to
the asset or liability. For our assets measured on a recurring basis at fair
value, the table below summarizes (in thousands) fair values as of March 31,
2009 by fair value hierarchy:





Assets
                    
                    Quoted prices in active
                        markets
      for identical
                      assets
      (level 1)
                    
                    
                    Significant other
                        observable inputs
                      (level 2)
                    
                    
                    Significant
                        unobservable
                      inputs (level 3)
                    
                    
                    Total
      assets
                        measured at fair
                      valueInvestment
      securities—trading
                    
                    $
                    370
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    370Securitized
      earning assets
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    621,834
                    
                    
                    $
                    621,834




19
 Table of Contents




For Level
3 assets measured at fair value on a recurring basis using significant
unobservable inputs, the following table presents (in thousands) a
reconciliation of the beginning and ending balances for 2008:





2009Investment
                              securities—trading
                            
                            
                            Securitized
                              earning assets
                            
                            
                            TotalBeginning
      balance
                            
                            $
                            —
                            
                            
                            $
                            813,793
                            
                            
                            $
                            813,793Total
      gains (losses)—realized/unrealized:Net
      revaluations of/additions to retained interests
                            
                            
                            —
                            
                            
                            
                            186,061
                            
                            
                            
                            186,061Total
      realized and unrealized losses
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Purchases,
      issuances, and settlements, net
                            
                            
                            —
                            
                            
                            
                            (378,020
                            )
                            
                            
                            (378,020
                            )Net
      transfers in and/or out of Level 3
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Ending
      balance
                            
                            $
                            —
                            
                            
                            $
                            621,834
                            
                            
                            $
                            621,834





2009Investment
                            securities—trading
                          
                          
                          Securitized
                            earning assets
                          
                          
                          TotalTotal
      gains for the period included in earnings attributable to the change in
      unrealized gains or losses relating to assets still held at period
      end
                          
                          $
                          —
                          
                          
                          $
                          186,061
                          
                          
                          $
                          186,061




The
unrealized gains and losses for assets and liabilities within the Level 3
category presented in the tables above include changes in fair value that are
attributable to both observable and unobservable inputs. We provide below a
brief description of the valuation techniques used for Level 3 assets and
liabilities.




Net Revaluation
of Retained Interests. We record the net revaluation of retained
interests in the fees and related income from securitized earning assets
category in our consolidated statements of operations, specifically as income
from retained interests in credit card receivables securitized. The net
revaluation of retained interests includes revaluations of our I/O strip,
accrued interest and fees, servicing liabilities associated with our residual
interests, amounts due from securitization, residual interests and issuing bank
partner continuing interests. We estimate the present value of future cash flows
using a valuation model consisting of internally developed estimates of
assumptions third-party participants would use in determining fair value,
including estimates of net collected yield, principal payment rates, expected
principal credit loss rates, costs of funds and discount rates.




Total Realized
and Unrealized Losses. We record total realized and unrealized losses
within the fees and related income from non-securitized earning assets category
in our consolidated statements of operations. We formerly held certain
securities available for sale that we classified as Level 3, indicating that
significant valuation assumptions are not readily observable in the market due
to limited trading activity. For those securities, the last of which we disposed
of in the second quarter of 2008, we measured fair value using the best
available data, in the form of quotes provided directly by various dealers
associated with the securities and third-party valuations.




Valuations and
Techniques for Assets Measured at Fair Value on a Non-Recurring
Basis




We
also have assets that under certain conditions are subject to measurement at
fair value on a non-recurring basis. These assets include those associated with
acquired businesses, including goodwill and other intangible assets. For these
assets, measurement at fair value in periods subsequent to their initial
recognition is applicable if one or more of these assets is determined to be
impaired.




We were
required to make such a determination of the fair value of goodwill and
intangible assets associated with our Retail Micro-Loans segment in the first
quarter of 2008 by reason of our decision to discontinue and sell that segment’s
Texas operations. We estimated the fair value of those assets using Level 3
inputs, specifically discounted cash flow projections reflecting our best
estimate of what third-party participants would use in determining fair value,
including estimates of yield, default rates, same-store growth rates and payment
rates. We recorded within loss from discontinued operations a
non-cash goodwill impairment charge of $1.1 million in the first quarter of
2008.




For
our assets measured on a non-recurring basis at fair value, the table below
summarizes (in thousands) fair values as of March 31, 2009 by fair value
hierarchy:




Quoted prices in active markets
      for identical
                  assets
      (level 1)
                
                
                Significant other
                    observable inputs
                  (level 2)
                
                
                Significant
                    unobservable
                  inputs (level 3)
                
                
                Total
      assets
                    measured at fair
                  valueAssets:Goodwill
                
                $
                —
                
                
                $
                —
                
                
                $
                64,355
                
                
                $
                64,355Intangibles,
      net
                
                $
                —
                
                
                $
                —
                
                
                $
                4,041
                
                
                $
                4,041







9.
            Convertible Senior Notes, Notes
      Payable and Other Borrowings




Convertible
Senior Notes




In
May 2005, we issued $250.0 million aggregate principal amount of 3.625%
convertible senior notes due 2025, and in November of that same year, we
issued $300.0 million aggregate principal amount of 5.875% convertible senior
notes due 2035.
These notes (net of repurchases since the issuance dates) are reflected within
convertible senior notes on our consolidated balance
sheets.


20
 Table of Contents




Upon our
January 1, 2009 required adoption of FSP APB 14-1, we (1) reclassified a portion
of our outstanding convertible senior notes to additional paid-in capital, (2)
established a discount to the face amount of the notes as previously reflected
on our consolidated balance sheets, (3) created a deferred tax liability related
to the discount on the notes, and (4) reclassified out of our originally
reported deferred loan costs and into additional paid-in capital the portion of
those costs considered under FSP APB 14-1 to have been associated with the
equity component of the convertible senior notes issuance.  The
discount to the face amount of the notes is being amortized to interest expense
over the expected life of the notes and will result in a corresponding release
of our associated deferred tax liability. Total amortization for the three
months ended March 31, 2009 totaled $2.5 million and in accordance with the
required retrospective application of FSP APB 14-1 to the three months ended
March 31, 2008 totaled $2.5 million.  The remaining discount at March
31, 2009 will be amortized to interest expense over the expected term of the
convertible senior notes (currently expected to be May 2012 and October 2035 for
the 3.625% and 5.875% notes, respectively). The weighted average effective
interest rate for the 3.625% and 5.875% notes was 9.2% for all periods
presented.





The following
summarizes (in thousands) components of our condensed consolidated balance
sheets associated with our convertible senior notes after giving effect to both
our required adoption of FSP APB 14-1 upon its January 1, 2009 effective date
and our retrospective application of this pronouncement to prior presented
financial reporting periods:




March
      31,
                    2009
                
                
                December
      31,
                    2008Face
      amount of outstanding convertible senior notes
                
                $
                389,551
                
                
                $
                389,851Discount
                
                
                (87,503
                )
                
                
                (90,017
                )Net
      carrying value
                
                $
                302,048
                
                
                $
                299,834Carrying
      amount of equity component included in additional paid-in
      capital
                
                $
                108,714
                
                
                $
                108,714Excess
      of instruments’ if-converted values over face principal
      amounts
                
                $
                —
                
                
                $
                —





In January
2009, we repurchased $300,000 in face amount of our 3.625% convertible senior
notes due 2025. The January 2009 purchase price for these notes totaled $90,000
(including accrued interest) and resulted in an aggregate gain of $160,000 (net
of the notes’ applicable share of deferred costs and debt discount, which were
recovered in connection with the purchase).These repurchased convertible senior
notes (and others purchased in 2008 with an aggregate face amount of $160.1
million from among both of our series of our convertible senior notes)are held in treasury and
have been netted against the face amount of originally issued convertible senior
notes on our March 31, 2009 condensed consolidated balance sheet.




Notes
Payable and Other Borrowings




Notes
payable and other borrowings consists of the following (in millions) as of
March 31, 2009:


As
      of
                          March
      31, 2009Structured
      financings within our Auto Finance segment, average rate 5.5%, payable
      from 2009 through 2013
                        
                        $
                        134.3Third-party
      financing of Auto Finance segment receivables, rate of 9.5%, due January
      2010
                        
                        
                        29.5Third-party
      financing of Auto Finance segment inventory, average rate of 24.0%,
      payable from 2009 through 2010
                        
                        
                        1.2Vendor-financed
      software and equipment acquisitions, average rate 5.4%, payable from
      2009 through 2013
                        
                        
                        2.3MEM
      secured debt, average rate of 2.3%, payable upon demand
                        
                        
                        6.3MEM
      secured debt, average rate of 1.8%, payable through 2009
                        
                        
                        5.3MEM
      subordinated debt, rate of 9.0%, payable through 2009
                        
                        
                        0.4Jefferson
      Capital charged-off receivable purchase financing, rate of 12%, payable
      through 2011
                        
                        
                        3.7Total
      notes payable and other borrowings
                        
                        $
                        183.0





We are in
compliance with the covenants underlying our various notes payable and other
borrowings.




10.    Goodwill
and Intangible Assets




Goodwill




Goodwill
represents the excess of the purchase price and related costs over the value
assigned to net tangible and identifiable intangible assets acquired and
accounted for under the purchase method. Statement of Financial Accounting
Standards No. 142, “Goodwill and Other Intangible
Assets” (“Statement No. 142”), requires that entities assess the
fair value of all acquisition-related goodwill on a reporting unit basis. We
review the recorded value of goodwill for impairment at least annually at the
beginning of the fourth quarter of each year, or earlier if events or changes in
circumstances indicate that the carrying amount may exceed fair
value.




In
April 2007, we acquired 95% of the outstanding shares of MEM, our
U.K.-based, Internet, micro-loan operations, for £11.6 million ($22.3
million) in cash. Under the original purchase agreement, a contingent
performance-related earn-out could have been payable to the sellers on
achievement of certain earnings measurements for the years ended 2007, 2008 and
2009. The maximum amount payable under this earn-out was £120.0 million. The MEM
acquisition agreement was amended in the first quarter of 2009 to remove the
sellers’ earn-out rights and in exchange grant the sellers a 22.5% ownership
interest in the entity.  The settlement of the contingent earn-out
resulted in a re-measurement of the carrying value of our investment in MEM in
accordance with Statement No. 160 and additional goodwill of $5.6
million.




In
connection with our first quarter 2008 decision to sell our Texas retail
micro-loans operations and hold those operations for sale, we allocated goodwill
between our retained Retail Micro-Loans segment operations and our discontinued
Texas operations, thereby resulting in a $1.1 million impairment loss that is
reported within loss from discontinued operations in 2008. This valuation
analyses was based on current internal projections and existing market data
supporting valuation prices of similar companies.




21
 Table of Contents


Changes
(in thousands) in the carrying amount of goodwill for the three months ended
March 31, 2009 and 2008, respectively, by reportable segment are as
follows:




Retail Micro-
                          Loans
                        
                        
                        Auto
                          Finance
                        
                        
                        Other
                        
                        
                        ConsolidatedBalance
      as of December 31, 2007
                        
                        $
                        44,346
                        
                        
                        $
                        30,868
                        
                        
                        $
                        21,955
                        
                        
                        $
                        97,169Impairment
      loss
                        
                        
                        (1,132
                        )
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (1,132
                        )Foreign
      currency translation
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (25
                        )
                        
                        
                        (25
                        )Balance
      as March 31, 2008
                        
                        $
                        43,214
                        
                        
                        $
                        30,868
                        
                        
                        $
                        21,930
                        
                        
                        $
                        96,012Balance
      as of December 31, 2008
                        
                        $
                        43,214
                        
                        
                        $
                        —
                        
                        
                        $
                        15,915
                        
                        
                        $
                        59,129Goodwill
      related to settlement of contingent performance-related
      earn-out
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        5,553
                        
                        
                        
                        5,553Foreign
      currency translation
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (327
                        )
                        
                        
                        (327
                        )Balance
      as of March 31, 2009
                        
                        $
                        43,214
                        
                        
                        $
                        —
                        
                        
                        $
                        21,141
                        
                        
                        $
                        64,355




Intangible
Assets




We had
$2.3 million of intangible assets that we determined had an indefinite benefit
period as of both March 31, 2009 and December 31, 2008. The net unamortized
carrying amount of intangible assets subject to amortization was $1.7 million
and $2.2 million as of March 31, 2009 and December 31, 2008, respectively.
Intangible asset-related amortization expense was $0.5 million and $0.6 million
for the three months ended March 31, 2009 and 2008, respectively.


11.           Commitments and
Contingencies
  General


In the normal
course of business through the origination of unsecured credit card receivables,
we incur off-balance-sheet risks. These risks include our commitments of $434.2
million at March 31, 2009 to purchase receivables associated with cardholders
who have the right to borrow in excess of their current balances up to the
maximum credit limit on their credit card accounts. These commitments involve,
to varying degrees, elements of credit risks in excess of the amounts we have
securitized. We have not experienced a situation in which all of our customers
have exercised their entire available line of credit at any given point in time,
nor do we anticipate this will ever occur in the future. We also have the
effective right to reduce or cancel these available lines of credit at any
time.




For
various receivables portfolio investments we have made through our subsidiaries
and equity-method investees, we have entered into guarantee agreements and/or
note purchase agreements whereby we have agreed to guarantee the purchase of or
purchase directly additional interests in portfolios of credit card receivables
owned by trusts, the retained interests in which are owned by our subsidiaries
and equity-method investees, should there be net new growth in the receivables
or should collections not be available to fund new cardholder purchases. As of
March 31, 2009, neither we nor any of our subsidiaries or equity-method
investees had purchased or been required to purchase any additional notes under
the note purchase agreements. Our guarantee is limited to our respective
ownership percentages in the various subsidiaries and equity-method investees
multiplied by the total amount of the notes that each of the subsidiaries and
equity-method investees could be required to purchase. As of March 31, 2009, the
maximum aggregate amount of our collective guarantees and direct purchase
obligations related to all of our subsidiaries and equity-method investees was
$121.2 million—a decrease from $152.0 million at December 31, 2008 as a
result of further account actions and declines in our liquidating portfolios. In
general, this aggregate contingency amount will decline in the absence of
portfolio acquisitions as the aggregate amounts of credit available to
cardholders for future purchases decline along with our liquidation of the
purchased portfolios and a corresponding reduction in the number of open
cardholder accounts. The acquired credit card receivables portfolios of all of
our affected subsidiaries and equity-method investees have declined with each
passing quarter since acquisition and we expect them to continue to decline
because we expect combined payments and charge offs to exceed new purchases each
month. We currently do not have any liability recorded with respect to these
guarantees or direct purchase obligations, but we will record one if events
occur that make payment probable under the guarantees or direct purchase
obligations. The fair value of these guarantees and direct purchase obligations
is not material.




Additionally,
we have entered into an agreement whereby we have agreed to guarantee certain
servicing obligations of one of our subsidiaries servicing a portfolio of auto
loans owned by another of our subsidiaries. We currently do not have any
liability recorded with respect to this guarantee, but we will record one if
events occur that make payment probable under this guarantee.




Our
agreements with our third-party originating financial institutions require us to
purchase on a daily basis the credit card receivables that are originated in the
accounts maintained for our benefit. To secure this obligation for one of our
third-party originating financial institutions, we have $10.0 million on deposit
with the financial institution, and we have pledged retained interests carried
at $45.0 million at March 31, 2009. Our arrangements with this particular
originating financial institution expired in March 2009, but we have a
continuing security obligation during the contractually specified wind-down
period during which accounts underlying our credit card receivables continue to
be owned by this financial institution.




Our other
third-party originating financial institution relationships require security for
our daily purchases of their credit card receivables, and we have pledged $16.8
million in collateral as such security as of March 31, 2009. In addition, in
connection with our April 2007 U.K. Portfolio acquisition, we guarantee
certain obligations of our subsidiaries and our third-party originating
financial institution to one of the European payment systems ($5.1 million as of
March 31, 2009). Those obligations include, among other things, compliance with
one of the European payment system’s operating regulations and by-laws. We also
guarantee certain performance obligations of our servicer subsidiary to the
indenture trustee and the trust created under the securitization relating to our
U.K. Portfolio.




Also,
under the agreements with our third-party originating financial institutions, we
have agreed to indemnify the financial institutions for certain costs associated
with the financial institutions’ card issuance and other lending activities on
our behalf. Our indemnification obligations generally are limited to instances
in which we either (1) have been afforded the opportunity to defend against
any potentially indemnifiable claims or (2) have reached agreement with the
financial institutions regarding settlement of potentially indemnifiable
claims.




Total
System Services, Inc. provides certain services to us as a system of record
provider. Were we to terminate our U.S. relationship with Total System Service,
Inc. prior to the contractual termination period, we would incur significant
penalties ($32.1 million as of March 31, 2009); we have no intention,
however, of terminating this agreement, which in May 2008 was renegotiated and
extended through May 2015.


22
 Table of Contents


Litigation


We are
involved in various legal proceedings that are incidental to the conduct of our
business. The material proceedings in which we are involved are described
below.





We and five
of our subsidiaries are defendants in a purported class action lawsuit
entitledKnox, et al., vs.
First Southern Cash Advance, et al., No. 5 CV 0445, filed
in the Superior Court of New Hanover County, North Carolina, on February 8,
2005. The plaintiffs allege that in conducting a so-called “payday lending”
business, certain of our Retail Micro-Loans segment subsidiaries violated
various laws governing consumer finance, lending, check cashing, trade practices
and loan brokering. The plaintiffs further allege that we are the alter ego of
our subsidiaries and are liable for their actions. The plaintiffs are seeking
damages of up to $75,000 per class member. We are vigorously defending this
lawsuit. These claims are similar to those that have been asserted against
several other market participants in transactions involving small balance,
short-term loans made to consumers in North Carolina.




On
May 23, 2008, CompuCredit and one of our subsidiaries filed a complaint
against Columbus Bank and Trust Company and Synovus Financial Corporation
(collectively, “CB&T”) in the Georgia State Court, Fulton County,
(subsequently transferred to the Georgia Superior Court, Fulton County) in
an action entitledCompuCredit Corporation
et al. vs. CB&T et al ., Civil Action No. 08-EV-004730-F. Among
other things, the complaint as now amended alleges that CB&T, in violation
of its contractual obligations, failed to provide CompuCredit rebates, marketing
fees, revenues or other fees or discounts that were paid or granted by Visa®,
MasterCard®, or
other card associations with respect to or apportionable to accounts covered by
CB&T’s agreements with us and other consideration due to us. The complaint
also alleges that CB&T refused to approve changes requested by us to the
terms of the credit card accounts and refused to transfer credit card accounts
to our third-party designees, all in violation of the agreements among the
parties. Also in this litigation, CB&T has asserted claims against us for
alleged failure to follow certain account management guidelines and for
reimbursement of certain legal fees that it has incurred associated with our
contractual relationship with them.




On
July 14, 2008, CompuCredit and four of our officers, David G. Hanna,
Richard R. House, Jr., Richard W. Gilbert and J. Paul Whitehead III, were
named as defendants in a purported class action securities case filed in the
United States District Court for the Northern District of Georgia entitledWaterford Township General
Employees Retirement System vs. CompuCredit Corporation, et al. , Civil
Action No. 08-CV-2270. On August 22, 2008, a virtually identical case was
filed entitledSteinke vs. CompuCredit
Corporation et al., Civil Action No. 08-CV-2687. In general,
the complaints alleged that we made false and misleading statements (or
concealed information) regarding the nature of our assets, accounting for loan
losses, marketing and collection practices, exposure to sub-prime losses,
ability to lend funds, and expected future performance. The complaints recently
were consolidated, and a consolidated complaint has now been filed. We are
vigorously contesting this complaint, and the defendants have filed a motion to
dismiss.




We
received a demand dated August 25, 2008, from Sue An that we take action against
all of our directors and two of our officers for alleged breaches of fiduciary
duty. In general, the alleged breaches are the same as the actions that are the
subject of the class action securities case. Our Board of Directors has
appointed a special litigation committee to investigate the allegations and
determine how to proceed.




Our
debt collections subsidiary, Jefferson Capital, is a party to a series of
agreements with Encore. In general, Encore is obligated to purchase from
Jefferson Capital certain defaulted credit card receivables. The agreements also
require Encore to sell certain charged-off receivables to Jefferson Capital
under its balance transfer program and chapter 13 bankruptcy agreements. On
July 10, 2008, Encore did not purchase certain accounts as contemplated by
the agreements, alleging that we breached certain representations and warranties
set forth in the agreements, generally as a result of the allegations made by
the FTC and settled by us in December 2008. We are vigorously contesting this
dispute. This dispute has been submitted to the American Arbitration Association
for resolution.




12.           Net Income Attributable to
Controlling Interests Per Common Share




We compute
earnings per share (“EPS”) attributable to CompuCredit Corporation common
shareholders by dividing income from continuing operations attributable to
controlling interests, by the weighted-average common shares outstanding
including participating securities outstanding during the period, as discussed
below.  Diluted EPS reflects the potential dilution beyond shares for
basic EPS that could occur if securities or other contracts to issue common
stock were exercised, were converted into common stock or were to result in the
issuance of common stock that would share in our earnings.
  On
January 1, 2009, we adopted FSP EITF 03-6-1, which requires us to include all
unvested stock awards that contain non-forfeitable rights to dividends or
dividend equivalents, whether paid or unpaid, in the number of shares
outstanding in our basic and diluted EPS calculations.  As a result,
we have included all of these outstanding restricted stock awards in our
calculation of basic and diluted EPS for current and prior
periods.  Undistributed earnings represent earnings that were
available for distribution but were not distributed.  Common stock and
unvested share-based payment awards earn dividends equally as shown in the table
below.


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The
following table sets forth the computation of net income attributable to
controlling interests per common share (in thousands, except per share
data):




For
      the Three Months
                    Ended
      March  31,2009
                
                
                2008Numerator:(Loss)
      income from continuing operations attributable to controlling
      interests
                
                $
                (112,517
                )
                
                $
                3,968Loss
      from discontinued operations attributable to controlling
      interests
                
                $
                —
                
                
                $
                (3,045
                )Net
      (loss) income attributable to controlling interests
                
                $
                (112,517
                )
                
                $
                923Denominator:Basic
      (including unvested share-based payment awards) (1)
                
                
                47,546
                
                
                
                47,552Effect
      of dilutive stock options and warrants
                
                
                —
                
                
                
                97Diluted
      (including unvested share-based payment awards) (1)
                
                
                47,546
                
                
                
                47,649(Loss)
      income from continuing operations attributable to controlling interests
      per common share—basic
                
                $
                (2.37
                )
                
                $
                0.08(Loss)
      income from continuing operations attributable to controlling interests
      per common share—diluted
                
                $
                (2.37
                )
                
                $
                0.08Loss
      from discontinued operations attributable to controlling interests per
      common share—basic
                
                $
                —
                
                
                $
                (0.07
                )Loss
      from discontinued operations attributable to controlling interests per
      common share—diluted
                
                $
                —
                
                
                $
                (0.07
                )Net
      (loss) income attributable to controlling interests per common
      share—basic
                
                $
                (2.37
                )
                
                $
                0.01Net
      (loss) income attributable to controlling interests per common
      share—diluted
                
                $
                (2.37
                )
                
                $
                0.01(1) Included in our basic and diluted share counts are 680,626
      and 810,519 shares related to unvested share-based payment awards for
      the three months ended March 31, 2009 and 2008, respectively.




As their
effects were anti-dilutive due to our net losses, we excluded all of our stock
options and unvested restricted share units from our net loss attributable
to controlling interests per common share calculations for the three months
ended March 31, 2009. Also as their effects were anti-dilutive, we excluded
671,148 and 565,333 of stock options and unvested restricted share units,
respectively from the net income attributable to controlling interests per
common share calculations for the three months ended March 31, 2008. Also
excluded from net (loss) income attributable to controlling per common share
calculations for the three months ended March 31, 2009 and 2008 are shares into
which our convertible senior notes may one day be converted and shares
represented by a share lending agreement into which we entered contemporaneously
with our November 2005 issuance of convertible senior notes.




13.
            Stock-Based
      Compensation




As of
March 31, 2009, we had two stock-based employee compensation plans (our Employee
Stock Purchase Plan and our 2008 Equity Incentive Plan). The 2008 Equity
Incentive Plan provides for grants of stock options, stock appreciation
rights, restricted stock awards, restricted stock units and incentive
awards. The maximum aggregate number of shares of common stock that may be
issued under this plan and to which awards may relate is 2,000,000 shares, and
1,366,165 shares remained available for grant under this plan as of March
31, 2009. Upon shareholder approval of the 2008 Equity Incentive Plan in May
2008, all remaining shares available for grant under our previous stock option
and restricted stock plans were terminated. Exercises and vestings under our
stock-based employee compensation plans resulted in our recognition of an income
tax-related charge to additional paid-in capital of $1.2 million in the first
quarter of 2009, while we recognized income tax-related benefits within
additional paid-in capital of $1.1 million in the first quarter of
2008.




Stock
Options




Our
2008 Equity Incentive Plan and its predecessor plans provide that we may grant
options on or shares of our common stock to members of the Board of Directors,
employees, consultants and advisors. The exercise price per share of the options
may be less than, equal to or greater than the market price on the date the
option is granted. The option period may not exceed 10 years from the date
of grant. The vesting requirements for options granted by us range from
immediate to


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 Table of Contents




5 years.
Effective January 1, 2006, we adopted Statement of Financial Accounting
Standards No. 123(R), “Share-Based Payment,” using
modified prospective application. During each of the three-month periods ended
March 31, 2009 and 2008, we expensed compensation costs of $0.5 million related
to our stock options. We recognize stock-option-related compensation expense for
any awards with graded vesting on a straight-line basis over the vesting period
for the entire award.Information related to
options outstanding is as follows:


For the Three
      Months Ended March 31, 2009Number of
                          shares
                        
                        
                        Weighted-
                          average
                          exercise price
                        
                        
                        Weighted-
                          average of remaining
                          contractual
      life
                        
                        
                        Aggregate
                          intrinsic
                          valueOutstanding
      at January 1, 2009
                        
                        
                        840,664
                        
                        
                        $
                        31.04Granted
                        
                        
                        —
                        
                        
                        
                        —Exercised
                        
                        
                        —
                        
                        
                        
                        —Cancelled/Forfeited
                        
                        
                        (34,083
                        )
                        
                        
                        21.28Outstanding
      at March 31, 2009
                        
                        
                        806,581
                        
                        
                        $
                        31.45
                        
                        
                        
                        3.9
                        
                        
                        $
                        0.0Exercisable
      at March 31, 2009
                        
                        
                        56,581
                        
                        
                        $
                        24.78
                        
                        
                        
                        1.6
                        
                        
                        $
                        0.0




As
March 31, 2009, our unamortized deferred compensation costs associated with
non-vested stock options were $3.8 million, and no grants or exercises of stock
options occurred during the three months ended March 31, 2009.




Restricted Stock
and Restricted Stock Unit Awards




During
the three months ended March 31, 2009, we granted 206,825 shares of restricted
stock and restricted stock units with an aggregate grant date fair value of $1.1
million. When we grant restricted shares, we defer the grant date value of the
restricted shares and amortize the grant date values of these shares (net of
anticipated forfeitures) as compensation expense with an offsetting entry to the
additional paid-in capital component of our consolidated shareholders’ equity.
Our issued restricted shares generally vest over a range of twenty-four to sixty
months and are being amortized to salaries and benefits expense ratably over the
respective vesting periods. As of March 31, 2009, our unamortized deferred
compensation costs associated with non-vested restricted stock awards were $10.6
million with a weighted-average remaining amortization period of 2.0
years.




Occasionally,
we issue or sell stock in our subsidiaries to certain members of the
subsidiaries’ management teams. The terms of these awards vary but generally
include vesting periods comparable to those of stock issued under our restricted
stock plan. Generally, these shares can be converted to cash or our stock at our
discretion after the specified vesting period or the occurrence of other
contractual events. Ownership in these shares constitutes noncontrolling
interests in the subsidiaries. We are amortizing this compensation cost
commensurate with the applicable vesting period. The weighted average remaining
vesting period for stock still subject to restrictions was 2.2 years as of March
31, 2009.










25
 Table of Contents






ITEM 2.
            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS




The
following discussion should be read in conjunction with our condensed
consolidated financial statements and the related notes included herein and our
Annual Report on Form 10-K for the year ended December 31, 2008, where
certain terms (including trust, subsidiary and other entity names and financial,
operating and statistical measures) have been defined.




This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations includes forward-looking statements. We have based these
forward-looking statements on our current plans, expectations and beliefs about
future events. Actual results could differ materially, however, because of
factors discussed in “Risk Factors” in Part II, Item 1A and elsewhere in this
report.




OVERVIEW




We are a
provider of various credit and related financial services and products to or
associated with the financially underserved consumer credit market—a market
represented by credit risks that regulators classify as “sub-prime.” We
traditionally have served this market principally through our marketing and
solicitation of credit card accounts and other credit products and our servicing
of various receivables underlying both originated and acquired accounts. We
contract with third-party financial institutions pursuant to which the financial
institutions issue general purpose consumer credit cards and we purchase the
receivables relating to such accounts on a daily basis. We market to cardholders
other ancillary products, including credit and identity theft monitoring, health
discount programs, shopping discount programs, debt waivers and life insurance.
Our product and service offerings also include small-balance, short-term cash
advance loans—generally less than $500 (or the equivalent thereof in the British
pound for pound-denominated loans) for 30 days or less and to which we
refer as “micro-loans”; these loans are marketed through various channels,
including retail branch locations and the Internet. We also originate auto loans
through franchised and independent auto dealers, purchase and/or service auto
loans from or for a pre-qualified network of dealers in the buy-here, pay-here
used car business and sell used automobiles through our own buy-here, pay-here
lots. Lastly, our licensed debt collections subsidiary purchases and collects
previously charged-off receivables from us, the trusts that we service and third
parties.




The most
significant ongoing issues and events for our business during the three months
ended March 31, 2009 were (1) the ongoing difficulties in the liquidity markets
and with the economic downturn that have prevented us from raising new funds in
order to originate loans, thereby causing us to continue to reduce credit lines,
close some accounts and offer payment incentive programs to customers (all of
which have a negative impact on both short-term earnings and the potential for
longer term profitability) and to continue with our expense paring efforts; and
(2) Encore’s continued failure to purchase certain previously charged-off
accounts under its forward flow contract with us, thereby significantly
affecting both our profitability and liquidity adversely as we now retain
charged-off credit card receivables and collect them while we pursue resolution
of the conflict with Encore.




Most
critical to us is the disruption we continue to see in global liquidity markets
and the ongoing malaise in the world economy. As is customary in our industry,
we finance most of our credit card receivables through the asset-backed
securitization markets—markets that worsened significantly in 2008 and have not
recovered thus far in 2009. While we extended our principal lower-tier credit
card securitization facility out to October 2010 in the third quarter of
2008—albeit at a reduced advance rate with increased pricing—we are concerned
that the traditional securitization markets may not return to any degree of
efficient and effective functionality for us in the near term. As a result, we
are closely monitoring and managing our liquidity position by marketing only at
test levels in very discrete areas and taking a variety of account management
actions (including credit line reductions, account closures and payment
incentive programs) and other actions (including reducing our overhead
infrastructure, which was built to accommodate higher account originations and
managed receivables levels) in an effort to preserve cash. Some of these
actions, while prudent to preserve liquidity, have the effect of reducing our
profitability both in the near term and over the long term.




Lower
real estate and other asset values and higher rates of job loss and overall
unemployment have resulted from the current global economic crisis and have
translated into reduced payment rates within the credit card industry generally
and for us specifically. Should we experience an extended period of reduced or
worsening payment rates, the cash flows to us from our securitization trusts
could be significantly curtailed (e.g., the terms of our securitization
facilities might require them to accumulate or retain cash or use it to repay
investor notes on an accelerated basis, rather than distribute it to us). The
curtailment of the cash that we receive, combined with the fact that we now are
already accumulating cash within our upper-tier originated portfolio master
trust for the September 2009 scheduled maturity of a term securitization
facility, could require us to reduce our personnel, overhead and other costs to
levels that could impact the values of our retained interests in our securitized
credit card


26
 Table of Contents


receivables and result in impairments.




Our
credit card and other operations are heavily regulated, and over time we change
how we conduct our operations either in response to regulation or in keeping
with our goals of continuing to lead the industry in the application of
consumer-friendly credit card practices. We have made several significant
changes to our practices over the past several years, and because our account
management practices are evolutionary and dynamic, it is possible that we may
make further changes to these practices, some of which may produce positive, and
others of which may produce adverse, effects on our operating results and
financial position.




Subject
to the availability of liquidity to us at attractive terms and pricing, which is
difficult if not impossible to obtain in the current market, our shareholders
should expect us to continue to evaluate and pursue for acquisition additional
credit card receivables portfolios, and potentially other financial assets that
are complementary to our financially underserved credit card business.
Additionally, given that financing for growth and acquisitions currently is
constrained, our shareholders should expect us to pursue less capital intensive
activities, like servicing credit card receivables and other assets for third
parties (and in which we have limited or no equity interests), that allow us to
leverage our expertise and infrastructure. Our focus is on making good economic
decisions that will result in high returns on equity to our shareholders over a
long-term horizon, even if these decisions may result in volatile earnings under
GAAP—such as in the case of incurring significant marketing expenses in one
particular quarter to facilitate expected future long-term growth and
profitability or in the case of the current gain-on-sale accounting requirements
for securitizations under Statement of Financial Accounting Standards
No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,” (“Statement No. 140”). For further discussion of our
historic results and the impact of securitization accounting on our results, see
the “Results of Operations” and “Liquidity, Funding and Capital Resources”
sections below, as well as our consolidated financial statements and the notes
thereto included herein.




CONSOLIDATED
RESULTS OF OPERATIONS




For
      the Three Months
                    Ended
      March 31,
                
                
                Income
      increases (decreases) from(In
      thousands)
                
                2009
                
                
                2008
                
                
                2008 to
      2009Earnings:Total
      interest income
                
                $
                20,130
                
                
                $
                24,999
                
                
                $
                (4,869
                )Interest
      expense
                
                
                (10,192
                )
                
                
                (13,990
                )
                
                
                3,798Fees
      and related income on non-securitized earning assets:Retail
      micro-loan fees
                
                
                18,495
                
                
                
                20,549
                
                
                
                (2,054
                )Internet
      micro-loan fees
                
                
                11,788
                
                
                
                7,718
                
                
                
                4,070Fees
      on non-securitized credit card receivables
                
                
                —
                
                
                
                2,642
                
                
                
                (2,642
                )Income
      on investments in previously charged-off receivables
                
                
                4,319
                
                
                
                18,797
                
                
                
                (14,478
                )Gross
      profit on auto sales
                
                
                8,471
                
                
                
                9,098
                
                
                
                (627
                )Gains
      (losses) on investments in securities
                
                
                77
                
                
                
                (5,161
                )
                
                
                5,238Other
                
                
                1,315
                
                
                
                2,621
                
                
                
                (1,306
                )Other
      operating (loss) income:(Loss)
      income from retained interest in credit card receivables
      securitized
                
                
                (158,255
                )
                
                
                34,322
                
                
                
                (192,577
                )Fees
      on securitized receivables
                
                
                6,229
                
                
                
                8,271
                
                
                
                (2,042
                )Servicing
      income
                
                
                39,404
                
                
                
                48,286
                
                
                
                (8,882
                )Ancillary
      and interchange revenues
                
                
                5,998
                
                
                
                15,421
                
                
                
                (9,423
                )Gain
      on repurchase of convertible senior notes
                
                
                160
                
                
                
                —
                
                
                
                160Equity
      in (loss) income of equity-method investees
                
                
                (2,182
                )
                
                
                8,474
                
                
                
                (10,656
                )$
                (54,243
                )
                
                $
                182,047
                
                
                $
                (236,290
                )Provision
      for loan losses
                
                
                12,763
                
                
                
                20,406
                
                
                
                7,643Operating
      expenses:Salaries
      and benefits
                
                
                14,232
                
                
                
                18,779
                
                
                
                4,547Card
      and loan servicing
                
                
                58,233
                
                
                
                77,413
                
                
                
                19,180Marketing
      and solicitation
                
                
                4,182
                
                
                
                15,859
                
                
                
                11,677Depreciation
                
                
                6,357
                
                
                
                9,954
                
                
                
                3,597Other
                
                
                25,682
                
                
                
                29,131
                
                
                
                3,449Noncontrolling
      interests
                
                
                2,589
                
                
                
                (2,019
                )
                
                
                (4,608
                )




Three
Months Ended March 31, 2009, Compared to Three Months Ended March 31,
2008




Total interest
income. Total interest income consists primarily of finance charges and
late fees earned on loans and fees receivable we have not securitized in
off-balance-sheet securitization transactions—principally from our Auto Finance
segment.  The decrease is primarily due to the ongoing attrition
within our auto finance receivables portfolios as we do not originate sufficient
new loans to replace those of consumers who either pay off their balances or
become delinquent and charge off.




Also
included within total interest income (under the other category on our
consolidated statements of operations) is interest income we earn on our various
investments in debt securities, including interest earned on bonds distributed
to us from our equity-method investees and on our subordinated, certificated
interest in the Embarcadero Trust. Principal amortization caused a reduction in
interest income levels associated with some of our bonds and the Embarcadero
Trust interest. Moreover, the elimination of our holdings of bonds issued by
other third-party asset-backed securitizations contributed further to our
reduced other interest income relative to that experienced in the three months
ended March 31, 2008. Subsequent to the end of our second quarter of 2008, we
liquidated our remaining investments in third-party asset-backed securities in
response to margin calls; as a result, we do not have any continuing interest
income associated with these investments.




Our
ongoing total interest income is expected to be lower than experienced in prior
years and quarters. Due to tightening liquidity, we significantly restricted
growth within our Auto Finance segment beginning with the third quarter of 2008,
and absent our obtaining additional financing at attractive terms and pricing,
we expect interest income within our Auto Finance segment to decline with net
liquidations in its receivables levels for the foreseeable future.




Interest
expense. The decreases are primarily due to repurchases of our
convertible senior notes during 2008 and in the first quarter of 2009 as well as
our declining interest expense levels associated with the reduced levels of
collateralized financing of our investments in third-party asset-backed
securitizations. With our disposition of these investments immediately after the
close of our second quarter of 2008, we will not incur any further interest
costs associated with the financing of these investments.




Our noted
declines in interest costs were partially offset, however, by higher interest
costs within our MEM, U.K.-based, Internet, micro-loan operations, reflecting
the funding of receivables growth within these operations through draws against
available credit lines. Because MEM’s cash flows at moderate growth levels
should allow it to de-lever in 2009 and pay down its outstanding debt, we expect
to incur diminishing interest costs throughout 2009 related to this business
line.


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Increased
pricing on debt facilities within our Auto Finance segment (as of the third
quarter of 2008) also partially offset our noted declines in interest costs.
However, we expect a gradual reduction in interest costs within this segment
over time, reflecting both lower advance rates, and hence lower relative
outstanding debt balances, and expected contractions in this segment’s
receivables as we have significantly curtailed marketing within this
segment.




The
above-noted net declines in interest costs will be partially offset in the
future by increasing non-cash interest charges as a result of our adoption of
FSP APB 14-1 effective January 1, 2009. The amount of interest expense
attributable to our adoption of this new standard will gradually increase over
time slowing the downward trend we have been seeing in total interest costs. Our
adoption of FSP APB 14-1 contributed an additional $2.5 million to interest
expense for the three months ended March 31, 2009, and our retrospective
application of this pronouncement to the first three months ended March 31, 2008
resulted in $2.5 million of higher interest expense than we originally reported
in that period; offsetting the trending higher interest costs that we expect in
each passing quarter under FSP APB 14-1, however, was the effect of repurchases
of our convertible senior notes between the first quarter of 2008 and the first
quarter of 2009.


Fees and related
income on non-securitized earning assets. The factors affecting our
levels of fees and related income on non-securitized earning assets
include:




•
            lower
      retail micro-loan fees due to our implementation of new credit
      scoring models that initially served to reduce the number of new loan
      originations and thus constricted fee income, while also reducing
      associated charge offs;




•
            increases
      in Internet micro-loan fees, reflecting our organic growth of its
      operations;




•
            decreases
      in income on investments in previously charged-off receivables principally
      reflecting the adverse effects of the dispute with Encore based on its
      failure to continue purchases of previously charged-off receivables under
      our forward flow contract as discussed in detail within the Investment in Previously
      Charged-Off Receivables Segment section below—offset somewhat,
      however, by growth in the segment’s balance transfer program and Chapter
      13 bankruptcy activities;




•
            slightly
      diminished gross profits on automotive vehicle sales for the three months
      ended March 31, 2009 relating to our JRAS operations primarily due to the
      closure of four facilities during the first quarter of 2009 and slowing
      sales in its remaining facilities;
and




•
            lowers
      levels of losses associated with our investments in securities primarily
      due to our cessation of a significant majority of these activities as we
      liquidated our remaining investments in third-party asset-backed
      securities in response to margin calls in the second quarter of
      2008.




As we
have now disposed of all of our investments in third-party asset-backed
securities, we expect no further losses on these investments.




Prospects
for near-term profits and revenue growth within our Investments in Previously
Charged-off Receivables segment are uncertain pending resolution of its disputes
with Encore, the effects of the economic downturn on its ability to collect
certain pools of previously charged-off paper at sufficient levels to earn
desired returns and the effects of liquidity constraints on the ability of this
segment to purchase previously charged-off paper.




Additionally,
we expect Auto Finance segment gross profits to remain relatively flat to
potentially lower during 2009 given our decision to close four of JRAS’s twelve
locations during the first quarter of 2009. We do not intend to expand JRAS’s
operations for the foreseeable future and may take further actions to limit the
amount of capital required to fund ongoing operations.




Lastly,
we currently expect continued, but limited, growth in fees from our U.K.-based
Internet micro-loan operations within MEM as this entity continues to execute on
its growth plans. Moreover, with the re-commencement of loan generation within
our Ohio retail micro-loan storefronts coupled with new underwriting criteria,
we expect increases in retail micro-loan fees for 2009 along with a return to
profitability in the second half of the year. Our expectations here are
tempered, however, based on adverse regulatory developments within Arkansas that
have arisen subsequent to the close of our first quarter of 2009; see our Retail Micro-Loans Segment
discussion for further details with respect to Arkansas.




Fees and related
(loss) income on securitized earning assets. Fees and related (loss)
income on securitized earning assets include (1) securitization gains,
(2) income from retained interests in credit card receivables securitized
and (3) returned-check, cash advance and other fees associated with our
securitized credit card receivables.




Given the
current net liquidating status of each of our credit card receivables portfolios
within their respective securitization trusts, we have not recognized any
securitization gains during 2009, and absent portfolio additions we do not
anticipate any securitization gains for the foreseeable future.




We
experienced losses on retained interests in credit card receivables securitized
during the first three months of 2009.  The record number of new
accounts originated in the second and third quarters of 2007 generated
significant fee income during the first quarter of 2008. Throughout 2008,
however, we saw significant declines in the levels of receivables within our
originated portfolios, which resulted in significantly lower fee billings for
the first quarter of 2009. Also contributing to losses we experienced in the
first quarter of 2009 on our retained interests in credit card receivables were
(1) our inability to re-price accounts owned by CB&T at market-appropriate
pricing (a matter that is the subject of litigation between us and CB&T),
(2) certain adverse changes to our retained interest valuation assumptions given
ongoing current negative trends in the U.S. and U.K. economies, (3) certain
account actions (including reductions in credit lines and account closures) that
have negatively affected


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the fair
value of our interest-only strips embedded within our income from retained
interests in credit card receivables securitized computations and resulted in
accelerations of charge offs as some customers are either unwilling or unable to
pay down on existing balances once account actions have been taken, and (4) the
effects of significant fee and finance charge credits that we provided to
customers in the first quarter of 2009 under incentive programs aimed at
stimulating prompt and increased payments from customers in the face of
reductions in payment rates due to deteriorating economic
conditions.




In the
Credit Cards Segment
section below, we provide further details concerning delinquency and credit
quality trends, which affect the level of our income from retained interests in
credit card receivables securitized and fees on securitized
receivables.




Servicing income.Servicing income decreased relative to 2008 levels due to the effects on
our servicing compensation of liquidations in our credit card receivables
portfolios and those of our equity-method investees for which we have been
engaged as servicer. In the absence of portfolio acquisitions and given
currently planned originations at only test levels, we anticipate further
decreases in our servicing income levels throughout 2009 and beyond due to our
currently liquidating portfolios.




Ancillary and
interchange revenues. Ancillary and interchange revenues decreased in the
first three months of 2009, when compared to the same period in 2008. This
decrease resulted from significantly fewer new credit card account additions in
recent months and net liquidations we have experienced in all of our credit card
receivables portfolios. Absent portfolio acquisitions, we expect further
reductions in our ancillary and interchange revenues throughout 2009 principally
because we are currently originating only a small number of new credit card
accounts, thereby resulting in a gradual liquidation of our
portfolios.




Equity in (loss)
income of equity-method investees. The adverse results with respect to
our equity-method investees primarily reflects the effects of worsening economic
conditions on the performance of the credit card receivables underlying our
equity-method investees’ retained interests holdings and the valuations thereof,
as well as our continued gradual liquidation of the receivables balances
associated with these equity-method investees.




Provision for
loan losses. Our provision for loan losses covers aggregate loss
exposures on (1) principal receivable balances, (2) finance charges
and late fees receivable underlying income amounts included within our total
interest income category, and (3) other fees receivable. The decrease in
the provision for loan losses is primarily due the declines in receivables we
have experienced in our Auto Finance segment.  We currently expect our
2009 provision for loan losses to be relatively comparable to that in 2008. We
should experience increased 2009 loan losses associated with our plans to
continue modestly growing our retail and Internet micro-loans and given
potential degradation in credit quality based on weakness in the U.S. and U.K.
economies. These increases are expected to be offset, however, by net
liquidations within our Auto Finance segment receivables.




Total other
operating expense. Total other operating expense decreased, reflecting
the following:




·
            decreases
      in marketing and solicitation costs due to our desire to preserve capital
      given the current dislocation of the liquidity markets and our
      corresponding scale back in our credit card marketing efforts primarily to
      test levels;




·
            diminished
      salaries and benefits costs resulting from our ongoing cost-cutting
      efforts as we continue to adjust our internal operations to reflect the
      declining size of our existing
portfolios;




·
            decreases
      within card and loan servicing expenses, primarily as a result of credit
      card and other loan portfolio liquidations—such decreases being partially
      offset by increased costs associated with our MEM, U.K.-based, Internet,
      micro-loan operations that we expanded throughout 2008 and in the first
      quarter of 2009;




·
            decreases
      in depreciation due to cost containment measures, specifically a
      diminished level of capital investments by us in light of liquidity
      constraints; and




·
            lower
      other expenses (which include, for example, rent and other occupancy
      costs, legal and professional fees, transportation and travel costs,
      telecom and data processing costs, insurance premiums, and other overhead
      cost categories) as we continue to adjust our associated internal costs
      based on the declining size of our existing
  portfolios.


29
 Table of Contents




While we
incur certain base levels of fixed costs, the majority of our operating costs
are variable based on the levels of accounts we market and receivables we
service (both for our own account and for others) and the pace and breadth of
our search for, acquisition of and introduction of new business lines, products
and services. We have substantially reduced our exploration of new products and
services and research and development efforts pending improvements in the
liquidity markets. In addition, we have terminated various operations that were
start-up in nature and were not individually meeting our current capital
allocation requirements. Given our current focus on cost-cutting and capital
preservation in light of the continuing dislocation in the liquidity markets and
significant uncertainties as to when these markets will improve, we expect
further reductions in marketing efforts and expense levels and in most other
cost categories discussed above over the next several quarters. We continue to
perform extensive reviews of all areas of our businesses for cost savings
opportunities to better align our costs with our currently liquidating portfolio
of managed receivables.




Notwithstanding
the above and notwithstanding some anticipated legal cost savings given our
December 2008 settlement of litigation with the FTC and FDIC, we continue to
incur heightened legal costs and will continue to incur these costs at
heightened levels until we resolve all outstanding
litigation.  Additionally, while it is relatively easy for us to scale
back our variable expenses, it is much more difficult for us to appreciably
reduce our fixed and other costs associated with an infrastructure (particularly
within our Credit Cards segment) that was built to support growing managed
receivables and levels of managed receivables that are significantly higher than
both our current levels and the levels that we expect to see given our
liquidity-related receivables contraction efforts. Our inability to reduce these
costs as rapidly as our receivables reductions is expected to put continuing
pressure on our ability to be profitable.




Noncontrolling
interests. We reflect the ownership interests of noncontrolling holders
of equity in our majority-owned subsidiaries (including management team holders
of shares in our subsidiary entities; see Note 13, “Stock-Based Compensation”)
as noncontrolling interests in our consolidated statements of operations.
Generally, this expense is declining, which is consistent with liquidations of
acquired credit card portfolios within securitization trusts, the retained
interests of which are owned by our majority-owned subsidiaries and the
resulting relative decline in contributions of our majority-owned subsidiaries
to income from retained interests in credit card receivables securitized. These
trends within our majority-owned subsidiaries, coupled with the challenges they
have faced given liquidity constraints and dislocation in the economy, have
resulted in net losses for our majority-owned subsidiaries and hence income
recognition with respect to our noncontrolling interests in recent quarters,
including the first quarter of 2009. Contributors to the recent losses
experienced by our majority-owned subsidiaries include losses stemming from
reduced income on our retained interests in securitized credit card receivables
within these subsidiaries in part associated with more conservative valuation
assumptions used with respect to their retained interest valuations and losses
incurred within the majority-owned subsidiary that is a holding company within
our Investments in Previously Charged-off Receivables segment principally given
the ongoing dispute with Encore as discussed throughout this
report.  Further contributing to income recognition with respect to
our noncontrolling interests in the first quarter of 2009 is the new requirement
with our adoption of Statement 160 that we continue to allocate losses to the
noncontrolling interests of our majority-owned subsidiaries even if the
allocation results in a deficit balance in the noncontrolling interests’ capital
account; as such, the adoption of Statement 160 will provide us with modest
income recognition increases as we allocate to noncontrolling interests a
portion of the losses we would have otherwise absorbed prior to the effective
date of Statement 160.




Income
taxes. Our overall effective tax benefit rate (computed considering both
continuing and discontinued operations in the aggregate) was 34.5% and 49.5% for
the three months ended March 31, 2009 and 2008, respectively. The variance in
the effective tax benefit rates between these two years is substantially related
to differing ratios of our permanent differences to pre-tax GAAP loss levels. We
have experienced no material changes in effective tax benefit rates associated
with differences in filing jurisdictions and changes in law between these two
years.




Credit
Cards Segment




Our
Credit Cards segment includes our activities relating to investments in and
servicing of our various credit card portfolios as well as the performance
associated with various investments in asset-backed debt and equity securities.
The revenues we earn from credit card activities primarily include finance
charges, late fees, over-limit fees, annual fees, activation fees, monthly
maintenance fees, returned-check fees and cash advance fees. We also sell
ancillary products such as memberships, insurance products, subscription
services and debt waiver. Additionally, we earn interchange fees, which
represent a portion of the merchant fee assessed by card associations based on
cardholder purchase volumes underlying credit card receivables.


30
 Table of Contents


Background




We make
various references within our discussion of the Credit Cards segment to our
managed receivables. In calculating managed receivables data, we assume that
none of the credit card receivables underlying our off-balance-sheet
securitization facilities was ever transferred to a securitization trust, and we
present our credit card receivables as if we still owned them. We reflect the
portion of the receivables that we own within our managed receivables data,
whether or not we consolidate the entity in which the receivables are held.
Therefore, managed receivables data include both securitized and non-securitized
credit card receivables. They include the receivables we manage for our
consolidated subsidiaries, except for the noncontrolling interest holders’
shares of the receivables, and they also include our share of the receivables
that we manage for our equity-method investees.




Financial,
operating and statistical data based on these aggregate managed receivables are
vital to any evaluation of our performance in managing our credit card
portfolios, including our underwriting, servicing and collecting activities and
our valuing of purchased receivables. In allocating our resources and managing
our business, management relies heavily upon financial data and results prepared
on this “managed basis.” Analysts, investors and others also consider it
important that we provide selected financial, operating and statistical data on
a managed basis because this allows a comparison of us to others within the
specialty finance industry. Moreover, our management, analysts, investors and
others believe it is critical that they understand the credit performance of the
entire portfolio of our managed receivables because it reveals information
concerning the quality of loan originations and the related credit risks
inherent within the securitized portfolios and our retained interests in their
underlying securitization trusts.




Reconciliation
of the managed receivables data to our GAAP financial statements requires:
(1) recognition that we now sell substantially all of our credit card
receivables in securitization transactions; (2) an understanding that our
managed receivables data are based on billings and actual charge offs as they
occur, without regard to any changes in our allowance for uncollectible loans
and fees receivable; (3) inclusion of our economic share of (or equity
interest in) the receivables that we manage for our equity-method investees; and
(4) removal of our noncontrolling interest holders’ shares of the managed
receivables underlying our GAAP consolidated results.




We
typically have purchased credit card receivables portfolios at substantial
discounts. A portion of these discounts is applied against receivables acquired
for which charge off is considered likely, including accounts in late stages of
delinquency at the date of acquisition; this portion is measured based on our
acquisition date estimate of the shortfall of cash flows expected to be
collected on the acquired portfolios relative to the face amount of receivables
represented within the acquired portfolios. We refer to the balance of the
discount for each purchase not needed for credit quality as accretable yield,
which we accrete into net interest margin using the interest method over the
estimated life of each acquired portfolio. As of the close of each financial
reporting period, we evaluate the appropriateness of the credit quality discount
component of our acquisition discount and the accretable yield component of our
acquisition discount based on actual and projected future results.




Asset
Quality




Our
delinquency and charge-off data at any point in time reflect the credit
performance of our managed receivables. The average age of the credit card
accounts underlying our receivables, the timing of portfolio purchases, the
success of our collection and recovery efforts and general economic conditions
all affect our delinquency and charge-off rates. The average age of the accounts
underlying our credit card receivables portfolio also affects the stability of
our delinquency and loss rates. We consider this delinquency and charge-off data
in the valuation of our retained interests in credit card receivables
securitized which is a component of securitized earning assets on our
consolidated balance sheets.




Our
strategy for managing delinquency and receivables losses consists of account
management throughout the customer relationship. This strategy includes credit
line management and pricing based on the risks of the credit card accounts. See
also our discussion of collection strategies under the heading “How Do We
Collect from Our Customers?” in Item 1, “Business,” of our Annual Report on
Form 10-K for the year ended December 31, 2008.




The
following table presents the delinquency trends of the credit card receivables
that we manage, as well as charge-off data and other managed loan statistics (in
thousands; percentages of total):




At or For the
      Three Months Ended2009
                    
                    
                    2008
                    
                    
                    2007Mar.
      31
                    
                    
                    Dec.
      31
                    
                    
                    Sep.
      30
                    
                    
                    Jun.
      30
                    
                    
                    Mar.
      31
                    
                    
                    Dec.
      31
                    
                    
                    Sep.
      30
                    
                    
                    Jun.
      30Period-end managed
      receivables
                    
                    $
                    2,299,925
                    
                    
                    $
                    2,714,375
                    
                    
                    $
                    3,041,877
                    
                    
                    $
                    3,126,936
                    
                    
                    $
                    3,378,827
                    
                    
                    $
                    3,717,050
                    
                    
                    $
                    3,722,373
                    
                    
                    $
                    3,501,468Period-end
      managed accounts
                    
                    
                    3,392
                    
                    
                    
                    3,801
                    
                    
                    
                    4,171
                    
                    
                    
                    4,358
                    
                    
                    
                    4,775
                    
                    
                    
                    5,105
                    
                    
                    
                    5,268
                    
                    
                    
                    4,756Percent
      30 or more days past due
                    
                    
                    23.3
                    %
                    
                    
                    23.8
                    %
                    
                    
                    18.8
                    %
                    
                    
                    18.0
                    %
                    
                    
                    21.4
                    %
                    
                    
                    24.9
                    %
                    
                    
                    21.0
                    %
                    
                    
                    18.6
                    %Percent
      60 or more days past due
                    
                    
                    18.7
                    %
                    
                    
                    17.4
                    %
                    
                    
                    13.9
                    %
                    
                    
                    13.4
                    %
                    
                    
                    17.8
                    %
                    
                    
                    19.6
                    %
                    
                    
                    15.5
                    %
                    
                    
                    14.0
                    %Percent
      90 or more days past due
                    
                    
                    14.6
                    %
                    
                    
                    12.7
                    %
                    
                    
                    9.8
                    %
                    
                    
                    9.7
                    %
                    
                    
                    14.3
                    %
                    
                    
                    14.2
                    %
                    
                    
                    11.0
                    %
                    
                    
                    9.6
                    %Average
      managed receivables
                    
                    $
                    2,530,390
                    
                    
                    $
                    2,903,953
                    
                    
                    $
                    3,079,867
                    
                    
                    $
                    3,227,006
                    
                    
                    $
                    3,558,518
                    
                    
                    $
                    3,731,286
                    
                    
                    $
                    3,613,924
                    
                    
                    $
                    3,419,306Combined
      gross charge-off ratio
                    
                    
                    52.6
                    %
                    
                    
                    33.9
                    %
                    
                    
                    33.0
                    %
                    
                    
                    50.6
                    %
                    
                    
                    50.2
                    %
                    
                    
                    37.4
                    %
                    
                    
                    29.8
                    %
                    
                    
                    34.6
                    %Net
      charge-off ratio
                    
                    
                    20.7
                    %
                    
                    
                    14.8
                    %
                    
                    
                    15.4
                    %
                    
                    
                    21.5
                    %
                    
                    
                    20.6
                    %
                    
                    
                    15.8
                    %
                    
                    
                    13.9
                    %
                    
                    
                    16.9
                    %Adjusted
      charge-off ratio
                    
                    
                    20.2
                    %
                    
                    
                    14.2
                    %
                    
                    
                    14.5
                    %
                    
                    
                    20.3
                    %
                    
                    
                    19.1
                    %
                    
                    
                    13.9
                    %
                    
                    
                    10.5
                    %
                    
                    
                    9.6
                    %Total
      yield ratio
                    
                    
                    36.2
                    %
                    
                    
                    46.4
                    %
                    
                    
                    44.4
                    %
                    
                    
                    45.3
                    %
                    
                    
                    47.4
                    %
                    
                    
                    56.1
                    %
                    
                    
                    53.0
                    %
                    
                    
                    49.3
                    %Gross
      yield ratio
                    
                    
                    22.0
                    %
                    
                    
                    25.3
                    %
                    
                    
                    24.8
                    %
                    
                    
                    23.1
                    %
                    
                    
                    24.3
                    %
                    
                    
                    29.2
                    %
                    
                    
                    29.2
                    %
                    
                    
                    28.6
                    %Net
      interest margin
                    
                    
                    3.7
                    %
                    
                    
                    13.6
                    %
                    
                    
                    14.8
                    %
                    
                    
                    12.3
                    %
                    
                    
                    13.2
                    %
                    
                    
                    18.0
                    %
                    
                    
                    19.1
                    %
                    
                    
                    19.0
                    %Other
      income ratio
                    
                    
                    (1.9
                    )%
                    
                    
                    9.8
                    %
                    
                    
                    7.7
                    %
                    
                    
                    (0.8
                    )%
                    
                    
                    (0.8
                    )%
                    
                    
                    11.9
                    %
                    
                    
                    13.1
                    %
                    
                    
                    8.4
                    %Operating
      ratio
                    
                    
                    9.3
                    %
                    
                    
                    8.6
                    %
                    
                    
                    9.1
                    %
                    
                    
                    9.8
                    %
                    
                    
                    9.4
                    %
                    
                    
                    11.9
                    %
                    
                    
                    10.5
                    %
                    
                    
                    10.6
                    %


Managed receivables.Our individual
purchased portfolios currently are in a state of liquidation due to the absence
of new cardholders to replace those who either pay off their balances or become
delinquent and charge off. The general trend-line decrease in our managed
receivables beginning in the fourth quarter of 2007 principally was due to
reductions in originations midway through the third quarter of 2007 in response
to tightened liquidity markets, combined with significant charge offs, primarily
of accounts originated in the second and third quarters of 2007. Additionally,
like other credit card issuers, we experienced lower than expected cardholder
purchases beginning in the fourth quarter of 2007, which also contributed to the
trend-line decrease in our managed receivables.




Recent
account actions, including credit line reductions, account closures and finance
charge and fee credits under incentive programs aimed at increasing cardholder
payment rates, have resulted in an accelerated pace of reductions in our managed
receivables balances. Beyond the significant effect on our managed receivables
balances of finance charge and fee credits aimed at improving customer payment
rates, balances have fallen rapidly in recent quarters as (1) there are
significantly lower cardholder purchases and (2) many customers are either
unwilling or unable to continue making payments on closed accounts given the
current economic landscape, thereby leading to delinquencies and ultimate charge
offs of the accounts and their underlying receivables. Because of the
significance of the credit line reduction and account closure actions that we
took in the fall of 2008 and because of ongoing finance charge and fee credit
programs that appear effective at improving payment rates, we anticipate that
the recent accelerated reduction in our managed receivables balances will
continue into the second quarter of this year, after which time we expect
managed receivables levels to decline at a slower pace. We have essentially curtailed our credit card marketing efforts
in light of dislocation in the liquidity markets and our uncertainty as to when
these markets will rebound sufficiently to facilitate organic growth in our
credit card receivables operations and as a result do not anticipate meaningful
additions in the near term to offset the balance contractions noted
above.


31
 Table of Contents


Delinquencies.
Delinquencies have the potential to impact net income in the form of net credit
losses. Delinquencies also are costly in terms of the personnel and resources
dedicated to resolving them. We intend for the account management strategies we
use on our portfolio to manage and, to the extent possible, reduce the higher
delinquency rates that can be expected in a more mature managed portfolio such
as ours. These account management strategies include conservative credit line
management, purging of inactive accounts and collection strategies intended to
optimize the effective account-to-collector ratio across delinquency categories.
We further describe these collection strategies under the heading “How Do We
Collect from Our Customers?” in Item 1, “Business,” in our Annual Report on
Form 10-K for the year ended December 31, 2008. We measure the success of these
efforts by measuring delinquency rates. These rates exclude accounts that have
been charged off.
  We
experienced an increasing trend in our 30-plus, 60-plus and 90-plus day
delinquencies through December 31, 2007. These increases predominantly are
attributable to a mix change reflecting disproportionate receivables growth
rates in our lower-tier credit card portfolios relative to those of our other
credit card receivables. Our lower-tier credit card receivables typically
experience substantially higher delinquency rates and charge-off levels than
those of our other originated and purchased portfolios. Since December 31, 2007,
however, our delinquency statistics have benefited
from a mix change in the other direction whereby disproportionate charge-off
levels for our lower-tier credit card portfolios relative to those of our other
credit card receivables have caused a decline in lower-tier credit card
receivables as a percentage of our aggregate managed credit card
receivables.




The
accounts underlying our lower-tier credit card receivables generally have a
shorter life cycle than our other accounts, with peak charge offs occurring
approximately eight to nine months after activation. Our lower-tier credit card
account growth recently has fluctuated significantly. We experienced record
account growth in the second and third quarters of 2007, moderate account
originations in the fourth quarter of 2007 and significantly lower and trending
lower account originations throughout 2008. This “marketing volume-based
volatility” results in increasing delinquencies in the months shortly following
periods of high growth, followed by high charge offs generally in the third
quarter following activation. Despite these fluctuations, we believe that the
heightened delinquency and charge-off levels and greater volatility in our
delinquency statistics associated with our lower-tier credit card offerings are
reasonable based on the relative returns offered.




The 2007
mix change toward a greater percentage of our receivables being comprised of
lower-tier credit card receivables would have resulted in even greater 2007
delinquencies (as a percentage of managed receivables) but for our U.K.
Portfolio acquisition in the second quarter of 2007; our U.K. Portfolio’s
delinquencies are significantly below those of our lower-tier credit card
receivables.




In the
first quarter of 2008, we experienced the initial charge offs from the record
1.5 million aggregate originations of the second and third quarters of
2007. A portion of these accounts underlying our lower-tier credit card
offerings was significantly delinquent at the end of the fourth quarter of 2007,
and many accounts charged off in the first two quarters of 2008. Compounding the
impacts on delinquency rates is the fact that we had significantly reduced new
originations in the fourth quarter of 2007 and thereafter and as such did not
receive any benefit of adding new current (i.e., non-delinquent) receivables,
which would serve to suppress delinquency rates somewhat (“denominator effect”).
Generally offsetting the so-called denominator effect in recent quarters,
however, is the relative maturity of all of our credit card receivables
portfolios. Given our significantly reduced marketing and origination
activities, most of our credit card accounts have now passed through peak
delinquency and charge-off stages of their vintage cycles. Supporting this
observation is the fact that substantially all of our individual credit card
receivables portfolios had a lower percentage of 60-plus day delinquencies at
September 30, 2008 than they did at September 30, 2007.




Notwithstanding
the above and the general observation that our delinquencies and charge offs are
lower in more mature portfolios that have passed through their peak delinquency
and charge-off stages, we took account actions that caused a rise in
delinquencies in the fourth quarter of 2008 and in the first quarter of
2009—namely credit line reductions and account closures. We know from our
experience with purchasing credit card portfolios from others that when we
reduce credit lines and close accounts, we cause an acceleration of
delinquencies and charge offs for those cardholders, many of whom ultimately
would have charged off after a longer period of account utilization. We do not
believe, however, that credit line reductions and account closures cause
good-performing cardholders to charge off at significantly higher levels. This
is to say that we believe credit line reductions and account closures cause an
accelerating shift forward in our credit card charge-off curves, rather than
causing a lift in these curves.




We do
note, however, that our fall 2008 credit line reductions and account closures
certainly did not account for all of the increase in delinquencies at December
31, 2008 and further trending increases in delinquencies at March 31, 2009. We
saw a significant downward shift in payments rates generally beginning in
November 2008, and our delinquency statistics reflect this and the effects of
continued and worsening economic weakness on the ability of our cardholders to
make their required minimum payments. Higher delinquencies at December 31, 2008
and March 31, 2009 will translate into higher charge-off rates in the first
couple quarters of 2009. Once the wave of account reduction and account
closure-related charge offs cycle through in the first two quarters of 2009, we
expect to begin to see the lower delinquency and charge-off benefits of our more
mature portfolios. However, with growing unemployment levels and continuing
economic weakness in both of our U.S. and U.K. credit card receivables markets,
we could see further deterioration in payment rates and higher delinquencies and
charge offs even for our generally better performing cardholders who remain with
us after credit line reduction and account closure actions.




Charge
offs. We generally charge off credit card receivables when they become
contractually 180 days past due or within thirty days of notification
and confirmation of a customer’s bankruptcy or death. However, if a cardholder
makes a payment greater than or equal to two minimum payments within a month of
the charge-off date, we may reconsider whether charge-off status remains
appropriate. Additionally, in some cases of death, receivables are not charged
off if, with respect to the
deceased customer’s account, there is a surviving, contractually liable
individual or an estate large enough to pay the debt in
full.


32
 Table of Contents





Our
lower-tier credit card offerings have higher charge offs relative to their
average managed receivables balances, than do our other portfolios. The growth
in these receivables throughout 2007 changed the mix of our receivables by
weighting the lower-tier credit card portfolio more heavily than in prior years.
Based on this mix change, we generally would expect our charge-off ratios to
increase during periods of disproportionate growth in our lower-tier credit card
receivables. We saw this mix change effect given our record lower-tier credit
card originations through the third quarter of 2007, which adversely impacted
our combined gross charge-off ratio and our net charge-off ratio through the
second quarter of 2008. All things being equal, we would expect reduced
charge-off ratios in future quarters due to a mix change in the other direction
whereby recent disproportionate charge-off levels for our lower-tier credit card
portfolios relative to those of our other credit card receivables have caused a
decline in lower-tier credit card receivables as a percentage of our aggregate
managed credit card receivables. As previously mentioned, however, recent credit
line reduction and account closure actions we have undertaken resulted in higher
charge offs in the first quarter of 2009 and are expected to result in higher
charge offs in the second quarter of 2009 before returning to more normalized
levels.




In
addition to the generally increasing trend in charge offs through the end of the
second quarter of 2008, we also generally had experienced seasonal trends in
which the first and fourth quarters incur higher levels of charge offs than do
the second and third quarters. This tendency results from the cash flow patterns
impacting our cardholders. Typically, because of tax refunds, we experience
greater remittances by cardholders late in the first quarter of each year,
improving their delinquency status and reducing charge offs in the second and
third quarters. This trend was muted somewhat by the effects of our U.K.
portfolio acquisition in the second quarter of 2007 and is not evident at all in
the second quarter of 2008 due to the peak vintage charge-off effects of our
third quarter 2007 lower-tier credit card originations. Moreover, our recent
credit line reduction and account closure actions are expected to disrupt
general seasonal patterns in the second quarter of 2009 and contribute to higher
than typical charge-off rates.




Combined gross
charge-off ratio. Our combined gross charge-off ratio increased in the
fourth quarter of 2007 due primarily to marketing volume-based fluctuations
caused by greater volumes of our lower-tier credit card accounts originated in
prior quarters that reached their peak charge-off levels in the fourth quarter.
In addition, we experienced seasonal increases that were amplified somewhat by
the broader economic pressures felt by our cardholders. These two factors
carried over into the first two quarters of 2008, with the marketing
volume-based fluctuations having a far greater impact than in the fourth quarter
of 2007. Because we had incurred the peak charge offs associated with our record
lower-tier credit card account originations of the second and third quarters of
2007, the third and fourth quarter 2008 combined gross charge-off ratios dropped
dramatically from the first half of 2008 to below the average combined gross
charge-off ratio we experienced in 2007. The increase in the combined gross
charge-off level experienced in the first quarter of 2009 is largely
attributable to credit line reduction and account closure actions undertaken in
the fall of 2008, which have resulted in an acceleration of charge offs. We
expect this trend to continue through the second quarter of 2009.
Notwithstanding an adverse economic environment and the adverse denominator
effect discussed previously, we expect the combined gross charge-off ratio to
begin trending down after the second quarter of 2009 given that our recent
credit line reduction and account closure actions will result in a well-seasoned
base of more stable cardholders after the effects of the actions are realized
within our charge-off statistics.




Net
charge-off ratio.The net charge-off ratio measures principal
charge offs, net of recoveries. Seasonal trends apply to this ratio in a manner
similar to their effects on the combined gross charge-off ratio. The increasing
trend due to the shift in our mix toward a greater percentage of our receivables
being comprised of lower-tier credit card receivables also affected our net
charge-off ratio over the past several quarters, but to a lesser degree than it
affected our combined gross charge-off ratio. Our lower-tier credit card
portfolio has a significantly lower principal to total receivables ratio than do
our other portfolios, so growth in this portfolio has less of an effect on our
net charge-off ratio than it does on our combined gross charge-off
ratio.




The net
charge-off ratio was elevated in the second quarter of 2007 due to our U.K.
Portfolio acquisition in that quarter. This portfolio had a significant number
of receivables that were in a late stage of delinquency and that charged off in
the months following our acquisition. Without this U.K. Portfolio acquisition,
our net charge-off ratio would have fallen to 13.1% in the second quarter of
2007, in line with our seasonal trend. The ratio also would have fallen in the
third quarter of 2007, but to a lesser degree than it did, as the incremental
charge offs from the U.K. Portfolio were much greater in the second quarter than
in the third. In the fourth quarter of 2007, our net charge-off ratio was lower
than it otherwise would have been without the U.K. Portfolio acquisition, as the
U.K. Portfolio’s receivables have a lower ongoing net charge-off ratio than the
receivables of our other portfolios. In the first quarter of 2008, the net
charge-off ratio increased at a slightly lesser rate than our combined gross
charge-off ratio, which is consistent with our expectations that our lower-tier
credit card portfolio will influence net charge offs less than it will affect
combined gross charge offs due to the relative mix of a cardholder’s balance
between principal and finance charge and fee receivables. However, the net
charge-off ratio increased at a greater rate than the gross charge-off ratio in
the second quarter of 2008 because peak vintage charge offs of


33
 Table of Contents




our
lower-tier credit card receivables reversed recently experienced trending
changes in mix toward a greater percentage of our portfolio being comprised of
lower-tier credit card receivables. As the peak vintage charge offs have now
been fully incurred, we saw a trending decline in the net charge-off ratio in
the last two quarters of 2008. This trending decline was abated during the first
quarter of 2009, however, given the previously discussed adverse effects of our
recent credit line reduction and account closure actions, which we expect to
continue through the second quarter of 2009.




Adjusted charge-off ratio.This ratio
reflects our net charge offs, less credit quality discount accretion with
respect to our acquired portfolios. Therefore, its trend line should follow that
of our net charge-off ratio, adjusted for the diminishing impact of past
portfolio acquisitions and for the additional impact of new portfolio
acquisitions. Because our most recent portfolio acquisition was our second
quarter 2007 U.K. Portfolio acquisition, we expect the gap between the net
charge-off ratio and the adjusted charge-off ratio to continue to decline absent
the purchase of another portfolio at a discount to the face amount of its
receivables.




Total yield ratio
and gross yield ratio. As noted previously, the mix of our managed
receivables generally shifted throughout 2007 toward those receivables of our
lower-tier credit card offerings. These receivables have higher delinquency
rates and late and over-limit assessments than do our other portfolios, and thus
have higher total yield and gross yield ratios as well. Accordingly, we
generally would expect these ratios to increase with disproportionate growth in
and to decrease with disproportionate reductions in our lower-tier credit card
receivables.




Our total
and gross yield ratios were adversely affected  in the second quarter
of 2007 due to the addition of our acquired U.K. Portfolio. Its total yield and
gross yield are below average as compared to our other portfolios, and the
addition of the U.K. Portfolio negatively impacted our total yield and gross
yield ratios by 4.8% and 1.7%, respectively, in the second quarter of 2007 and
by 8.0% and 3.0%, respectively, in the second half of 2007. The effects of the
U.K. Portfolio on these measures likewise continued into 2008 and the first
quarter of 2009.




Our total
and gross yield ratios bear the effects throughout the final two quarters of
2007 and going forward of changes we made to our billing practices in keeping
with our goals of ensuring that our practices continue to be among the most
consumer-friendly practices in the credit card industry and to address evolving
negative amortization industry guidance. As an example of these changes, in
November 2007, we began to reverse fees and finance charges on the accounts of
cardholders who made their contractual payments to us so that those accounts
would not be in negative amortization. These changes reduced our gross yield
ratio in the fourth quarter of 2007, and because only two months of the effects
of these changes are reflected in the fourth quarter, they had a greater impact
throughout 2008.




Significant
declines in our total yield and gross yield ratios are noted in the first and
second quarters of 2008 primarily related to the relative delinquency status of
our lower-tier credit card receivables portfolio. We note that we do not bill
finance charges and fees on accounts ninety or more days delinquent. Late in the
fourth quarter of 2007, the initial wave of accounts from our record
1.5 million of predominantly lower-tier credit card originations in the
second and third quarters of 2007 became ninety or more days delinquent, and we
stopped charging finance charges and fees to these accounts. In the first and
second quarters of 2008, we did not bill finance charges and fees to a
significant portion of the accounts within our lower-tier credit card
receivables portfolio as the accounts remained ninety or more days delinquent.
We included these accounts in our average managed receivables, but generated no
yield from them, and our total and gross yield ratios declined as a result. Many
of these accounts charged off during these quarters, meaning that the effects of
this phenomenon should be much less significant for the foreseeable
future.




Partially
offsetting the beneficial effects in the third quarter of 2008 of reduced levels
of accounts in late stages of delinquency (for which we do not bill finance
charges and fees) were reduced early stage delinquency rates we experienced at
the end of the second quarter of 2008, which resulted in lower finance charge
and late fee billings in the third quarter of 2008. This trend reversed in the
fourth quarter of 2008 with rising delinquency levels. Also favorably affecting
our fourth quarter 2008 total and gross yield ratios were changes to terms and
re-pricings for many of our credit card accounts to reflect the higher risks and
costs we face in the current economic climate. In fact, these ratios suffered
somewhat in 2008 prior to these changes to terms and re-pricings as we were
effectively prohibited against making such changes by one of our issuing bank
partners—a matter that currently is subject to our claims against this issuing
bank partner in litigation. We expect our recent changes to terms and
re-pricings to positively affect our total and gross yield ratios going forward;
however, they were not adequate to offset the first quarter of 2009 adverse
effects on these ratios of the wave of later stage delinquencies (for which we
do not bill finance charges or fees) that resulted from our fourth quarter
credit line reduction and account closure actions as discussed above. This
negative trend is expected to continue into the second quarter of
2009.


34
 Table of Contents




Net interest
margin. Because of the significance of the late fees charged on
our lower-tier credit card receivables as a percentage of outstanding
receivables balances, we generally would expect our net interest margin to
increase as our lower-tier credit card receivables become a larger percentage
and to decrease as they become a smaller percentage of our overall managed
receivables. Principally by reason of peak lower-tier credit card receivables
charge-off vintage levels in the first and second quarters of 2008, we have
experienced reductions in our lower-tier credit card receivables levels as a
percentage of our managed credit card receivables over the past several
quarters. Accordingly, this is the principal factor that has contributed to the
general declining trend in our net interest margins relative to 2007
levels.




Our net
interest margin also has experienced reductions given the effects of our
acquired U.K. Portfolio in the second quarter of 2007. The net interest margin
for this portfolio is below the weighted average rate of our other portfolios,
and while the U.K. Portfolio offset had only a slight impact to our net interest
margin in the second quarter of 2007, it had a much greater impact in the third
and fourth quarters of 2007.




Our net
interest margin declined in the fourth quarter of 2007 due in part to higher
charge offs, which resulted from seasonal increases that were amplified somewhat
by economic pressures felt by our cardholders stemming from tightened liquidity
markets. Also contributing to trending contractions in our net interest margins
are the effects of negative-amortization-related changes to our billing
practices that we implemented beginning in November 2007—whereby to ensure
against negative amortization, we now reverse certain fees and finance charges
on the accounts of cardholders who make only their contractual payments to
us.




Our net
interest margins in the first and second quarters of 2008 were particularly
depressed due to changes within our lower-tier credit card receivables
portfolio. This portfolio generated lower finance charge and late fee billings
in the first two quarters of 2008 due to the significant portion of the accounts
within that portfolio that were in late stages of delinquency—stages for which
we do not bill finance charges or late fees. Further, many accounts within that
portfolio reached peak charge-off vintage levels and charged off during those
quarters, resulting in higher finance charge and late fee charge offs netting
against yields in the determination of our net interest margin for the quarters.
Because large volumes of second and third quarter of 2007 lower-tier credit card
receivables had rolled through their peak charge-off vintage levels by the end
of the second quarter of 2008, the net interest margin increased for the third
quarter of 2008. It declined in the fourth quarter of 2008, however, because of
continued reductions in our lower-tier credit card receivables as a percentage
of our total managed receivables and because of a heightened level of negative
amortization-related credits issued in the fourth quarter. Given our credit line
reduction and account closure actions undertaken in the fall of 2008, we
experienced further declines in our net interest margin for the first quarter of
2009 as reduced finance and late fee billings, coupled with an acceleration of
charge offs contributed to depress our net interest margin to historic lows.
These effects were exacerbated by significant finance charge and fee credits
issued in the first quarter of 2009 under incentive programs aimed at increasing
payment rates.  While we expect this negative trend to continue into
the second quarter of 2009, we do not anticipate it to be as dramatic as that
experienced in the first quarter with net interest margin levels improving
throughout the remainder of the year.




Other income ratio.We generally expect
our other income ratio to increase as our lower-tier receivables become a larger
percentage and to decrease as our lower-tier receivables become a smaller
percentage of our overall managed receivables. These receivables generate higher
membership, over-limit, monthly maintenance and other fees than do our other
portfolios.




Adversely
affecting our other income ratio principally beginning in the second quarter of
2007 was the performance of our then-held portfolio of investments in debt and
equity securities, which principally consisted of investments in CDOs and CMOs
backed by mortgages as well as trading positions in an ABX index and the
activities of which are reflected within our Credit Cards segment’s other income
ratio. While we generally generated income from these investments prior to the
second quarter of 2007, we incurred losses of $28.5 million, $37.4 million, $6.9
million, $5.2 million and $1.1 million in the second, third and fourth quarters
of 2007 and the first and second quarters of 2008, respectively. Excluding these
investment activities, our other income ratio would have increased to 11.8% and
17.2% in the second and third quarters of 2007, respectively, before declining
again to 12.7% in the fourth quarter of 2007 and -0.2% and 1.2% in the first and
second quarters of 2008, respectively. Because these investment activities were
completely discontinued by the end of the second quarter of 2008, we do not
expect any further effects from these activities in future periods.




The
addition of our acquired U.K. Portfolio in the second quarter of 2007 negatively
impacted our other income ratios for the last three quarters of 2007. The other
income ratio for this portfolio is well below the ratio for our lower-tier
credit card offerings and is slightly below that of our traditional upper-tier
originated portfolio. Adding the performance of these receivables to the overall
mix of our managed receivables resulted in a decrease of approximately 200 basis
points in the other income ratio in 2007. In the first and second quarters of
2008, however, the U.K. Portfolio was accretive in comparison to our lower-tier
credit card receivables as they experienced negative other income ratios in
those quarters as the record 1.5 million of predominantly lower-tier credit
card originations in the second and third quarters of 2007 reached peak
charge-off vintage levels.


35
 Table of Contents




Excluding
investment activities, our other income ratio increased quarter over quarter in
the first three quarters of 2007 before declining in the fourth quarter of 2007
and declining significantly the first and second quarters of 2008. The declines
are due primarily to higher charge offs in those quarters resulting from the
marketing volume-based volatility in our lower-tier credit card receivables
portfolios and from seasonal increases in charge offs that were amplified
somewhat by economic pressures felt by our cardholders. Our aforementioned
negative amortization-related finance charge and fee reversal changes to our
billing practices also negatively impacted our other income ratio in these
quarters and in the third and fourth quarters of 2008.




In the
first two quarters of 2008, our lower-tier credit card receivables’ fee charge
offs within the other income ratio exceeded the fee income from these
receivables, resulting in a negative other income ratio for this portfolio. The
same lower-tier credit card receivables-related factors mentioned in our
discussion of our first and second quarter 2008 net interest margins are at play
in the determination of our first and second quarter 2008 other income
ratios—such factors including the effects of significantly higher late
stage delinquency levels for which we do not bill over-limit and other fees and
the large proportion of lower-tier credit card accounts that reached peak
charge-off vintage levels and charged off during the quarters, resulting in
higher fee charge offs netting against billed fees in the determination of our
other income ratio. The second quarter 2008 other income ratio remained flat
relative to the first quarter of 2008 primarily due to a $13.7 million gain on
the repurchase of our convertible senior notes; excluding this gain, the ratio
declined to -2.5%, consistent with the trend from the first quarter of 2008.
Repurchases of our convertible senior notes also served to positively impact our
other income ratio in the fourth quarter of 2008. As computed without regard to
a $47.9 million gain related to these fourth quarter repurchases, our other
income ratio would have been 3.2%, lower than the 7.7% experienced in the third
quarter primarily due to the effects of account closure actions and annual and
other fee reversals associated therewith, heightened levels of negative
amortization-related fee reversals, and credits provided within our originated
portfolios under collection programs aimed at stimulating cardholder payments.
Our credit line reduction and account closure actions undertaken in the fall of
2008 also served to depress our other income ratio in the first quarter of 2009
as our lower-tier credit card receivables’ fee charge offs within the other
income ratio exceeded the fee income from these receivables. The actions,
coupled with the aforementioned fee credits issued in the first quarter of 2009
under incentive programs aimed at increasing payment rates, resulted in a
negative other income ratio in the first quarter of 2009.  While we
expect this negative trend to continue into the second quarter of 2009, we do
not anticipate it to be as dramatic as that experienced in the first
quarter.




Operating ratio.We have
experienced generally trending reductions in our operating ratio over the past
several quarters as our receivables mix has shifted from lower-tier credit card
receivables comprising a larger percentage of our managed receivables to
lower-tier credit card receivables comprising a smaller percentage of our
managed receivables. Our lower-tier credit card receivables are comprised of
accounts with smaller receivables balances than those accounts underlying our
upper-tier originated portfolio master trust and acquired portfolios. Smaller
receivable balance accounts require many more customer service interactions per
average dollar of outstanding balance (relative to our upper-tier originated
portfolio and acquired portfolios), and hence result in higher costs as a
percentage of average managed receivables than we historically have experienced
with our upper-tier originated portfolio master trust and acquired portfolios’
receivables. Our decline in account origination levels over the past several
quarters also has contributed to reductions in our quarterly operating ratios;
as our originated accounts mature, the level of interactions with the customer
declines, contributing to lower overall operating ratios.




Our
operating ratios in the second and third quarters of 2007 declined due to our
U.K. Portfolio acquisition. This portfolio is comprised of accounts with
relatively large receivables balances, and therefore, it bears a lower operating
ratio than that of our lower-tier credit card receivables portfolio. The fourth
quarter of 2007 operating ratio increased due to our $6.0 million charitable
contribution in that quarter in addition to our incurrence of higher legal and
related costs associated with now-settled FDIC and FTC investigations. In the
first, second and third quarters of 2008, we had lower operating expenses,
primarily due to our slow-down in originations (customer interactions and
related costs are higher in the first few months after card activation than they
are for more mature credit card accounts as noted above) and to the specific
expense reduction initiatives we undertook in the latter half of 2007 in
response to the tightened liquidity markets. But for a $5.5 million impairment
charge in the second quarter of 2008 associated with a sublease of 183,461
square feet of office space at our corporate headquarters, we would have
experienced a slight reduction in our second quarter 2008 operating ratio
relative to its first quarter 2008 level. The operating ratio in the third
quarter of 2008 was further reduced below that of the second quarter (as
adjusted for the lease impairment charge mentioned above) primarily due to our
continued expense reduction efforts. While expense reductions continued into the
fourth quarter of 2008 and the first quarter of 2009, our managed receivables
levels are dropping at faster rates than the rates at which we have been able
thus far to reduce our costs (particular when considering our fixed
infrastructure costs). As such, we experienced an increase in our operating
ratio for the first


36
 Table of Contents




quarter
of 2009 and expect further increases throughout 2009 unless and until we are
able to reduce fixed infrastructure costs to be more in line with our
contracting managed receivables levels.




Future
Expectations




Because
of our reduced levels of marketing spend, our fall 2008 credit line reduction
and account closure actions, our incentive programs undertaken in the first
quarter of 2009 to stimulate higher customer payment rates, and our expected
liquidations within each of our credit card receivables portfolios, we generally
do not expect our yield-oriented managed receivables statistics to return to
levels experienced in 2007 and prior years for the foreseeable future. There are
significant economic factors that could adversely affect our future Credit Cards
segment performance, including further potential slow-downs in the U.S. and U.K.
economies and rising unemployment rates within both countries as the ability of
our customers to make timely required payments on their credit cards is
significantly affected by their employment levels. Unemployment rates in the
U.S. have been rising over the past several quarters, and we have seen somewhat
lower payment rates—the effects of which could include further yield
compression, higher charge offs, reductions in receivables levels and reductions
in the cash flows we receive from our portfolios. It is also possible that
heightened levels of litigation as noted throughout this report may result in
higher legal expenses for us that could offset other cost-cutting measures that
we currently expect to experience within our operating ratios.




Investments
in Previously Charged-Off Receivables Segment




The
following table shows a roll-forward of our investments in previously
charged-off receivables activities (in thousands of dollars):




For
      the Three
                        Months
      Ended
                        March
      31, 2009Unrecovered
      balance at beginning of period
                      
                      $
                      47,676Acquisitions
      of defaulted accounts
                      
                      
                      17,373Cash
      collections
                      
                      
                      (13,880
                      )Accretion
      of deferred revenue associated with forward flow contract
                      
                      
                      —Cost-recovery
      method income recognized on defaulted accounts (included as a component of
      fees and related income on non-securitized earning assets on our
      consolidated statements of operations)
                      
                      
                      4,319Unrecovered
      balance at March 31
                      
                      $
                      55,488Estimated
      remaining collections (“ERC”)
                      
                      $
                      124,636




Previously
charged-off receivables held as of March 31, 2009 are principally comprised of
normal delinquency charged-off accounts purchased from the securitization trusts
that we service, accounts associated with Chapter 13 Bankruptcies and accounts
acquired through this segment’s balance transfer program prior to such time as
credit cards are issued relating to the program’s underlying
accounts.




We
generally estimate the life of each pool of charged-off receivables that we
typically acquire to be between twenty-four and thirty-six months for normal
delinquency charged-off accounts (including balance transfer program accounts)
and approximately sixty months for Chapter 13 Bankruptcies. We anticipate
collecting 44.3% of the ERC of the existing accounts over the next twelve
months, with the balance to be collected thereafter. Our acquisition of
charged-off accounts through our balance transfer program results in receivables
with a higher than typical expected collectible balance. At times when the
composition of our defaulted accounts includes more of this type of receivable,
the resulting estimated remaining collectible portion per dollar invested is
expected to increase. We saw this trend until our dispute with Encore arose in
2008, the result of which is our having to now hold significant investments in
normal delinquency charged-off accounts purchased from the securitization trusts
that we service—investments which prior to the dispute were purchased and sold
contemporaneously under the Encore forward flow contract. Compounding this trend
reversal is the fact that our Investments in Previously Charged-Off Receivables
segment’s balance transfer program has experienced lower overall placement
volumes primarily due to Encore Capital’s decision to discontinue balance
transfer program placements to us. It is unknown at this time if and when
placement volumes will return to the record volume placed in the first half of
2008; however, we believe that the current economic environment could lead to
increased opportunities for growth in the balance transfer program as consumers
with less access to credit create additional demand and lead to increased
placements from third parties.




Most of
our Investments in Previously Charged-Off Receivables segment’s acquisitions of
normal delinquency charge offs recently have been comprised of previously
charged-off receivables from the securitization trusts that we service. Until a
dispute arose with Encore in 2008, the segment had, almost simultaneously with
each of its purchases from these securitization trusts, sold these charge offs
for a fixed sales price under its five-year forward flow contract with Encore
rather


37
 Table of Contents




than
retained them on its balance sheet. With these essentially simultaneous
pass-through transactions, the segment had not previously experienced any
substantial mismatch between the timing of its collections expenses and the
production of revenues under its cost recovery method of accounting. This
changed in the third quarter of 2008, however, as a result of Encore’s refusal
to purchase receivables under the forward flow contract. Pending the resolution
of this dispute, our Investment in Previously Charged-Off receivables segment
will either have to find another buyer for its purchased charge offs or retain
its purchased charge offs on its balance sheet and undertake collection
activities to maximize its return on these purchases. The retention of these
receivables will cause significant reductions in its earnings given the
mismatching of cost recovery method collection expenses with their associated
revenues as collection expenses will be incurred up front, while revenue
recognition will be delayed until complete recovery of each respective acquired
portfolio’s investment. Once the investments are completely recovered, the
segment will begin to recognize the profitability associated with these
purchases. The expected time to recover investments in portfolios varies by
portfolio but generally is estimated to occur within twelve to eighteen months
after purchase.  Alternatively, if the segment sells these
receivables, we do not expect another buyer to pay as much as Encore was paying
under its fixed-price commitment—a price that was reflective of the high
valuations being place on charged-off paper in the market generally in 2005,
rather than in today’s environment in which the relative supply of charged-off
paper is greater.  This increase in the availability of charged-off
paper created several opportunities in the fourth quarter of 2008 and the first
quarter of 2009, during which we were able to complete several large purchases
of charged-off portfolios at attractive pricing.  The increasing
supply of charged-off paper is, however, likely to result in increased
opportunities to acquire charged-off receivables portfolios at prices under
which the segment can generate significant returns, and subject to liquidity
constraints, we expect to increase our purchases of charged off portfolios from
third parties in the coming year.




Our
Investments in Previously Charged-off Receivables segment’s pre-tax results for
the three months ended March 31, 2009 were appreciably lower than for the three
months ended March 31, 2008. This primarily reflects (1) the ongoing
effects of Encore’s refusal to purchase receivables, which has resulted in a
longer earnings recognition period for purchased charged off paper and the
commensurate expense and revenues mismatch mentioned above and our inability to
recognize as income the remaining escrowed funds owed to us under the Encore
forward flow agreement, and (2) increased pricing paid by this segment upon the
expiration of one of its more favorably priced forward flow agreements for
previously charged-off paper purchases.




As we
continue to grow our Chapter 13 bankruptcy and balance transfer programs within
this segment, we expect that losses will diminish over time as we recover our
basis in these assets and commence recognizing income; the success of these
programs currently is being masked by the cost-recovery-method expense and
revenue mismatches associated with charged-off receivables that we must now
purchase and hold given Encore’s refusal to purchase them as required under its
forward flow contract.




In the
second quarter of 2008, we began exploring a balance transfer program in the
U.K., and we anticipate that this program will generate modest revenues
throughout 2009.




Retail
Micro-Loans Segment




The
Retail Micro-Loans segment consists of a network of storefront locations that,
depending on the location, provide some or all of the following products or
services:  (1) small-denomination, short-term, unsecured cash
advances that are typically due on the customer’s next payday;
(2) installment loan and other credit products; and (3) money transfer
and other financial services. The assets associated with our retail micro-loan
operations were principally acquired during 2004 and early 2005. As of March 31,
2009, our Retail Micro-Loans segment subsidiaries operated 345 storefront
locations in ten states.




After
evaluating the operations of our Retail Micro-Loans segment on a state-by-state
basis, it became evident during 2007 that the potential risk-adjusted returns
expected in certain states did not justify the ongoing required investment in
the operations of those states. As a result, during the fourth quarter of 2007,
we decided to pursue a sale of our Retail Micro-Loans segment’s operations in
six states:  Florida; Oklahoma; Colorado; Arizona; Louisiana; and
Michigan. Through a series of staged closings with a single buyer, the first of
which was completed July 31, 2008, we completed the sale of operations in
three states (Florida, Louisiana, and Arizona) in the third quarter of 2008. By
September 30, 2008, we had closed all remaining storefronts in Michigan and our
unprofitable storefronts in Colorado and Oklahoma. For a limited number of
profitable storefronts in Colorado and Oklahoma, however, we elected to continue
operations, and we have removed these storefronts from discontinued operations
in our consolidated statements of operations for all periods presented. Our
various discontinued operations within these six states were classified as
assets held for sale on our March 31, 2008 condensed consolidated balance sheet
and are included in the discontinued operations category in our condensed
consolidated statements of operations for all periods
presented.


38
 Table of Contents




Additionally,
during the first quarter of 2008, after reevaluating the capital required for
sustaining start-up losses associated with our eighty-one store locations in
Texas, we decided to pursue a sale of our Texas store locations—a sale that was
completed in April 2008. We have included our Texas results in the discontinued
operations category in our consolidated statements of operations for all periods
presented.




During
the three months ended March 31, 2009, we closed five locations (including all
of our locations in the U.K.), and we and did not open any new locations.
Because of the immateriality of the closed locations and the routine nature of
these store closure decisions, we have not evaluated the need to segregate these
closed locations as discontinued operations. We are not planning to expand the
current number of locations in any new or existing markets; instead, we likely
will continue to look at closing individual locations that do not meet our
profitability thresholds. In addition, we will continue to evaluate our
risk-adjusted returns in the states comprising the continuing operations of our
Retail Micro-Loans segment.




Financial,
operating and statistical metrics for our Retail Micro-Loans segment are
detailed (dollars in thousands) in the following tables.




For the Three
      Months
                                Ended
      March 31,2009
                              
                              
                              2008Beginning
      number of locations (excluding locations discontinued and held for
      sale)
                              
                              
                              350
                              
                              
                              
                              410Closed
      locations
                              
                              
                              (5
                              )
                              
                              
                              (4
                              )Locations
      held for sale (1)
                              
                              
                              —
                              
                              
                              
                              (81
                              )Ending
      continuing locations
                              
                              
                              345
                              
                              
                              
                              325


(1)
            31 of the stores
      listed as locations held for sale were later reclassified back into
      continuing operations





For
      the Three Months
                          Ended
      March  31,2009
                        
                        
                        2008Gross
      retail micro-loans fees (from continuing operations)
                        
                        $
                        18,495
                        
                        
                        $
                        19,574Total
      gross revenues
                        
                        $
                        18,495
                        
                        
                        $
                        19,574(Loss)
      income from continuing operations before income taxes
                        
                        $
                        (927
                        )
                        
                        $
                        4,432Loss
      from discontinued operations before income taxes
                        
                        $
                        —
                        
                        
                        $
                        (4,185
                        )Period
      end loans and fees receivable, gross
                        
                        $
                        32,870
                        
                        
                        $
                        33,472




The
above-disclosed losses from discontinued operations reflect losses incurred
within the storefronts that we were holding for sale at December 31, 2007
and that we sold or closed during second and third quarters of 2008, including
$1.1 million of impairment to goodwill associated with the decision to sell our
Texas storefronts in the first quarter of 2008.




Net
losses for our locations in the U.K., including the costs to exit these
locations, totaled $2.0 million for the three months ended March 31, 2009.
Excluding U.K. storefront costs from our segment performance data for both the
three months ended March 31, 2009 and 2008 would have resulted in $1.1 million
and $4.9 million of segment income, respectively.




In
response to an increasingly negative regulatory environment within Arkansas, we
recently have decided (subsequent to the close of our first quarter of 2009) to
exit and close our 27 Arkansas locations over the next few months. We currently
are assessing the impact this decision will have on our second quarter financial
position and results of operations (including, for example, the fair value of
our recorded goodwill).




Auto
Finance Segment




Our Auto
Finance segment includes a variety of auto sales and lending
activities.




Our
original platform, CAR Financial Services (“CAR”), acquired in April 2005,
consists of a nationwide network of pre-qualified auto dealers in the buy-here,
pay-here used car business, from which our Auto Finance segment purchases auto
loans at a discount or for which we service auto loans for a
fee.


39
 Table of Contents




We also
have a 90% ownership interest in JRAS, a buy-here, pay-here dealer. As of
December 31, 2008, JRAS had twelve retail locations in four states. In the first
quarter of 2009, we undertook steps to close four locations in two states. The
capital requirements to bring JRAS’s sales for its twelve locations to a level
necessary to completely cover fixed overhead costs and consistently generate
profits were more than we are willing to undertake given the current liquidity
environment. Until credit markets improve, we do not intend to expand JRAS’s
operations.




Lastly,
our San Diego, California-based ACC platform consists of a $189.0 million auto
loan portfolio and a platform to purchase retail installment contracts from
franchised car dealers. From a credit quality perspective, the ACC borrower base
is slightly above the niche historically served by our Auto Finance
segment.




Collectively,
we serve 906 dealers through our Auto Finance segment in forty-one states and
the District of Columbia.  Selected financial, operating and
statistical data (in thousands except for percentages) for our Auto Finance
segment are provided in the following two tables; where terms used within these
tables are identical to the terms used within our Credit Cards segment
discussion above (albeit with appropriate substitution of Auto Finance
receivables and activities for the Credit Card receivables and activities
described within those definitions).




Analysis
of statistical data




Financial, operating and statistical
metrics for our Auto Finance segment are detailed (dollars and numbers of
accounts in thousands; percentages of total) in the following
tables.




At or For the Three Months Ended2009
                
                
                2008Mar.
      31
                
                
                Dec.
      31
                
                
                Sep.
      30
                
                
                Jun.
      30
                
                
                Mar.
      30Period-end
      managed receivables
                
                $
                327,038
                
                
                $
                349,212
                
                
                $
                372,313
                
                
                $
                382,168
                
                
                $
                367,228Period-end
      managed accounts
                
                
                43
                
                
                
                45
                
                
                
                47
                
                
                
                49
                
                
                
                48Receivables
      delinquent as % of
                  period-end
      loans:30
      to 59 days past due
                
                
                10.1
                %
                
                
                11.0
                %
                
                
                10.6
                %
                
                
                9.0
                %
                
                
                8.1
                %60
      to 89 days past due
                
                
                3.4
                %
                
                
                5.0
                %
                
                
                4.5
                %
                
                
                4.3
                %
                
                
                3.1
                %90
      or more days past due
                
                
                4.6
                %
                
                
                5.4
                %
                
                
                4.4
                %
                
                
                3.7
                %
                
                
                3.5
                %Total
      30 or more days past due
                
                
                18.1
                %
                
                
                21.4
                %
                
                
                19.5
                %
                
                
                17.0
                %
                
                
                14.7
                %Total
      60 or more days past due
                
                
                8.0
                %
                
                
                10.4
                %
                
                
                8.9
                %
                
                
                8.0
                %
                
                
                6.6
                %Average
      managed receivables
                
                $
                338,340
                
                
                $
                361,696
                
                
                $
                378,178
                
                
                $
                376,767
                
                
                $
                358,823Gross
      yield ratio
                
                
                23.7
                %
                
                
                24.8
                %
                
                
                25.2
                %
                
                
                25.7
                %
                
                
                25.0
                %Combined
      gross charge-off ratio
                
                
                14.8
                %
                
                
                15.1
                %
                
                
                13.3
                %
                
                
                12.1
                %
                
                
                13.9
                %Net
      charge-off ratio
                
                
                13.4
                %
                
                
                13.4
                %
                
                
                11.7
                %
                
                
                10.5
                %
                
                
                12.3
                %Adjusted
      charge-off ratio
                
                
                12.0
                %
                
                
                11.7
                %
                
                
                9.5
                %
                
                
                7.8
                %
                
                
                8.7
                %Recoveries
      as % of average
                  managed
      receivables
                
                
                1.5
                %
                
                
                1.6
                %
                
                
                1.3
                %
                
                
                1.4
                %
                
                
                1.2
                %Net
      interest margin
                
                
                16.9
                %
                
                
                17.5
                %
                
                
                19.3
                %
                
                
                20.3
                %
                
                
                18.9
                %Other
      income ratio
                
                
                9.7
                %
                
                
                6.8
                %
                
                
                7.5
                %
                
                
                9.2
                %
                
                
                10.0
                %Operating
      ratio
                
                
                18.5
                %
                
                
                21.4
                %
                
                
                50.2
                %
                
                
                20.4
                %
                
                
                20.6
                %











Retail
      Sales Data At or For the Three Months Ended2009
                
                
                2008Mar.
      31
                
                
                Dec.
      31
                
                
                Sep.
      30
                
                
                Jun.
      30
                
                
                Mar.
      30Retail
      sales
                
                $
                18,299
                
                
                $
                15,505
                
                
                $
                15,930
                
                
                $
                19,333
                
                
                $
                19,577Gross
      profit
                
                $
                8,471
                
                
                $
                7,027
                
                
                $
                7,355
                
                
                $
                8,909
                
                
                $
                9,098Retail
      units sold
                
                
                1,601
                
                
                
                1,312
                
                
                
                1,383
                
                
                
                1,908
                
                
                
                1,844Average
      stores in operation
                
                
                10
                
                
                
                12
                
                
                
                12
                
                
                
                12
                
                
                
                12Period-end
      stores in operation
                
                
                8
                
                
                
                12
                
                
                
                12
                
                
                
                12
                
                
                
                12







40
 Table of Contents


Managed
receivables.Period end managed receivables increased during the first
half of 2008 as we continued to originate and purchase new loans, primarily
within ACC and JRAS.  Beginning in the second quarter of 2008,
however, we slowed the purchase growth at ACC and CAR in order to preserve
capital. As of March 31, 2009, only CAR and JRAS continue to originate
loans—albeit at significantly reduced levels than those experienced in prior
periods.




Delinquencies.Delinquency rates at March 31, 2009 are above those experienced during
the same period of the prior year and reflect generally worsening economic
conditions. However, given the segment’s improved underwriting, better use of
technology and improved collections, management believes that this relatively
modest degradation in delinquencies is also meaningful when contrasted with a
substantially weaker economy and significant industry-wide delinquency
increases.




Gross yield
ratio, net interest margin and other income ratio.Variations in our
gross yield ratio and net interest margins reflect the effects of the timing and
magnitude of our various Auto Finance segment acquisitions and subsequent growth
patterns for our acquired operations. The Patelco portfolio acquisition, for
example, has caused the gross yield ratio and net interest margins to fall since
our acquisition of ACC because the gross yields on its existing loans are not as
high as those of our two buy-here, pay-here-oriented operations within CAR and
JRAS. This decline has been offset somewhat (although not completely) by
increased margins realized in our CAR operations as newly acquired and
originated loans are being underwritten with higher interest rates and fees. The
effects of higher delinquencies and charge offs have served to depress our net
interest margins in recent quarters and are expected to continue to depress our
net interest margins throughout 2009.




The
principal component of our other income ratio is the gross income that our JRAS
buy-here, pay-here operations have generated from their auto sales. The general
trend-line of improvements (excluding the fourth quarter of 2008) in our other
income ratio generally corresponds with growth in the number of autos sold as
set forth in the above table. We note, however, that we experienced a modest
reduction in gross profit on auto sales between the second and third quarters of
2008 as (1) seasonal demand for autos on JRAS’s lots is typically the
highest when its consumers receive their tax refunds during the first quarter
and (2) we temporarily reduced inventory purchases within JRAS for a few
weeks late in the second quarter in connection with our evaluation of its
liquidity position and borrowing base under its lending facilities, leaving JRAS
with a mix of autos available for sale on its lots at that time that attracted
lower gross margins. The reduction in our other income ratio in the fourth
quarter of 2008 is largely driven by a decline in consumer auto purchases on
JRAS’s lots and by severe reductions in inventory purchases as we sought to
conserve capital. Future growth in our Auto Finance segment’s other income ratio
will depend upon relative growth rates for JRAS versus CAR and ACC, as well as
demand for autos within JRAS which weakened in the first quarter of 2009. As
previously mentioned, we currently anticipate contractions in ACC’s and JRAS’
operations until such time that additional liquidity is available to us at rates
that would allow for acceptable returns.




Net charge-off
ratio, adjusted charge-off ratio and recoveries.We generally charge off
auto receivables when they are between 120 and 180 days past due, unless the
collateral is repossessed and sold before that point, in which case we will
record a charge off when the proceeds are received. The adjusted charge-off
ratio in the first quarter of 2009 was 12.0% compared to 11.7% in the fourth
quarter of 2008 and 8.7% in the first quarter of 2008. The adjusted charge-off
ratio reflects our net charge offs, less credit quality discount accretion with
respect to our acquired portfolios. Therefore, its trend line should follow that
of our net charge-off ratio, adjusted for the diminishing impact of past
portfolio acquisitions and for the additional impact of new portfolio
acquisitions. We acquired the Patelco portfolio at a significant purchase price
discount to the face amount of the acquired receivables and a significant
portion of this purchase price discount (which related entirely to credit
quality) was absorbed in 2007 as accounts that were severely delinquent at
acquisition date charged off immediately after our purchase. With each passing
quarter, the percentage of our portfolio (and hence charge offs within the
portfolio) that is comprised of new loans that we fund dollar for dollar
increases relative to the size of our total auto finance receivables portfolio
and the percentage of our charge offs that are comprised of accounts purchased
at a discount in the Patelco acquisition decreases. We expect the gap between
the net charge-off ratio and the adjusted charge-off ratio to continue to
decline absent the purchase of another portfolio at a discount to the face
amount of its receivables. Evident within our net charge-off ratio statistics
are the adverse macro-economic effects being seen throughout the auto finance
industry. We believe we are fortunate, however, as our underwriting and pricing
efforts have kept our increases in our charge offs lower than throughout the
industry generally.




Operating ratio.The large increase in the third quarter 2008 operating ratio resulted
from the CAR and ACC goodwill impairment charges during that quarter. Excluding
goodwill impairment charges, the operating ratio in the third quarter of 2008
would have been 19.4% compared to 20.4% in the second quarter of
2008.  Removing the additional $1.7 million of JRAS goodwill
impairment charges during the fourth quarter would result in an operating ratio
of 19.5%, consistent with the adjusted rate for the third quarter. The operating
ratio in the Auto Finance segment continued to improve from the first and second
quarters of 2008 primarily due to higher average receivables supporting a fixed
cost base and continued cost-cutting initiatives to better reflect existing
portfolio balances primarily within our CAR operations. The decline in our
operating ratio reflects continued cost-cutting efforts as


41
 Table of Contents




we
continue to adjust our variable costs to reflect the decline in our total
managed receivables balances. We expect this trend to continue until such time
our receivables levels drop at faster rates than the rates at which we can
reduce our costs (particular when considering our fixed infrastructure costs at
the various divisions within this segment). Based on current attrition rates we
expect for our operating ratio to continue to fall for the remainder of 2009
after which time fixed costs will likely cause the ratio to
stagnate.




Future
Expectations




Given our
expectation of modest contractions in our auto finance receivables over the
coming quarters, we should see overall reductions in our allowance for
uncollectible loans and fees receivable under GAAP, offset somewhat by increases
in reserve rates reflecting generally worsening economic conditions. We also
expect to experience higher costs of funds under our renegotiated auto finance
facilities which will put pressure on our Auto Finance segment’s GAAP
profitability. Moreover, despite the improved pricing power that we now possess
as a result of the reduction in lending by our auto finance competitors, which
allows us to price all new acquisitions and originations for higher risks of
defaults, we could experience further erosion in our delinquencies and higher
charge offs against earnings. Additionally, given our decision to close four of
JRAS locations during the first quarter of 2009, we expect unit sales (and gross
profit levels) to fall below levels seen in similar periods for the prior
year.  Considering all of these factors, we expect our Auto Finance segment
to perform at approximately break-even GAAP earnings levels for
2009.




Other
Segment




Our Other
segment recently has encompassed various operations that were start-up in nature
and did not individually meet separate reportable operating segment disclosure
criteria. The operations of MEM, our U.K.-based, Internet, micro-loans provider,
represent the only significant continuing operations within the Other segment,
and its operations are not yet material to our consolidated results of
operations. For the three months ended March 31, 2009, we experienced positive
impacts from our MEM operations, and we expect to continue to grow this business
at a modest pace in future quarters. As of March 31, 2009, we had $15.0 million
in net receivables associated with our MEM operations. Similar to our auto
finance operations, we provide an allowance for uncollectible loans and fees
receivable under GAAP on all new extensions of credit. However, notwithstanding
anticipated growing allowances for uncollectible loans and fees receivable, our
U.K.-based on-line micro-loan originations should be profitable enough to
overshadow the effects of allowance growth, thereby allowing our MEM operations
to achieve growing GAAP profits for the next several quarters.




Liquidity,
Funding and Capital Resources




During
2007, primarily toward the end of the second quarter and the beginning of the
third quarter, broad investor interest in providing liquidity to originators of
sub-prime loans, including credit card receivables, declined
substantially. This decline in interest was precipitated by the
well-publicized problems in the sub-prime mortgage lending business and the
related secondary markets and the global liquidity dislocation that resulted
from these problems. Since that time, the global credit markets have
experienced significant disruptions, requiring intervention from central banks
and governments throughout the world. All of these adverse developments have
resulted in significant reluctance—the duration of which is not known—by many
investors to invest in sub-prime asset classes, at least at the levels at which,
or with the terms under which, they previously invested. This, in turn, has
resulted in a decline in liquidity available to sub-prime market participants,
including CompuCredit, a widening of the spreads above the underlying interest
indices (typically LIBOR for our borrowings) for the loans that lenders are
willing to make, and a decrease in advance rates for those loans as
well.




Although
we are hopeful that the liquidity markets ultimately will return to more
traditional levels, we are not able to predict when that will occur, and we are
managing our business with the assumption that the liquidity markets will not
return to more traditional levels in the near term. Specifically, we have
curtailed or limited growth in many parts of our business and are managing our
receivables portfolios with a goal of generating positive cash flows over the
coming quarters for us to use in de-leveraging our business—which we believe to
be prudent in this environment. Our efforts are necessary to protect us from the
potential that our lenders may be willing to renew or replace existing financing
and securitization facilities only at reduced advance rates, if at all. We saw
this in the third quarter of 2008 as we were able to renew our Auto Finance
segment financing facilities only at reduced advance rates, reduced lending
capacity, and higher pricing. We also experienced a decline in advance rates for
one of the securitization facilities within our lower-tier credit card portfolio
master trust in connection with our third quarter of 2008 extension of that
facility (albeit at increased pricing and lower capacity) through October 2010.
Fortunately, our cost control efforts and other self-imposed constraints on
growth and investment have helped us thus far to cope with these reductions in
our debt financing and securitization advance rates. However, we have material
Auto Finance segment facilities that come up for renewal or replacement in
September 2009, and we cannot be sure that these facilities will be renewed
under favorable terms and pricing, or at all.


42
 Table of Contents




Our
current emphasis on de-leveraging our business in the current environment will
result in short and long-term growth and profitability trade-offs. For example,
as noted throughout this report, we have substantially reduced credit card
receivables marketing, and we have reduced credit lines and closed accounts.
Consequently, each of our managed credit card receivables portfolios is expected
to show net liquidations in balances for the foreseeable future. Similarly, the
reduction in debt facility advance rates within our Auto Finance segment has
caused us to limit capital deployment to this business, which will cause
contraction in its receivables and revenues over the coming months. Furthermore,
in our MEM, U.K.-based, Internet, micro-loan operations, where we currently are
continuing to selectively deploy capital specifically aimed at growing the
business, the levels of capital that we plan to deploy are expected to allow for
only modest growth. More aggressive growth would, over time, require additional
liquidity beyond what is available under our current facilities. Once
enhanced liquidity is again available to us on attractive terms, we expect to
increase our marketing efforts across our businesses and thereby our growth and
profitability.




At
March 31, 2009, we had $78.1 million in unrestricted cash. Because the
characteristics of our assets and liabilities change, liquidity management is a
dynamic process affected by the pricing and maturity of our assets and
liabilities. We finance our business through cash flows from operations,
asset-backed securitizations and the issuance of debt and equity. Details
concerning our cash flows follow:




·
            During
      the three months ended March 31, 2009, we generated $49.6 million in cash
      flows from operations, compared to $198.3 million of cash flows from
      operations generated during the three months ended March 31, 2008. The
      decrease principally reflects:  (1) lower collections of
      credit card finance charge receivables in 2009 relative to the same period
      in 2008 given the diminished originations and the effects on our margins
      of changes we have made in response to ongoing discussions with
      regulators; (2) generally lower payment rates, and consequently lower
      collections of credit card finance charge receivables, across our credit
      card portfolios throughout the latter half of 2008 and into 2009, which
      reflect the economic stress we believe many of our customers are
      experiencing; and (3) the receipt of $87.4 million in tax refunds during
      the first quarter of 2008 as contrasted with no receipt of tax refunds
      during the first quarter of 2009. These impacts were offset somewhat
      by:  (1) declines in deposits required to be maintained
      with our third-party issuing bank partners and retail electronic payment
      network providers associated with declining receivables balances in our
      portfolio of credit card receivables in the U.K.; (2) growth in 2008
      in inventory balances associated with our JRAS subsidiary which have now
      leveled off; and (3) lower marketing expenses in 2009 than in
      2008.




·
            During
      the three months ended March 31, 2009, we used $28.0 million of cash
      in investing activities, compared to using $135.3 million of cash in
      investing activities in 2008. This decrease in cash used in investing
      activities reflects the fact that we had lower net investments in our
      securitized and non-securitized earning assets in 2009 relative to 2008,
      which is consistent with liquidations of our purchased portfolios, credit
      line reduction and account closure account actions taken by us to preserve
      capital and the fact that we have experienced no meaningful originations
      in 2009 for which we had to fund new purchases. We expect further declines
      in net cash used in investing activities as we currently do not anticipate
      meaningful originations of new credit card accounts or substantial growth
      in our other business lines or significant purchases of new equipment,
      thus reducing the amount of cash used to fund such
      investments.




·
            During
      the three months ended March 31, 2009, our financing activities used $19.5
      million of cash, compared to providing $11.5 million of cash in 2008.
      The decrease primarily reflects decreased draws and net paydowns on
      outstanding debt facilities associated with our CAR and ACC divisions as
      we continue to experience net declines in receivables for these
      portfolios.  We expect this trend to continue for the remainder
      of the year as net collections are expected to exceed new
      originations.




After
giving effect to the advance rate reductions discussed above and the
implications of those reductions to our cash position, we had approximately $115
million in aggregate unrestricted cash and available liquidity under our debt
and securitization facilities as of the end of the first quarter 2009. Our
available liquidity under our debt and securitization facilities is represented
by draw potential against our collateral base both within our securitization
trusts and supporting our structured financing facilities. We continue to
aggressively pursue a number of new financing facilities and liquidity sources
that, if ultimately available to us at attractive pricing and terms, will
support investment opportunities that could include repurchases of our
convertible senior securities and stock, portfolio acquisitions, and marketing
and originations within our various businesses. However, the liquidity
environment worsened significantly in 2008 and continues to be particularly
challenging in general and more specifically for sub-prime asset classes such as
ours. Moreover, the $115 million in aggregate unrestricted cash and available
liquidity mentioned herein is represented by summing up all unrestricted cash
and availably liquidity from among and within all of our business segments, and
the liquidity available to any one of our business segments is appreciably below
the $115 million in available liquidity balance.


43
 Table of Contents


While we
extended our principal lower-tier credit card securitization facility in the
third quarter of 2008 out to October 2010—albeit at a reduced advance rate with
increased pricing—we are concerned that the traditional securitization markets
for our broad product offerings may not return to any degree of efficient and
effective functionality for us for the foreseeable future. As a result, we are
closely monitoring and managing our liquidity position by marketing only at test
levels in very discrete areas and taking a variety of account management actions
(including credit line reductions and account closures) and other actions
(including reducing our overhead infrastructure, which was built to accommodate
higher account originations and managed receivables levels) in an effort to
preserve cash. Some of these actions, while prudent to preserve liquidity, have
the effect of reducing our profitability.




The
current global financial crisis differs in key respects from our experiences
during other down economic and financing cycles. First, while we had difficulty
obtaining asset-backed securitization financing for our originated portfolio
activities at attractive advance rates in the last down cycle, the credit
spreads (above base pricing indices like LIBOR) at that time were not as wide
(expensive) as they now are. Additionally, while we were quite successful during
that down cycle in obtaining asset-backed securitization financing for portfolio
acquisitions at attractive advance rates, pricing and other terms, that
financing is currently not available from traditional market participants. Last
and most significant is the adverse impact that the current global liquidity
crises is having on the U.S. and worldwide economies (including real estate and
other asset values and the labor markets). Unemployment is significantly higher
than during 2001 through 2003 and is forecasted by many economists to further
increase. Lower assets values and higher rates of job loss and levels of
unemployment have translated into reduced payment rates within the credit card
industry generally and for us specifically.




While
substantially all of our asset-based financing and securitization facilities are
non-recourse to assets beyond those specific pools of assets backing each
respective facility, our failure to renew or replace a maturing financing or
securitization facility (except where the facility may represent excess and
unneeded capacity) could potentially result in (1) asset seizures by our
lenders or investors, which in turn would result in impairments to the book
value of our equity, and/or (2) accelerated repayment amortization
schedules, including early amortization, which over time could impair the
profitability of the assets underlying the facility. Under some circumstances,
we would receive only servicing compensation, rather than the significantly
higher proceeds that we currently receive from our facilities. Any reduction in
cash flows would negatively impact other parts of our operations that normally
depend upon those funds. Moreover, should we experience an extended term period
of reduced payment rates, the cash flows to us from our securitization trusts
could be significantly curtailed (e.g., the terms of our securitization
facilities might require them to accumulate or retain cash or use it to repay
investor notes on an accelerated basis, rather than distribute it to us). The
curtailment of the cash that we receive, combined with the fact that we already
are accumulating cash within our upper-tier originated portfolio master trust
for the September 2009 scheduled maturity of a term securitization facility,
could require us to reduce our personnel, overhead and other costs to levels
that could impact the values of our retained interests in our securitized credit
card receivables and result in impairments that could be material to our
operating results and financial position.




Beyond
our immediate financing efforts discussed throughout this Report, shareholders
should expect us to evaluate debt and equity issuances as a means to fund our
investment opportunities. We expect to take advantage of any opportunities to
raise additional capital if terms and pricing are attractive to us. We also may
use cash flows generated from the net liquidations in our credit card portfolios
and other cost control measures to fund both (1) further repurchases of our
convertible senior securities and stock, which at current prices we believe
provide returns that on a risk-adjusted basis are far superior to our potential
returns from organic growth in the current environment, and (2) potential
portfolio acquisitions, which may represent attractive opportunities for us in
the current liquidity environment. As of March 31, 2009, we are authorized to
repurchase 10,000,000 common shares under our share repurchase program that our
board of directors authorized in May 2008, and this authorization extends
through June 30, 2010.




Securitization
Facilities




Our most
significant source of liquidity is the securitization of our credit card
receivables. At March 31, 2009, we had committed total securitization
facilities of $2.0 billion, of which we had drawn $1.7 billion. The
weighted-average borrowing rate on our securitization facilities was 2.7% at
March 31, 2009, and the maturity terms of our securitizations vary.




In the
table below, we have noted the securitization facilities (in millions) with
respect to which substantially all of our managed credit card receivables serve
as collateral as of March 31, 2009. Following the table are further details
concerning each of the facilities.




Maturity
      date
                          
                          Facility Limit(1)October 2009(2)
                          
                          $
                          299.5December 2009(3)
                          
                          
                          100.0January 2010(4)
                          
                          
                          750.0October 2010(2)
                          
                          
                          299.5October
      2010(5)
                          
                          
                          214.2January 2014(6)
                          
                          
                          69.5September 2014(7)
                          
                          
                          14.1April
      2014(8)
                          
                          
                          285.7Total
                          
                          $
                          2,032.5





(1)
            Excludes
      securitization facilities related to receivables managed by our
      equity-method investees because such receivables and their related
      securitization facilities are appropriately excluded from direct
      presentation in our consolidated statements of operations or consolidated
      balance sheet items included herein.




(2)
            In
      October 2004, we completed two term securitization facilities that we
      issued out of our upper-tier originated portfolio master trust, a 5-year
      facility represented by $299.5 million aggregate principal notes and a
      6-year facility also represented by $299.5 million aggregate principal
      notes. To date, we have elected to sell only $287.0 million of the
      principal notes underlying the 5-year facility and $264.0 million of the
      principal notes underlying the 6-year facility. We currently are
      accumulating the principal necessary to repay the 5-year facility and
      expect to begin accumulating the principal necessary to repay the 6-year
      facility within twelve months of its expected principal repayment
      date.




(3)
            Represents
      the anticipated final scheduled monthly payment date for a $300.0 million
      facility issued out of our lower-tier originated portfolio master trust;
      through March 31, 2009, amortization payments aggregating $200 million had
      been made against the outstanding balance of this
  facility.




(4)
            This
      two-year variable funding note facility issued out of our upper-tier
      originated portfolio master trust provides for continued funding of all
      cardholder purchases on all accounts in existence upon expiration of the
      facility with any remaining cash flows after funding all such purchases,
      servicing costs and debt service costs to be applied toward repayment of
      the investor.


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(5)
            Represents
      the end of the revolving period for a conduit facility issued out of our
      lower-tier originated portfolio master trust. The
      committed amount of this facility is $400.0 million.  Currently,
      however, we do not anticipate any further draws on this
      facility.




(6)
            Represents
      a ten-year amortizing term series issued out of the Embarcadero
      Trust.




(7)
            Represents
      the conduit notes associated with our 75.1% membership interest in our
      majority-owned subsidiary that securitized the $92.0 million (face amount)
      of receivables it acquired in the third quarter of 2004 and the $72.1
      million (face amount) of receivables it acquired in the first quarter of
      2005.




(8)
            In
      April 2007, we closed an amortizing securitization facility in connection
      with our U.K. Portfolio acquisition; this facility is denominated in U.K.
      sterling.




Structured
      Financings
  Beyond
the securitization facilities discussed above, we have two structured financing
facilities within our Auto Finance segment with an aggregate March 31, 2009
outstanding balance of $97.5 million that mature in September
2009.  These facilities are non-recourse, and a substantial majority
of our Auto Finance segment receivables disclosed in this report provides the
exclusive means of repayment for the notes. When these structured financings
mature, there can be no assurance that lenders will renew the debt facilities
under attractive terms and conditions or at all. Should we not be able to renew
these facilities or find replacement facilities upon their maturity, they will
become due and payable at that time with no provision for amortizing pay-down.
We face an aggregate $80.5 million exposure to equity loss if we are unable to
repay the facilities and the lender takes the underlying receivables in
satisfaction of the facilities.




Covenants
under our securitization and financing facilities vary, but generally include
asset performance covenants (such as maximum permitted delinquency and
charge-off rates, minimum excess spread levels, etc.) and in some cases include
corporate-level covenants (including minimum equity levels, minimum tangible
equity levels, maximum permitted quarterly reductions in equity levels, and
minimum  liquidity levels) and cross-default covenants, the violation
of which at varying levels could result in (1) curtailed future draws on
the facilities, (2) “cash trapping” (e.g., the accumulation of cash within
the facility to fund a reserve) within the structures or (3) early
amortization of the facilities within the structures. We closely monitor the
covenants and we exercise the discretion that is afforded to us under the
facilities with a view toward ensuring that these events are not triggered.
Nevertheless, if we experience a prolonged period of substantially reduced
consumer payment rates, we may trigger one of these events with respect to one
or more of our outstanding facilities.




Each of
our securitization facilities and structured financing facilities is recourse
only to the specific financial assets underlying each respective securitization
or structured financing trust.  However, cash trapping or early
amortization for any of our outstanding securitization or structured financing
facilities would have adverse effects on our liquidity during the early
amortization period, as well as adverse effects on the book value of our equity
to the extent of our net equity investment in each particular securitization or
structured financing trust. Moreover, an early amortization event could have
potential long-term adverse effects on our liquidity because potential investors
could elect to abstain from future CompuCredit-backed facility
issuances.


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Contractual
Obligations, Commitments and Off-Balance-Sheet Arrangements




See
Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in our Annual Report on Form 10-K for the year ended
December 31, 2008.




Commitments
and Contingencies




We also
have certain contractual arrangements that would require us to make payments or
provide funding if certain circumstances occur (“contingent commitments”). We do
not currently expect that these contingent commitments will result in any
material amounts being paid by us. See Note 11, “Commitments and
Contingencies,” to our condensed consolidated financial statements included
herein for further discussion of these matters.




Recent
Accounting Pronouncements




See
Note 2, “Summary of Significant Accounting Policies and Condensed
Consolidated Financial Statement Components,” to our condensed consolidated
financial statements included herein for a discussion of recent accounting
pronouncements.




Critical
Accounting Estimates





We have
prepared our financial statements in accordance with GAAP. These principles are
numerous and complex. We have summarized our significant accounting policies in
the notes to our condensed consolidated financial statements. In many instances,
the application of GAAP requires management to make estimates or to apply
subjective principles to particular facts and circumstances. A variance in the
estimates used or a variance in the application or interpretation of GAAP could
yield a materially different accounting result. It is impracticable for us to
summarize every accounting principle that requires us to use judgment or
estimates in our application. Nevertheless, in our Annual Report on Form 10-K
for the year ended December 31, 2008, we discuss the five areas (valuation of
retained interests, investments in previously charged-off receivables,
non-consolidation of qualifying special purpose entities, allowance for
uncollectible loans and fees, and goodwill and identifiable intangible assets
and impairment analyses) for which we believe that the estimations, judgments or
interpretations that we have made, if different, would have yielded the most
significant differences in our consolidated financial statements. We urge
readers to review that discussion, along with Note 7, “Securitizations and
Structured Financings,” to the condensed consolidated financial statements
included in this report for an update to a portion of the sensitivity analysis
with respect to retained interests valuations.







Related Party
Transactions




During
2008, two of our executive officers and a member of our Board of Directors
separately purchased an aggregate $3.4 million (face amount) of our outstanding
convertible senior notes.  The purchases were made at prevailing
market prices from unrelated third parties.




Under a
shareholders agreement into which we entered with David G. Hanna, Frank J.
Hanna, III, Richard R. House, Jr. (our President), Richard W. Gilbert (our Chief
Operating Officer and Vice Chairman) and certain trusts that were or are
affiliates of the Hanna’s following our initial public offering (1) if one
or more of the shareholders accepts a bona fide offer from a third party to
purchase more than 50% of the outstanding common stock, each of the other
shareholders that are a party to the agreement may elect to sell their shares to
the purchaser on the same terms and conditions, and (2) if shareholders
that are a party to the agreement owning more than 50% of the common stock
propose to transfer all of their shares to a third party, then such transferring
shareholders may require the other shareholders that are a party to the
agreement to sell all of the shares owned by them to the proposed transferee on
the same terms and conditions.




In June
2007, we entered into a sublease for 1,000 square feet of excess office space at
our new Atlanta headquarters office location, to HBR Capital, Ltd., a
corporation co-owned by David G. Hanna and Frank J. Hanna, III. The sublease
rate of $22.44 per square foot is the same as the rate that we pay on the prime
lease. This sublease expires in May of 2022.




In June
2007, a partnership formed by Richard W. Gilbert (our Chief Operating Officer
and Vice Chairman of our Board of Directors), Richard R. House, Jr. (our
President and a member of our Board of Directors), J. Paul Whitehead III (our
Chief Financial Officer), Krishnakumar Srinivasan (President of our Credit Cards
segment), and other individual investors (including an unrelated third-party
individual investor), acquired £4.7 million ($9.2 million) of class “B”
notes originally issued to another investor out of our U.K. Portfolio
securitization trust. This acquisition price of the notes was the same price at
which the original investor had sold $60 million


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of notes
to another unrelated third party. As of March 31, 2009, the outstanding
balance of the notes held by the partnership was £1.0 million ($1.6
million). The notes held by the partnership comprise 0.5% of the $285.7 million
in total notes within the trust on that date and are subordinate to the senior
tranches within the trust. The “B” tranche bears interest at U.K. LIBOR
plus 9%.




In
December 2006, we established a contractual relationship with Urban Trust
Bank, a federally chartered savings bank (“Urban Trust”), pursuant to which we
purchase credit card receivables underlying specified Urban Trust credit card
accounts. Under this arrangement, in general Urban Trust is entitled to receive
5% of all payments received from cardholders and is obligated to pay 5% of all
net costs incurred by us in connection with managing the program, including the
costs of purchasing, marketing, servicing and collecting the receivables.
Because the parties agreed in 2008 to waive Urban Trust’s requirements to pay 5%
of all net costs incurred by us, Urban Trust’s interest in future net payments
received from cardholders is only 2.7% as of March 31, 2009; its interests are
netted against securitized earnings assets on our condensed consolidated balance
sheets as noted in Note 7, “Securitizations and Structured Financings.” Frank J.
Hanna, Jr., owns a substantial noncontrolling interest in Urban Trust and serves
on its Board of Directors. In December 2006, Urban Trust deposited $0.7 million
with us to cover its share of future expenses of the program. Also in December
2006, we deposited $0.3 million with Urban Trust to cover purchases by Urban
Trust cardholders. Through March 31, 2009, Urban Trust used all of the $0.7
million deposit to fund its share of the net costs of the program and made
certain net additional contributions to cover further growth. As of March 31,
2009, our deposit with Urban Trust decreased to $51,000, corresponding to
account closures and reduced credit lines impacting Urban Trust
cardholders.  In April 2009, we amended our contractual relationship
with Urban Trust such that, in exchange for a payment by us of $300,000, Urban
Trust would sell back its ownership interest in the economics underlying cards
issued through Urban Trust Bank. The purchase of this interest resulted in a net
gain of $1.1 million that we will record in our second quarter 2009 results of
operations.




Forward-Looking
Information




We make
forward-looking statements throughout this report including statements with
respect to our expected revenue, income, receivables, income ratios, net
interest margins, marketing-based volatility and peak charge-off vintages,
acquisitions and other growth opportunities, location openings and closings,
loss exposure and loss provisions, delinquency and charge off rates, changes in
collection programs and practices, securitizations and gains from
securitizations, changes in the credit quality of our on-balance sheet loans and
fees receivable, account growth, the performance of investments that we have
made, operating expenses, marketing plans and expenses, the profitability of and
expansion and growth within our Auto Finance segment, the growth and performance
of receivables originated over the Internet, our plans in the U.K., the impact
of the acquisition of our U.K. Portfolio of credit card receivables on our
financial performance, performance of the U.K. portfolio, sufficiency of
available liquidity, the prospect for improvements in the liquidity markets,
future interest costs, sources of funding operations and acquisitions, our
ability to raise funds and renew or replace securitization and financing
facilities, our losses and income in equity-method investees, the levels of our
ancillary and interchange revenues, our servicing income levels, gains and
losses from investments in securities (including asset-backed securities) and
other statements of our plans, beliefs or expectations are forward-looking
statements. In some cases these statements are identifiable through the use of
words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,”
“project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and
similar expressions.




You are
cautioned not to place undue reliance on these forward-looking statements. The
forward-looking statements we make are not guarantees of future performance and
are subject to various assumptions, risks and other factors that could cause
actual results to differ materially from those suggested by these
forward-looking statements. Actual results may differ materially from those
suggested by the forward-looking statements that we make for a number of reasons
including those described in Part II, Item 1A, “Risk Factors,” of this
report.




We
expressly disclaim any obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise,
except as required by law.




ITEM 3.
            QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK




Interest
Rate Sensitivity and Market Risk




In the
ordinary course of business, we are exposed to various interest rate risks
particularly in our Credit Cards and Auto Finance segments. Our interest rate
sensitivity is comprised of basis risk, gap risk and market risk. Basis risk is
caused by the difference in the interest rate indices or rates used to price
assets and liabilities. Gap risk is caused by the difference in repricing
intervals between assets and liabilities. Market risk is the risk of loss from
adverse changes in market prices and rates. Our principal market risk is related
to changes in interest rates. This affects us directly in our lending and
borrowing activities, as well as indirectly because interest rates may impact
the payment performance of our customers. To date, we have chosen not to hedge
these various interest rate risks because we believe


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our
exposure to these risks is not likely to have a materially adverse effect on our
business and because we believe that our business model creates a natural hedge
to certain of these risks.




Credit Cards
Segment. In our Credit Cards segment, we incur basis risk because we fund
managed assets at a spread over commercial paper rates or LIBOR, while the rates
underlying our U.S. managed assets generally are indexed to the prime rate. This
basis risk results from the potential variability over time in the spread
between the prime rate on the one hand, and commercial paper rates and LIBOR on
the other hand. We have not hedged our basis risk because we believe that these
indices tend to move together and that the costs of hedging this risk are
greater than the benefits we would get from the elimination of this risk. Recent
liquidity market duress caused the base LIBOR rate to fluctuate significantly.
While these fluctuations did not move in tandem with the prime rate as
anticipated, we believe that this dislocation was a temporary
phenomenon.




We incur
gap risk within our Credit Cards segment because the debt underlying our
securitization trust facilities reprices monthly; whereas, some of our
receivables do not adjust automatically (as in the case of our U.K. Portfolio)
unless we specifically adjust them with appropriate notification. Under ordinary
circumstances, this gap risk is relatively minor, however, because we generally
can reprice the substantial majority of our credit card receivables in response
to a rate change. We note our gap risk currently is much more significant than
normal as CB&T has refused to re-price a substantial number of credit card
accounts in violation of our agreements with them; we are litigating against
CB&T regarding this refusal and are seeking damages against
them.




As to the
issue of market risk within our Credit Cards segment, we attempt to minimize the
impact of interest rate fluctuations on net income by regularly evaluating the
risk inherent within our asset and liability structure, especially our
off-balance-sheet assets (such as securitized receivables) and their
corresponding liabilities. The impact of interest rate fluctuations on our
securitized receivables is reflected in the valuation of our retained interests
in credit card receivables securitized. This risk arises from continuous changes
in our asset and liability mix, changes in market interest rates (including such
changes that are caused by fluctuations in prevailing interest rates, payment
trends on our interest-earning assets and payment requirements on our
interest-bearing liabilities) and the general timing of all other cash flows. To
manage our direct risk to interest rates, management actively monitors interest
rates and the interest sensitive components of our securitization structures.
Management seeks to minimize the impact of changes in interest rates on the fair
value of assets, net income and cash flows primarily by matching asset and
liability repricings. There can be no assurance, however, that we will be
successful in our attempts to manage such risks.




At March
31, 2009, a substantial majority of our managed credit card receivables,
including those related to our equity-method investees, and other
interest-earning assets had variable rate pricing, with substantially all U.S.
credit card receivables carrying annual percentage rates at a spread over the
prime rate, subject to interest rate floors. At March 31, 2009,
$935.4 million of our total managed credit card receivables were priced at
their floor rate, of which, $562.6 million of these receivables were closed
and therefore ineligible to be repriced and the remaining $372.8 million were
open and eligible to be repriced. Although not keenly relevant to the current
accommodative interest rate environment, if we experience a long-term increase
in LIBOR, our earnings and cash flows will be adversely affected until the
variable rate pricing on the $562.6 million in closed receivables (as
hypothetically determined under the assumption that there was no floor rate)
rises to the level of their floor rate. To the extent we choose to reprice any
of the $372.8 million of receivables underlying the open accounts for which
variable rate pricing (assuming that there was no floor rate) is below their
floor rate, we can mitigate against any possible adverse effects of these open
accounts on our earnings and cash flows.




Auto Finance
Segment.At March 31, 2009, all of our Auto Finance segment’s loans
receivable were fixed rate amortizing loans and typically are not eligible to be
repriced. As such, we incur interest rate risks within our Auto Finance segment
because funding under our structured financing facilities is priced at a spread
over floating commercial paper rates; whereas, our Auto Finance receivables are
fixed-rate amortizing loans. In a rising rate environment, our net interest
margin between a floating cost of funds and a fixed rate interest income stream
may become compressed. Our various debt facilities in the Auto Finance segment
contain requirements to fix our floating rate exposure should floating rate
indexes reach certain prescribed levels (generally 6.25%). Given the current
accommodative rate environment, we may choose to effectively fix our floating
rate exposure at current lower levels. This may be accomplished via derivative
instruments such as interest swaps or interest rate caps, and we may elect to
enter into these arrangements even if, by their nature or structure, they are
not perfect hedges from an accounting perspective.


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Foreign
Currency Risk




Our
Sterling-denominated investments in the United Kingdom (£65.1 million as of
March 31, 2009) have created balance sheet exposure to currency exchange rates.
Specifically, the translation of the balance sheets of our U.K. operations from
their local currencies into U.S. dollars is sensitive to changes in U.S. dollar/
U.K. sterling currency exchange rates. These translation gains and losses are
recorded as foreign currency translation adjustments on our consolidated
statements of comprehensive (loss) income and as a component of accumulated
other comprehensive loss within shareholders’ equity on our consolidated
balance sheets. We also will have transactional gains and losses that are caused
by changes in foreign currency exchange rates. These transactional gains and
losses flow through our consolidated statements of operations. We have not
hedged our foreign currency risk; however, with the recent rise in the U.S.
dollar against the U.K. sterling, we currently are weighing the benefits versus
costs of hedging this risk.




ITEM 4.
            CONTROLS AND PROCEDURES




(a)
Disclosure controls and procedures.




As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that as of the end of the period covered by this report, our
disclosure controls and procedures were effective at meeting their
objectives.




(b)
Internal control over financial reporting.




There
were no changes in our internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.


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PART II—OTHER INFORMATION




ITEM 1.                      LEGAL
PROCEEDINGS




We are
involved in various legal proceedings that are incidental to the conduct of our
business. The most significant of these are described below.




CompuCredit
Corporation and five of our subsidiaries are defendants in a purported class
action lawsuit entitled Knox, et al., vs. First Southern Cash Advance, et al.,
No. 5 CV 0445, filed in the Superior Court of New Hanover County,
North Carolina, on February 8, 2005. The plaintiffs allege that in
conducting a so-called “payday lending” business, certain of our Retail
Micro-Loans segment subsidiaries violated various laws governing consumer
finance, lending, check cashing, trade practices and loan brokering. The
plaintiffs further allege that CompuCredit is the alter ego of our subsidiaries
and is liable for their actions. The plaintiffs are seeking damages of up to
$75,000 per class member. We are vigorously defending this lawsuit. These claims
are similar to those that have been asserted against several other market
participants in transactions involving small balance, short-term loans made to
consumers in North Carolina.




On
May 23, 2008, CompuCredit and one of our subsidiaries filed a complaint
against Columbus Bank and Trust Company and Synovus Financial Corporation
(collectively, “CB&T”) in the Georgia State Court, Fulton County,
(subsequently transferred to the Georgia Superior Court, Fulton County) in
an action entitled CompuCredit
Corporation et al. vs. CB&T et al., Civil Action
No. 08-EV-004730-F. Among other things, the complaint as now amended
alleges that CB&T, in violation of its contractual obligations, failed to
provide CompuCredit rebates, marketing fees, revenues or other fees or discounts
that were paid or granted by Visa®,
MasterCard®, or
other card associations with respect to or apportionable to accounts covered by
CB&T’s agreements with us and other consideration due to us. The complaint
also alleges that CB&T refused to approve changes requested by us to the
terms of the credit card accounts and refused to transfer credit card accounts
to our third-party designees, all in violation of the agreements among the
parties. Also in this litigation, CB&T has asserted claims against us for
alleged failure to follow certain account management guidelines and for
reimbursement of certain legal fees that it has incurred associated with our
contractual relationship with them.




On
July 14, 2008, CompuCredit and four of our officers, David G. Hanna,
Richard R. House, Jr., Richard W. Gilbert and J. Paul Whitehead III, were named
as defendants in a purported class action securities case filed in the United
States District Court for the Northern District of Georgia entitled Waterford Township General Employees
Retirement System vs. CompuCredit Corporation, et al., Civil Action
No. 08-CV-2270. On August 22, 2008, a virtually identical case was filed
entitled Steinke vs.
CompuCredit Corporation et al., Civil Action No.
08-CV-2687.In general, the complaints alleged that we made
false and misleading statements (or concealed information) regarding the nature
of our assets, accounting for loan losses, marketing and collection practices,
exposure to sub-prime losses, ability to lend funds, and expected future
performance. The complaints recently were consolidated, and a consolidated
complaint has been filed. We are vigorously contesting this complaint, and the
defendants have filed a motion to dismiss.




We received a
demand dated August 25, 2008, from Sue An that we take action against all of our
directors and two of our officers for alleged breaches of fiduciary duty. In
general, the alleged breaches are the same as the actions that are the subject
of the class action securities case. Our Board of Directors has appointed a
special litigation committee to investigate the allegations and determine how to
proceed.




Our debt
collections subsidiary, Jefferson Capital, is a party to a series of agreements
with Encore. In general, Encore is obligated to purchase from Jefferson Capital
certain defaulted credit card receivables. The agreements also require Encore to
sell certain charged off receivables to Jefferson Capital under its balance
transfer program and Chapter 13 bankruptcy agreements. On July 10, 2008,
Encore did not purchase certain accounts as contemplated by the agreements,
alleging breaches by CompuCredit and Jefferson Capital of certain
representations and warranties set forth in the agreements, generally as a
result of the allegations made by the FTC—allegations that subsequently have
been resolved through our December 2008 settlement with the FTC. CompuCredit was
dismissed from the proceeding, and we are vigorously contesting this dispute.
This dispute has been submitted to the American Arbitration Association for
resolution.


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ITEM 1A.                      RISK FACTORS




An
investment in our common stock or other securities involves a number of risks.
You should carefully consider each of the risks described below before deciding
to invest in our common stock. If any of the following risks develops into
actual events, our business, financial condition or results of operations could
be negatively affected, the market price of our common stock or other securities
could decline and you may lose all or part of your investment.




Investors
should be particularly cautious regarding investments in our common stock or
other securities at the present time in light of the current economic
circumstances.  We are predominately a sub-prime lender, and our
customers have been adversely impacted by the loss of jobs and the overall
decline in the economy.  Moreover, it is impossible for us to predict
with certainty the impact of the current economic circumstances on our
business.




Our
Cash Flows and Net Income Are Dependent Upon Payments on the Receivables
Underlying Our Securitizations and From Our Other Credit Products.




The
collectibility of the receivables underlying our securitizations and those that
we hold and do not securitize is a function of many factors including the
criteria used to select who is issued credit, the pricing of the credit
products, the lengths of the relationships, general economic conditions, the
rate at which customers repay their accounts or become delinquent, and the rate
at which customers use their cards or otherwise borrow funds from
us.  Deterioration in these factors, which we recently have
experienced, adversely impacts our business.  In addition, to the
extent we have over-estimated collectibility, in all likelihood we have
over-estimated our financial performance. Some of these concerns are discussed
more fully below.




We may not
successfully evaluate the creditworthiness of our customers and may not price
our credit products so as to remain profitable. The creditworthiness of
our target market generally is considered “sub-prime” based on guidance issued
by the agencies that regulate the banking industry. Thus, our customers
generally have a higher frequency of delinquencies, higher risks of nonpayment
and, ultimately, higher credit losses than consumers who are served by more
traditional providers of consumer credit. Some of the consumers included in our
target market are consumers who are dependent upon finance companies, consumers
with only retail store credit cards and/or lacking general purpose credit cards,
consumers who are establishing or expanding their credit, and consumers who may
have had a delinquency, a default or, in some instances, a bankruptcy in their
credit histories, but have, in our view, demonstrated recovery. We price our
credit products taking into account the perceived risk level of our customers.
If our estimates are incorrect, customer default rates will be higher, we will
receive less cash from the receivables, the value of our retained interests and
our loans and fees receivable will decline, and we will experience reduced
levels of net income if not losses. Payment rates by our customers have declined
recently and, correspondingly, default rates have increased.  It is
unclear whether these changes are temporary and, if they are, how long they will
last and whether, for instance, the federal government’s economic stimulus
programs will partially or fully offset them.




Economic
slowdowns increase our credit losses.Because our business is directly
related to consumer spending, during periods of economic slowdown or recession
it is more difficult for us to add or retain accounts and receivables (we
recently have almost entirely stopped opening new accounts), and receivables may
decline if consumers restrain spending. In addition, during periods of economic
slowdown or recession, we experience an increase in rates of delinquencies and
frequency and severity of credit losses. Our actual rates of delinquencies and
frequency and severity of credit losses may be comparatively higher during
periods of economic slowdown or recession than those experienced by more
traditional providers of consumer credit because of our focus on the financially
underserved consumer market, which may be disproportionately impacted. Other
economic and social factors, including, among other things, changes in consumer
confidence levels, the public’s perception of the use of credit and changing
attitudes about incurring debt, and the stigma of personal bankruptcy, also can
impact credit use and account performance. Moreover, adverse changes in economic
conditions in states where customers are located, including as a result of
severe weather, can have a direct impact on the timing and amount of payments of
receivables. Recent trends in the U.S. economy suggest that we have entered a
period of economic downturn or recession, and in recent months we have seen
reduced payments and an increase in default rates.  If this trend
continues, it will significantly, and negatively, impact our
business.




We recently
purchased a substantial portfolio of receivables in the U.K. and now will have
greater exposure to the U.K. economy and currency exchange rates.In
April 2007, we purchased a portfolio of credit card receivables having a face
value of £490 million ($970 million) as of the date of purchase. Although
we have had minor operations in the U.K. previously, this is our first
significant investment there, and we now will have substantially greater
exposure to fluctuations in the U.K. economy. As a result of this investment, we
also have greater exposure to fluctuations in the relative values of the U.S.
dollar and the British pound. Because the British pound recently has declined in
value significantly relative to the U.S. dollar, we have experienced significant
transaction and translation losses within our financial
statements.


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Because a
significant portion of our reported income is based on management’s estimates of
the future performance of securitized receivables, differences between actual
and expected performance of the receivables may cause fluctuations in net
income. Income from the sale of receivables in securitization
transactions and income from retained interests in receivables securitized have
constituted, and are likely to continue to constitute, a significant portion of
our income. Significant portions of this income are based on management’s
estimates of cash flows we expect to receive from the interests that we retain
when we securitize receivables. The expected cash flows are based on
management’s estimates of interest rates, default rates, payment rates,
cardholder purchases, costs of funds paid to investors in the securitizations,
servicing costs, discount rates and required amortization payments. These
estimates are based on a variety of factors, many of which are not within our
control. Substantial differences between actual and expected performance of the
receivables will occur and will cause fluctuations in our net income. For
instance, higher than expected rates of delinquency and loss could cause our net
income to be lower than expected. Similarly with respect to financing agreements
secured by our on-balance-sheet receivables, levels of loss and delinquency
could result in our being required to repay our lenders earlier than expected,
thereby reducing funds available to us for future growth. Recent payment and
default trends appear likely to substantially reduce the cash flow that we
receive from these securitized receivables.




Our portfolio of
receivables is not diversified and originates from customers whose
creditworthiness is considered sub-prime. We obtain the receivables that
we securitize and retain on our balance sheet in one of two ways—we either
originate the receivables or purchase pools of receivables from other issuers.
In either case, substantially all of our receivables are from financially
underserved borrowers—borrowers represented by credit risks that regulators
classify as “sub-prime.” Our reliance on sub-prime receivables has in the past
(and may in the future) negatively impacted our performance. For example, in
2001, we suffered a substantial loss after we increased the discount rate that
we used in valuing our retained interests to reflect the higher rate of return
required by securitization investors in sub-prime markets. These losses might
have been mitigated had our portfolios consisted of higher-grade receivables in
addition to our sub-prime receivables. We have no immediate plans to issue or
acquire significant higher-grade receivables. More recently, we began to
experience reductions in payments, and default rates have increased and may
increase further in the future. While we believe that the discount rate that we
use to value our retained interests accurately reflects the risk attendant to
these increases, it is impossible to make this determination with certainty at
the current time.




Seasonal factors
may result in fluctuations in our net income. Our quarterly income may
fluctuate substantially as a result of seasonal consumer spending. In
particular, our credit card customers may charge more and carry higher balances
during the year-end holiday season and during the late summer vacation and
back-to-school period, resulting in corresponding increases in the receivables
we manage and subsequently securitize or finance during those
periods.




The timing and
volume of originations with respect to our lower-tier credit card offerings
causes significant fluctuations in quarterly income. Fluctuations in the
timing or the volume of our originations of receivables will cause fluctuations
in our quarterly income. Factors that affect the timing or volume include
marketing efforts, the general economy and the other factors discussed in this
section. For example, given the significant and variable growth rates that we
have experienced for our lower-tier credit card offerings and given the
appreciably shorter vintage life cycles for these offerings relative to our more
traditional credit card offerings, we have experienced, and in the future expect
to experience, significant volatility of quarterly earnings from these offerings
based on the varying levels of marketing and receivables origination in the
quarters preceding peak vintage charge-off periods. Our lower-tier credit card
receivables tend to follow similar patterns of delinquency and write off, with
the peak period of write offs occurring approximately eight to nine months
following account origination. During periods of sustained growth, the negative
impact of these peak periods generally is offset by the impact of new
receivables. During periods of no or more limited growth, it is not. We
substantially reduced our credit card marketing efforts beginning in August 2007
and more recently have almost entirely stopped issuing new cards, thereby
reducing our growth. This followed a period of substantial marketing efforts and
growth. One impact of this was an increase in write offs during the first,
second and third quarters of 2008 that were not offset by growth.  In
addition, commencing early in the fourth quarter of 2008, like others in our
industry, we reduced credit lines and closed accounts in order to ensure that we
had the capacity to fund new purchases on the remaining accounts and to reduce
our risk exposure. This will result in an overall decline in the amount of
outstanding receivables.




Increases in
interest rates will increase our cost of funds and may reduce the payment
performance of our customers. Increases in interest rates will increase
our cost of funds, which could significantly affect our results of operations
and financial condition. We recently have experienced higher interest rates. Our
credit card accounts have variable interest rates. Significant increases in
these variable interest rates may reduce the payment performance of our
customers.




Due to the lack
of historical experience with Internet customers, we may not be able to target
successfully these customers or evaluate their creditworthiness. There is
less historical experience with respect to the credit risk and performance of
customers acquired over the Internet. As part of our growth strategy, we are
expanding our origination of accounts over the Internet; however, we may not be
able to target and evaluate successfully the creditworthiness of these potential
customers. Therefore, we


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may
encounter difficulties managing the expected delinquencies and losses and
appropriately pricing our products.




We
Are Substantially Dependent Upon Securitizations and Other Borrowed Funds to
Fund the Receivables That We Originate or Purchase.




All of
our securitization and financing facilities are of finite duration (and
ultimately will need to be extended or replaced) and contain financial covenants
and other conditions that must be fulfilled in order for funding to be
available. Assuming that we meet applicable financial covenants and other
conditions (which cannot be assured), our principal credit card receivables
securitization facilities alleviate, until January 2010 and October 2010, our
principal exposure to advance rate fluctuations within our upper-tier originated
portfolio master trust and our lower-tier originated portfolio master trust,
respectively. However, we have significant Auto Finance segment financing
facilities that mature in September 2009 and have not yet identified a means for
replacing or repaying these facilities. In the event that future advance rates
(i.e., the percentage on a dollar of receivables that lenders will lend us) for
securitizations or financing facilities are reduced, investors in
securitizations or financing facilities lenders require a greater rate of
return, we fail to meet the requirements for continued funding or
securitizations, or securitization or financing arrangements otherwise become
unavailable to us on acceptable terms, we may not be able to maintain or grow
our base of receivables or it may be more expensive for us to do so. In
addition, because of advance rate limitations, we retain subordinated “retained
interests” in our securitizations that must be funded through profitable
operations, equity raised from third parties or funds borrowed elsewhere. The
cost and availability of equity and borrowed funds is dependent upon our
financial performance, the performance of our industry generally and general
economic and market conditions, and at times equity and borrowed funds have been
both expensive and difficult to obtain. Most recently, funding for sub-prime
lending has been largely unavailable. Some of these concerns are discussed more
fully below.




As our
securitization and financing facilities mature or experience early amortization
events, the proceeds from the underlying receivables will not be available to us
for reinvestment or other purposes. Repayment for our securitization
facilities begins as early as one year prior to their maturity dates. Once
repayment begins and until the facility is paid, payments from customers on the
underlying receivables are accumulated to repay the investors and no longer are
reinvested in new receivables. When a securitization facility matures, the
underlying trust continues to own the receivables, and the maturing facility
retains its priority in payments on the underlying receivables until it is
repaid in full. As a result, new purchases need to be funded using debt, equity
or a replacement facility subordinate to the maturing facility’s interest in the
underlying receivables. Although this subordination historically has not made it
more difficult to obtain replacement facilities, it may do so in the future. If
we are obligated to repay a securitization facility and we also are unable to
obtain alternative sources of liquidity, such as debt, equity or new
securitization facilities that are structurally subordinate to the facility
being repaid, we may be forced to prohibit new purchases in some or all of our
accounts in order to significantly reduce our need for any additional
cash.




The
documents governing our securitization facilities provide that, upon the
occurrence of certain adverse events known as “early redemption events,” and
sometimes called “early amortization events,” investors can accelerate payments.
Early redemption events include portfolio performance triggers, the termination
of certain of our affinity agreements with third-party financial institutions to
originate credit cards, breach of certain representations, warranties and
covenants, insolvency or receivership, and servicer defaults, and may include
the occurrence of an early redemption event with respect to another
securitization transaction. In our upper-tier originated portfolio master trust
variable funding facility, an early redemption event also may be triggered among
other things based on a total consolidated equity test, a maximum permitted
reduction in quarterly total consolidated equity levels test, a change of
control in CompuCredit or other corporate finance events. If an early redemption
event occurs, principal payments would be made to investors to reduce their
notes in our securitizations. Until these investors are repaid in full, we
likely would receive no further funds from the receivables other than the
servicing fees provided for in the documents governing the securitizations.
These servicing fees are significantly less than the cash flows that we
currently receive as holders of the retained interests. In an early amortization
scenario with respect to facilities within our originated portfolio master
trusts, we estimate it could take several years to repay investors, after which
time we would again receive other funds from the receivables. During this
intervening period, our liquidity would be negatively impacted, our financial
results would suffer and we would need to obtain alternative sources of funding,
which under current market conditions would be very difficult for us to
do.




We may be unable
to obtain capital from third parties needed to fund our existing securitizations
and loans and fees receivable, investors and lenders under our securitization
and debt facilities may be unable or unwilling to meet their contractual
commitments to provide us funding, or we may be forced to rely on more expensive
funding sources than those that we have today. We need equity or debt
capital to fund our retained interests in our securitizations and the difference
between our loans and fees receivable and the amount that lenders will advance
or lend to us against those receivables. Investors should be aware of our
dependence on third parties for funding and our exposure to increases in costs
for that funding. External factors, including the general economy,


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impact
our ability to obtain funds. For instance, in 2001, we needed additional
liquidity to fund our operations and the growth in our retained interests, and
we had a difficult time obtaining the needed cash. Similarly, beginning in 2007
we have not been able to obtain financing on terms as favorable as those that we
previously were able to obtain, and we significantly curtailed our marketing
efforts and the issuance of new cards. More recently, we have not been able to
raise cash by issuing additional debt or equity or by selling a portion of our
retained interests. Moreover, the existing lenders under our securitization
facilities increasingly have required modifications to the terms of the
facilities that would reduce advance rates and otherwise adversely impact our
liquidity.  As a result, like all participants in the sub-prime market
place, we continue to operate under significant liquidity constraints, which
appear likely to worsen. We have read increasing press accounts of committed
investors and lenders who have been unable or unwilling to meet their
contractual funding obligations, and should we directly experience such a
situation, our liquidity position, financial results and financial position
could be jeopardized significantly.  In
addition, from time to time we have had disputes with investors in our
securitization facilities and lenders under our financing facilities regarding
whether, for instance, we have complied fully with our servicing
obligations.  We are unaware on any non-compliance on our part, and,
generally, it appears that these disputes have coincided with investors’ and
lenders’ desires to modify other terms of their arrangements.  A
failure by us in performing our servicing obligations at the level required in
the applicable documents could, among other things, entitle an investor or a
lender to replace us as servicer, which would deprive us of our attendant
servicing revenues, or cause an event of default under the applicable
facilities.


Increases in
expected losses and delinquencies may prevent us from securitizing future
receivables on terms similar to those that currently are available or from
obtaining favorable financing for non-securitized receivables. Greater
than expected delinquencies and losses also impact our ability to complete other
securitization or financing transactions on acceptable terms or at all, thereby
decreasing our liquidity and forcing us to either decrease or stop our growth or
rely on alternative, and potentially more expensive, funding sources if even
available. In recent months, payment rates have declined significantly and
defaults correspondingly have increased or will increase. It is premature to
predict the ultimate impact of these changes on our ability to securitize future
receivables, particularly given that there is no active securitization market at
the current time, but we do expect it to have an adverse impact.




The performance
of our competitors impacts the costs of our securitizations and financing
facilities. Generally speaking, investors in our securitizations also
invest in our competitors’ securitizations, and lenders against our receivables
also lend against our competitors’ receivables. When these investors and lenders
evaluate their investments and lending arrangements, they typically do so based
on overall industry performance. Thus, independent of our own performance, when
our competitors perform poorly, we typically experience negative investor and
lender sentiment, and the investors in our securitizations and lenders against
our receivables require greater returns, particularly with respect to
subordinated interests in our securitizations. In 2001, for instance, investors
demanded unprecedented returns. More recently, largely because of difficulties
in the sub-prime mortgage market, investors have been substantially more
reluctant, if even willing, to invest and those that have been willing to invest
have sought greater returns.




Rating
agencies have been aggressively reducing ratings across broad segments of the
consumer finance sector.  Recently, certain ratings on pools we
service have been downgraded.  Rating agency actions have impacted the
securitization industry and may impact our future ability to issue new
debt.




Although
due to conditions in the broader economic market, there currently are no
securitization opportunities for us, should these opportunities return in the
future, we expect investors to require higher returns. As a result, when we sell
our retained interests in securitizations at that time, the total returns to
buyers may be greater than the discount rates we are using to value the retained
interests for purposes of our financial statements. This would result in losses
for us at the time of the sales as the total proceeds from the sales would be
less than the carrying amount of the retained interests in our financial
statements. We also might increase the discount rates used to value all of our
other retained interests, which would result in further losses. Conversely, if
we sold our retained interests for total returns to investors that were less
than our current discount rates, we would record income from the sales, and we
potentially would decrease the rates used to value all of our other retained
interests, which would result in additional income.




Our growth is
dependent on our ability to add new securitization and financing
facilities. We finance our receivables through securitizations and
financing facilities. Beginning in 2007, largely as a result of difficulties in
the sub-prime mortgage market, new financing generally has been unavailable to
sub-prime lenders, and the financing that has been available has been on
significantly less favorable terms. As a result, beginning in the third quarter
of 2007, we significantly curtailed our marketing for new credit cards in order
to preserve our cash and access to financing for our most critical needs and
currently are not issuing a significant number of new cards. Moreover,
commencing in October 2008 we reduced credit lines and closed a significant
number of accounts in response to the unavailability of financing and to reduce
our risk exposure. If additional securitization and financing facilities are not
available in the future on terms we consider acceptable, or if existing
securitization and financing facilities are not renewed on terms as favorable as
we have now or are not renewed at all, we will not be able to grow our business
and it will continue to contract in size.




We may be
required to pay to investors in our securitizations an amount equal to the
amount of securitized receivables if representations and warranties regarding
those receivables are inaccurate. The representations and warranties made
to us by sellers of receivables we purchase may be inaccurate. In securitization
transactions, in reliance on the representations and warranties that we have
received, we make similar representations


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and
warranties to investors and, generally speaking, if there is a breach of our
representations and warranties, we could be required to pay the investors the
amount of the non-compliant receivables. Thus, our reliance on a representation
or warranty of a receivables seller, which proves to be false and causes a
breach of one of our representations or warranties, could subject us to a
potentially costly liability.




Our
Financial Performance Is, in Part, a Function of the Aggregate Amount of
Receivables That Are Outstanding.




The
aggregate amount of outstanding receivables is a function of many factors
including purchase rates, payment rates, interest rates, seasonality, general
economic conditions, competition from other credit card issuers and other
sources of consumer financing, access to funding, the timing and extent of our
marketing efforts and the success of our marketing efforts. To the extent that
we have over-estimated the size or growth of our receivables or underestimated
contraction of our receivables, in all likelihood we have over-estimated our
future financial performance.




Intense
competition for customers may cause us to lose receivables to
competitors. Historically, we have faced intense competition from other
providers of credit cards.  While we are not actively soliciting new
accounts at the current time, we do hope to resume account growth in the future,
and we would expect to lose receivables to competitors that offer lower interest
rates and fees or other more attractive terms or features. We believe that
customers choose credit card issuers and other lenders largely on the basis of
interest rates, fees, credit limits and other product features. For this reason,
customer loyalty is often limited. Our ability to maintain and grow our business
depends largely upon the success of our marketing efforts. Our credit card
business competes with national, regional and local bank and other credit card
issuers. Our other businesses have substantial competitors as well. Some of
these competitors already may use or may begin using many of the programs and
strategies that we have used to attract new accounts. In addition, many of our
competitors are substantially larger than we are and have greater financial
resources. Further, the Gramm-Leach-Bliley Act of 1999, which permits the
affiliation of commercial banks, insurance companies and securities firms, may
increase the level of competition in the financial services market, including
the credit card business.




Our business
currently is contracting. Growth is a product of a combination of
factors, many of which are not in our control. Factors include:




•
            the
      level of our marketing efforts;




•
            the
      success of our marketing efforts;




•
            the
      degree to which we lose business to
competitors;




•
            the
      level of usage of our credit products by our
  customers;




•
            the
      availability of portfolios for purchase on attractive
    terms;




•
            levels
      of delinquencies and charge offs;




•
            the
      availability of funding, including securitizations, on favorable
      terms;




•
            our
      ability to sell retained interests on favorable
  terms;




•
            the
      level of costs of soliciting new
customers;




•
            our
      ability to employ and train new
personnel;




•
            our
      ability to maintain adequate management systems, collection procedures,
      internal controls and automated systems;
and




•
            general
      economic and other factors beyond our
control.




We
substantially eliminated our marketing efforts and have aggressively reduced
credit lines and closed accounts. In addition, the general economy has been
experiencing a significant downturn, which has significantly impacted not just
the level of usage of our credit products by our customers but also levels of
payments and delinquencies and other performance metrics. As a result, our
business currently is contracting, and until market conditions reverse, we do
not expect to grow our business.




Our decisions
regarding marketing have a significant impact on our growth. We can
increase or decrease the size of our outstanding receivables balances by
increasing or decreasing our marketing efforts. Marketing is expensive, and
during periods when we have less liquidity than we like or when prospects for
continued liquidity in the future do not look promising, we may decide to limit
our marketing and thereby our growth. We decreased


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our
marketing during 2003, although we increased our marketing in 2004 through 2006
because of our improved access to capital. Similarly, we significantly curtailed
our marketing in August 2007 because of uncertainty regarding future access to
capital as a result of difficulties in the sub-prime mortgage market and
currently are not issuing a significant number of new cards.




Our operating
expenses and our ability to effectively service our accounts are dependent on
our ability to estimate the future size and general growth rate of the
portfolio. Some of our servicing and vendor agreements require us to make
additional payments if we overestimate the size or growth of our business. These
additional payments compensate the servicers and vendors for increased staffing
expenses and other costs they incur in anticipation of our growth. If we grow
more slowly than anticipated, we still may have higher servicing expenses than
we actually need, thus reducing our net income.




We
Operate in a Heavily Regulated Industry.




Changes
in bankruptcy, privacy or other consumer protection laws, or to the prevailing
interpretation thereof, may expose us to litigation, adversely affect our
ability to collect account balances in connection with our traditional credit
card business, our debt collection subsidiary’s charged-off receivables
operations, and our auto finance and micro-loan activities, or otherwise
adversely affect our operations. Similarly, regulatory changes could adversely
affect our ability or willingness to market credit cards and other products and
services to our customers. The accounting rules that govern our business are
exceedingly complex, difficult to apply and in a state of flux. As a result, how
we value our receivables and otherwise account for our business (including
whether we consolidate our securitizations) is subject to change depending upon
the changes in, and, interpretation of, those rules. Some of these issues are
discussed more fully below.




Reviews and
enforcement actions by regulatory authorities under banking and consumer
protection laws and regulations may result in changes to our business practices,
may make collection of account balances more difficult or may expose us to the
risk of fines, restitution and litigation.Our operations, and the
operations of the issuing banks through which we originate credit products, are
subject to the jurisdiction of federal, state and local government authorities,
including the SEC, the FDIC, the Office of the Comptroller of the Currency, the
FTC, U.K. banking authorities, state regulators having jurisdiction over
financial institutions and debt origination and collection and state attorneys
general. Our business practices, including the terms of our products and our
marketing, servicing and collection practices, are subject to both periodic and
special reviews by these regulatory and enforcement authorities. These reviews
can range from investigations of specific consumer complaints or concerns to
broader inquiries into our practices generally. If as part of these reviews the
regulatory authorities conclude that we are not complying with applicable law,
they could request or impose a wide range of remedies including requiring
changes in advertising and collection practices, changes in the terms of our
products (such as decreases in interest rates or fees), the imposition of fines
or penalties, or the paying of restitution or the taking of other remedial
action with respect to affected customers. They also could require us to stop
offering some of our products, either nationally or in selected states. To the
extent that these remedies are imposed on the issuing banks through which we
originate credit products, under certain circumstances we are responsible for
the remedies as a result of our indemnification obligations with those banks. We
also may elect to change practices or products that we believe are compliant
with law in order to respond to regulatory concerns. Furthermore, negative
publicity relating to any specific inquiry or investigation could hurt our
ability to conduct business with various industry participants or to attract new
accounts and could negatively affect our stock price, which would adversely
affect our ability to raise additional capital and would raise our costs of
doing business.




As
discussed in more detail below, in March 2006, one of our subsidiaries stopped
processing and servicing micro-loans in North Carolina in settlement of a review
by the North Carolina Attorney General, and also in 2006, we terminated our
processing and servicing of micro-loans for third-party banks in three other
states in response to a position taken in February 2006 with respect to banks
generally by the FDIC.




In June
2006, we entered into an assurance agreement with the New York Attorney General
in order to resolve an inquiry into our marketing and other materials and our
servicing and collection practices, principally as a result of New York Personal
Property Law Section 413. Pursuant to this agreement, we agreed to pay a
$0.5 million civil penalty to the State of New York and to refund certain fees
to New York cardholders, which resulted in cash payments of under $2.0 million
and a charge against a $5.0 million liability that we accrued for this purpose.
In addition, we assured the New York Attorney General that we would not engage
in certain marketing, billing, servicing and collection practices, a number of
which we previously had discontinued.




Also,
commencing in June 2006, the FDIC began investigating the policies, practices
and procedures used in connection with our credit card originating financial
institution relationships. In December 2006, the FTC commenced a related
investigation. In June 2008, both of the regulators commenced actions against us
and the FDIC commenced actions against two of the banks that historically have
issued cards on our behalf.


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We
settled the actions against us in December 2008. See Part I, Item 3, “Legal
Proceedings,” contained
in our Annual Report on Form 10-K filed with the SEC for the year ended
December 31, 2008.




If any
additional deficiencies or violations of law or regulations are identified by us
or asserted by any regulator, or if the FDIC, FTC or any other regulator
requires us to change any of our practices, there can be no assurance that the
correction of such deficiencies or violations, or the making of such changes,
would not have a materially adverse effect on our financial condition, results
of operations or business. In addition, whether or not we modify our practices
when a regulatory or enforcement authority requests or requires that we do so,
there is a risk that we or other industry participants may be named as
defendants in litigation involving alleged violations of federal and state laws
and regulations, including consumer protection laws. Any failure to comply with
legal requirements by us or the issuing banks through which we originate credit
products in connection with the issuance of those products, or by us or our
agents as the servicer of our accounts, could significantly impair our ability
to collect the full amount of the account balances. The institution of any
litigation of this nature, or any judgment against us or any other industry
participant in any litigation of this nature, could adversely affect our
business and financial condition in a variety of ways.




Increases in
required minimum payment levels could impact our business adversely. For
some time, regulators of credit card issuers have requested or required that
issuers increase their minimum monthly payment requirements to prevent so-called
“negative amortization,” in which the monthly minimum payment is not sufficient
to reduce the outstanding balance even if new purchases are not made. This can
be caused by, among other things, the imposition of over-limit, late and other
fees. Prior to recent changes to our minimum payment requirements, we requested
a minimum payment from our credit cardholders equal to the greater of 3% or 4%
(depending upon the credit card product) of their outstanding balance or an
amount that was sufficient to cover over-limit, late and other fees—a minimum
payment level that was designed to prevent negative amortization. However, we
had historically followed a more consumer-friendly practice of not treating
cardholders as delinquent (with commensurate adverse credit agency reporting)
provided they made a minimum payment of only 3% or 4% (depending upon the credit
card product) of their outstanding balance (i.e., exclusive of the requested
over-limit, late and other fees). Because of this practice, 3.8% of our U.S.
accounts and 5.9% of our U.S. credit card receivables were experiencing negative
amortization at December 31, 2006. However, in response to comments about
minimum payments and negative amortization received from the FDIC in the course
of its routine examinations of the banks that issue credit cards on our behalf,
we began a review of our practices in this area during the second quarter of
2006. As a result of this review and in keeping with our goals of maintaining
our consumer-friendly practices in this area, commencing during the third and
fourth quarters of 2006, we discontinued billing finance charges and fees on
credit card accounts once they become ninety or more days delinquent. We made
several additional consumer-friendly changes in 2007 and 2008 that had the
effect of reducing negative amortization, including a change in the fourth
quarter of 2007 whereby we began to reverse fees and finance charges on the
accounts of cardholders who made payments so that those accounts would not be in
negative amortization. Moreover, we modified our minimum payment requirements in
some cases to require a minimum payment equal to 1% of the outstanding balance
plus any finance charges and late fees billed in the current cycle. Based on our
various changes to our practices in this area, U.S. accounts representing only
0.03% of our U.S. credit card receivables were experiencing negative
amortization at March 31, 2009. The changes that we have made have adversely
impacted and are likely in the future to adversely impact amounts collected from
cardholders and therefore our reported fee income and delinquency and charge-off
statistics. Additionally, based on on-going discussions with our issuing bank
partners, evolving minimum payment practices in the credit card industry, and
our desire to continue to lead the industry in the application of
consumer-friendly credit card practices, we may make further payment and
fee-related changes in the next six to twelve months, and while it is possible
that some of these changes may even be beneficial to our financial position and
future results of operations, we do not yet know how these changes would affect
our customers’ payment patterns and therefore us.




Adverse
regulatory actions with respect to issuing banks have adversely impacted our
business and could continue to do so in the future. It is possible that a
regulatory position or action taken with respect to any of the issuing banks
through which we originate credit products or for whom we service receivables
might result in the bank’s inability or unwillingness to originate credit
products on our behalf or in partnership with us. For instance, in February 2006
the FDIC effectively asked insured financial institutions not to issue cash
advance and installment micro-loans through third-party servicers. As a result
of this request, the issuing bank for which we provided services in four states
stopped making new loans. Similarly, two of the banks through which we
traditionally have opened credit card accounts stopped opening new accounts,
principally because of the FDIC and FTC investigations and litigation discussed
elsewhere. In addition, Encore has refused to purchase certain receivables from
one of our subsidiaries, claiming that the allegations underlying our
now-settled dispute with the FTC relieve it from its obligations. In the future,
regulators may find other aspects of the products that we originate or service
objectionable, including, for instance, the terms of the credit offerings
(particularly for our higher priced lower-tier products), the manner in which we
market them or our servicing and collection practices. We are entirely dependent
on our issuing relationships with these institutions, and their regulators could
at any time limit their ability to issue some or all products on our behalf, or
that we service on their behalf, or to modify those products significantly. Any
significant interruption of those relationships would result in our being unable
to originate new receivables and other credit


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products,
which would have a materially adverse impact on our business.




Changes to
consumer protection laws or changes in their interpretation may impede
collection efforts or otherwise adversely impact our business practices.
Federal and state consumer protection laws regulate the creation and enforcement
of consumer credit card receivables and other loans. Many of these laws (and the
related regulations) are focused on sub-prime lenders and are intended to
prohibit or curtail industry-standard practices as well as non-standard
practices. For instance, Congress recently enacted legislation that regulates
loans to military personnel through imposing interest rate and other limitations
and requiring new disclosures, all as regulated by the Department of
Defense. Similarly, legislation currently is pending in Congress that would
require changes to a variety of marketing, billing and collection practices. The
Federal Reserve recently has adopted significant changes to a number of
practices that will be effective July 2010. While our practices are in
compliance with most of these proposed changes, some (e.g., limitations on the
ability to assess up-front fees) could significantly impact our lower-tier
products. Changes in the consumer protection laws could result in the
following:




•
            receivables
      not originated in compliance with law (or revised interpretations) could
      become unenforceable and uncollectible under their terms against the
      obligors;




•
            we
      may be required to credit or refund previously collected
      amounts;




•
            certain
      fees could be prohibited or restricted, which would reduce the
      profitability of certain accounts;




•
            certain
      of our collection methods could be prohibited, forcing us to revise our
      practices or adopt more costly or less effective
  practices;




•
            limitations
      on the content of marketing materials could be imposed that would result
      in reduced success for our marketing
efforts;




•
            federal
      and state laws may limit our ability to recover on charged-off receivables
      regardless of any act or omission on our
part;




•
            reductions
      in statutory limits for finance charges could require us to reduce our
      fees and charges;




•
            some
      of our products and services could be banned in certain states or at the
      federal level;




•
            federal
      or state bankruptcy or debtor relief laws could offer additional
      protections to customers seeking bankruptcy protection, providing a court
      greater leeway to reduce or discharge amounts owed to us;
    and




•
            a
      reduction in our ability or willingness to lend to certain individuals,
      such as military personnel.




Material
regulatory developments are likely to impact our business and results from
operations and we are unable to predict the nature or magnitude of that
impact.




The Retail
Micro-Loans segment of our business operates in an increasingly hostile
regulatory environment. Most states have specific laws regulating
micro-loan activities and practices. (One form of these activities is sometimes
referred to as “payday” lending.) Moreover, during the last few years,
legislation has been adopted in some states that prohibits or severely restricts
micro-loan cash advance services. Several state legislatures have introduced
bills to restrict or prohibit “cash advance” micro-loans by limiting the amount
of the advance and or reducing the allowable fees. In addition, Mississippi has
sunset provisions in its laws permitting micro-loans that require renewal of the
laws by the state legislature at periodic intervals. In June 2008, Ohio enacted
legislation that severely curtailed the traditional form of cash advance
micro-loans in that state, forcing us to seek and obtain approval for use of an
alternative micro-loan product under regulatory license within the state.
Although states provide the primary regulatory framework under which we conduct
our micro-loan services, certain federal laws also impact our business.
Moreover, future laws or regulations (at the state, federal or local level)
prohibiting micro-loan services or making them unprofitable could be passed at
any time or existing micro-loan laws could expire or be amended, any of which
could have a materially adverse effect on our business, results of operations
and financial condition.




Additionally,
state attorneys general, banking regulators and others continue to scrutinize
the micro-loan industry and may take actions that could require us to cease or
suspend operations in their respective states. For example, one of our
subsidiaries agreed with the Attorney General of the State of North Carolina in
March 2006 to stop servicing micro-loans for third-party banks, a practice that
we also terminated in three other affected states based on the February 2006
FDIC action cited above. Also, a group of plaintiffs brought a series of
putative class action lawsuits in North Carolina claiming, among other things,
that the cash advance micro-loan activities


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of the
defendants violate numerous North Carolina consumer protection laws. The
lawsuits seek various remedies including treble damages. One of these lawsuits
is pending against CompuCredit and five of our subsidiaries. If these cases are
determined adversely to us, there could be significant consequences to us,
including the payment of monetary damages. In the future, we also might
voluntarily (or with the encouragement of a regulator) withdraw particular
products from particular states, which could have a similar effect.




Negative
publicity may impair acceptance of our products. Critics of sub-prime
credit and micro-loan providers have in the past focused on marketing practices
that they claim encourage consumers to borrow more money than they should, as
well as on pricing practices that they claim are either confusing or result in
prices that are too high. Consumer groups, Internet chat sites and media reports
frequently characterize sub-prime lenders as predatory or abusive toward
consumers and may misinform consumers regarding their rights. If these negative
characterizations and misinformation become widely accepted by consumers, demand
for our products and services could be adversely impacted. Increased criticism
of the industry or criticism of us in the future could hurt customer acceptance
of our products or lead to changes in the law or regulatory environment, either
of which would significantly harm our business.




We
Recently Entered Into and Have Subsequently Expanded Our Automobile Lending
Activities, and These Activities Involve Risks in Addition to Those We
Historically Have Faced.




Automobile
lending exposes us not only to most of the risks described above but also to
additional risks, including the regulatory scheme that governs installment loans
and those attendant to relying upon automobiles and their repossession and
liquidation value as collateral. In addition, one of our Auto Finance segment
businesses acquires loans on a wholesale basis from used car dealers, for which
we rely upon the legal compliance and credit determinations by those
dealers.




The
decline in automobile sales has resulted in a decline in the overall demand for
automobile loans.  During 2008, sales of both new and used cars
declined precipitously. While the unavailability of funding may have had a
greater impact on our business, the decline in demand was consequential as well
as it adversely affects the volume of our lending transactions and our
recoveries of repossessed vehicles at auction. The continuation of this decline
in demand will adversely impact our business.




Funding for
automobile lending is difficult to obtain and expensive. In large part
due to market concerns regarding sub-prime lending, it is extremely difficult to
find lenders willing to fund our automobile lending activities. To the extent
that our Auto Finance segment’s renewal or replacement facilities carry higher
interest rates and lower advance rates than the funding that we historically
have obtained, our growth rates will be adversely affected, we may face periods
of liquidations in our Auto Finance segment receivables, and our profitability
and returns on equity may be reduced. We also may not be able to renew or
replace these facilities at all, in which event our Auto Finance segment could
experience significant liquidity constraints and diminution in reported asset
values as lenders retain significant cash flows within underlying structured
financings or otherwise under security arrangements for repayment of their
loans.




Our automobile
lending business is dependent upon referrals from dealers. Currently we
provide automobile loans only to or through new and used car dealers (including
JRAS, our own captive buy-here, pay-here dealer acquired in January 2007).
Providers of automobile financing have traditionally competed based on the
interest rate charged, the quality of credit accepted and the flexibility of
loan terms offered. In order to be successful, we not only will need to be
competitive in these areas, but also will need to establish and maintain good
relations with dealers and provide them with a level of service greater than
what they can obtain from our competitors. This is particularly true with our
ACC business, which stopped acquiring loans in November 2006 and began
reestablishing its relationships with dealers only following our acquisition of
it in February 2007.  More recently, because of market conditions, ACC
again has stopped acquiring loans.




The financial
performance of our automobile loan portfolio is in part dependent upon the
liquidation of repossessed automobiles. Our ACC business regularly
repossesses automobiles and sells repossessed automobiles at wholesale auction
markets located throughout the U.S. Auction proceeds from these sales and other
recoveries rarely are sufficient to cover the outstanding balances of the
contracts; where we experience these shortfalls, we will experience credit
losses. Decreased auction proceeds resulting from depressed prices at which used
automobiles may be sold in periods of economic slowdown or recession have
resulted in higher credit losses for us. Additionally, higher gasoline prices
during 2008 decreased the auction value of certain types of vehicles, such as
SUVs.




Repossession of
automobiles entails the risk of litigation and other claims. Although we
contract with reputable repossession firms to repossess automobiles on defaulted
loans, it is not uncommon for consumers to assert that we were not entitled to
repossess an automobile or that the repossession was not conducted in accordance
with applicable law. These claims increase the cost of our collection efforts
and, if correct, can result in awards against us.


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We
Routinely Explore Various Opportunities to Grow Our Business, to Make
Investments and to Purchase and Sell Assets.




We
routinely consider acquisitions of, or investments in, portfolios and other
businesses as well as the sale of portfolios and portions of our business. There
are a number of risks attendant to any acquisition, including the possibility
that we will overvalue the assets to be purchased and that we will not be able
to produce the expected level of profitability from the acquired business or
assets. Similarly, there are a number of risks attendant to sales, including the
possibility that we will undervalue the assets to be sold. As a result, the
impact of any acquisition or sale on our future performance may not be as
favorable as expected and actually may be adverse.




Portfolio purchases may
cause fluctuations in reported credit card managed receivables data, which may
reduce the usefulness of historical credit card managed loan data in evaluating
our business. Our reported managed credit card receivables data may fluctuate
substantially from quarter to quarter as a result of recent and future credit
card portfolio acquisitions. In April 2007, we purchased a portfolio in the U.K.
having a face amount of approximately £490 million ($970 million) as of the
date of purchase, and as of March 31, 2009, credit card portfolio acquisitions
accounted for 28.1% of our total credit card managed receivables portfolio based
on our ownership percentages.




Receivables
included in purchased portfolios are likely to have been originated using credit
criteria different from the criteria of issuing bank partners that originate
accounts on our behalf. Receivables included in any particular purchased
portfolio may have significantly different delinquency rates and charge-off
rates than the receivables previously originated and purchased by us. These
receivables also may earn different interest rates and fees as compared to other
similar receivables in our receivables portfolio. These variables could cause
our reported managed receivables data to fluctuate substantially in future
periods making the evaluation of our business more difficult.




Any
acquisition or investment that we make will involve risks different from and in
addition to the risks to which our business is currently exposed. These include
the risks that we will not be able to integrate and operate successfully new
businesses, that we will have to incur substantial indebtedness and increase our
leverage in order to pay for the acquisitions, that we will be exposed to, and
have to comply with, different regulatory regimes and that we will not be able
to apply our traditional analytical framework (which is what we expect to be
able to do) in a successful and value-enhancing manner.




Other
Risks of Our Business




If we ever
consolidate the entities that hold our receivables, there will be a number of
changes to our financial statements. When we securitize receivables, they
are owned by special purpose entities that are not consolidated with us for
financial reporting purposes. The rules governing whether these entities are
consolidated are complex and evolving and subject to periodic review. For
instance, changes currently proposed to be effective for us in 2010 are likely
to require us to consolidate our securitizations as of the beginning of that
year. In addition, we might at some point modify how we service or securitize
receivables, or propose modifications to existing securitization facilities,
such that the consolidation of these entities could be required. If this
occurred, we would include the receivables as assets on our balance sheet and
value them at fair value under an election to do so. This would result in a
different capital structure for us, although we do not believe it would have a
materially adverse effect on our consolidated results of operations, financial
position or cash flows. We believe this in part because we have no debt
covenants based on leverage ratios or on-balance-sheet debt levels. Moreover,
the cash flows used to determine the fair value of our credit card receivables
upon consolidation would not be offset by debt repayments and costs of funds as
they are in determining the fair value of our retained interests in our
securitizations.  As such, assuming otherwise similar valuation
assumptions, we believe that consolidation of our securitizations would be
accretive to our shareholders’ equity.  However, if there were any
defect in our fair value election, we would be required to consolidate our
receivables and include a loan loss reserve, which likely would cause
substantial reductions to our shareholders’ equity since this accounting would
ignore valuable interest-only (“I/O”) strip rights inherent within the
receivables.




Unless we obtain
a bank charter, we cannot issue credit cards other than through agreements with
banks. Because we do not have a bank charter, we currently cannot issue
credit cards other than through agreements with banks. Previously we applied for
permission to acquire a bank and our application was denied. Unless we obtain a
bank or credit card bank charter, we will continue to rely upon banking
relationships to provide for the issuance of credit cards to our customers. Even
if we obtain a bank charter, there may be restrictions on the types of credit
that it may extend. Our various issuing bank agreements have scheduled
expirations dates. If we are unable to extend or execute new agreements with our
issuing banks at the expirations of our current agreements with them, or if our
existing or new agreements with our issuing banks were terminated or otherwise
disrupted, there is a risk that we would not be able to enter into agreements
with an alternate provider on terms that we consider favorable or in a timely
manner without disruption of our business.


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Historically,
a substantial portion of our receivables have been generated through accounts
owned by Columbus Bank and Trust, which has not been originating any new
accounts on our behalf for over two years and has notified us that it is
terminating its relationship with us in 2009. In addition, Columbus Bank and
Trust has refused to provide us the portion of the proceeds that it received in
connection with the Visa® and
MasterCard® initial
public offerings that is attributable to the accounts that it originated on our
behalf. For a more complete discussion of the litigation pending between
Columbus Bank and Trust and us, see Part I, Item 3, “Legal Proceedings”
contained in our Annual Report on Form 10-K filed with the SEC for the year
ended December 31, 2008.




One of
our other bank partners recently was subject to actions brought by the FDIC, at
least in part as a result of the programs that it operates for our benefit and
is not currently issuing cards on our behalf.  For a more complete
discussion of these actions, see Part I, Item 3, “Legal Proceedings”
contained in our Annual Report on Form 10-K filed with the SEC for the year
ended December 31, 2008.




We are party to
substantial litigation. As more fully discussed above, we are
defendants in a significant number of legal proceedings. This includes
litigation relating to our relationship with Columbus Bank and Trust,
arbitration with Encore, securities class action litigation resulting from the
decline in our stock price, litigation relating to our payday lending operations
and other litigation customary for a business of our nature. In each case we
believe that we have meritorious defenses or that the positions that we are
asserting otherwise are correct. However, adverse outcomes are possible in each
of these matters, and we could decide to settle one or more of these matters in
order to avoid the cost of litigation or to obtain certainty of outcome. Adverse
outcomes or settlements of these matters could require us to pay damages, make
restitution, change our business practices or take other actions at a level, or
in a manner, that would adversely impact our business.




We may not be
able to purchase charged-off receivables at sufficiently favorable prices or
terms for our debt collection operations to be successful. The
charged-off receivables that are acquired and serviced (or resold) by Jefferson
Capital, our debt collection subsidiary, have been deemed uncollectible and
written off by the originators. Jefferson Capital seeks to purchase charged-off
receivables portfolios only if it expects projected collections or prices
received for sales of such charged-off receivables to exceed its acquisition and
servicing costs. Accordingly, factors causing the acquisition price of targeted
portfolios to increase could reduce the ratio of collections (or sales prices
received) to acquisitions costs for a given portfolio, and thereby negatively
affect Jefferson Capital’s profitability. The availability of charged-off
receivables portfolios at favorable prices and on favorable terms depends on a
number of factors, including the continuation of the current growth and
charge-off trends in consumer receivables, our ability to develop and maintain
long-term relationships with key charged-off receivable sellers, our ability to
obtain adequate data to appropriately evaluate the collectibility of portfolios
and competitive factors affecting potential purchasers and sellers of
charged-off receivables, including pricing pressures, which may increase the
cost to us of acquiring portfolios of charged-off receivables and reduce our
return on such portfolios.




Additionally,
sellers of charged-off receivables generally make numerous attempts to recover
on their non-performing receivables, often using a combination of their in-house
collection and legal departments as well as third-party collection agencies.
Charged-off receivables are difficult to collect, and we may not be successful
in collecting amounts sufficient to cover the costs associated with purchasing
the receivables and funding our Jefferson Capital operations.




The analytical
model we use to project credit quality may prove to be inaccurate. We
assess credit quality using an analytical model that we believe predicts the
likelihood of payment more accurately than traditional credit scoring models.
For instance, we have identified factors (such as delinquencies, defaults and
bankruptcies) that under some circumstances we weight differently than do other
credit providers. We believe our analysis enables us to better identify
consumers within the financially underserved market who are likely to be better
credit risks than otherwise would be expected. Similarly, we apply our
analytical model to entire portfolios in order to identify those that may be
more valuable than the seller or other potential purchasers might recognize.
There can be no assurance, however, that we will be able to achieve the
collections forecasted by our analytical model. If any of our assumptions
underlying our model proves materially inaccurate or changes unexpectedly, we
may not be able to achieve our expected levels of collection, and our revenues
will be reduced, which would result in a reduction of our earnings.




Because we
outsource account-processing functions that are integral to our business, any
disruption or termination of that outsourcing relationship could harm our
business. We outsource account and payment processing, and in 2008, we
paid Total System Services, Inc. $43.6 million for these services. If these
agreements were not renewed or were terminated or the services provided to us
were otherwise disrupted, we would have to obtain these services from an
alternative provider, such as First Data Resources, Inc., which currently
provides only limited account and payment processing for us. There is a risk
that we would not be able to enter into a similar agreement with an alternate
provider on terms that we consider favorable or in a timely manner without
disruption of our business.


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If we obtain a
bank charter, any changes in applicable state or federal laws could adversely
affect our business. From time-to-time we have explored the possibility
of acquiring a bank or credit card bank. If we obtain a bank or credit card bank
charter, we will be subject to the various state and federal regulations
generally applicable to similar institutions, including restrictions on the
ability of the banking subsidiary to pay dividends to us. We are unable to
predict the effect of any future changes of applicable state and federal laws or
regulations, but such changes could adversely affect the bank’s business and
operations.




Internet security
breaches could damage our reputation and business.As part of our growth
strategy, we may expand our origination of credit card accounts over the
Internet. The secure transmission of confidential information over the Internet
is essential to maintaining consumer confidence in our products and services
offered online. Advances in computer capabilities, new discoveries or other
developments could result in a compromise or breach of the technology used by us
to protect customer application and transaction data transmitted over the
Internet. Security breaches could damage our reputation and expose us to a risk
of loss or litigation. Moreover, consumers generally are concerned with security
and privacy on the Internet, and any publicized security problems could inhibit
the growth of the Internet as a means of conducting commercial transactions. Our
ability to solicit new account holders over the Internet would be severely
impeded if consumers become unwilling to transmit confidential information
online.




Investments that
we make in the securities of others may be more risky and volatile than similar
assets owned by us. From time-to-time we have purchased debt and
securities of others, principally those issued by asset-backed securitization
trusts (e.g., notes secured or “backed” by pools of assets). These
securities in many cases are junior, including below investment grade, tranches
of securities issued by the trusts. The assets underlying these securities
are not originated by us and, accordingly, may not meet the underwriting
standards that we follow in originating receivables. Further, we do not
have direct control over the management of the underlying assets and, similarly,
they may not be managed as effectively as we would manage similar
assets. As a result, the securities in which we invest may carry higher
risks, including risks of higher delinquencies and charge offs, risks of
covenant violations and risks of value impairment due to the claims of more
senior securities issued by the trusts, than similar assets originated and owned
by us. These higher risks can cause much greater valuation volatility for
these securities than we typically have experienced and would expect to
experience on our holdings of securities underlying the trusts that we service.
And although these securities generally are traded in an active secondary
market, valuation volatility also can be expected to result from liquidity needs
that we might have in the future, including any need that we may have for quick
liquidity or to meet margin requirements related to our investments in these
securities should their prices decline. In turn, this could result in steep and
immediate impairments in the values of the securities as presented within our
financial statements and could cause our financial position and results of
operations to deteriorate, possibly materially. Most recently, we made these
investments through a subsidiary that was advised by United Capital Asset
Management LLC. We recorded losses on investments in securities (determined
without regard to interest income) of $6.6 million and $70.0 million during 2008
and 2007, respectively. These losses were the result of what we believe to be a
significant dislocation in the market for mortgage-related and other
asset-backed securities caused, in part, by leverage and liquidity constraints
facing many market participants. Subsequent to the end of our second quarter of
2008, we liquidated our remaining investments in third-party asset-backed
securities in response to margin calls; as such, we will not have any continuing
interest income or investment gains or losses associated with these particular
investments.




Risks
Relating to an Investment in Our Common Stock




The price of our
common stock may fluctuate significantly, and this may make it difficult for you
to resell your shares of our common stock when you want or at prices you find
attractive. The price of our common stock on the NASDAQ Global
Market constantly changes. We expect that the market price of our common stock
will continue to fluctuate. The market price of our common stock may fluctuate
in response to numerous factors, many of which are beyond our control. These
factors include the following:




•
            actual
      or anticipated fluctuations in our operating
  results;




•
            changes
      in expectations as to our future financial performance, including
      financial estimates by securities analysts and
  investors;




•
            the
      overall financing environment, which is critical to our
    value;




•
            the
      operating and stock performance of our competitors and other sub-prime
      lenders;




•
            announcements
      by us or our competitors of new products or services or significant
      contracts, acquisitions, strategic partnerships, joint ventures or capital
      commitments;


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•
            changes
      in interest rates;




•
            the
      announcement of enforcement actions or investigations against us or our
      competitors or other negative publicity relating to us or our
      industry;




•
            changes
      in accounting principles generally accepted in the United States of
      America (“GAAP”), laws, regulations or the interpretations thereof that
      affect our various business activities and
  segments;




•
            general
      domestic or international economic, market and political
      conditions;




•
            additions
      or departures of key personnel; and




•
            future
      sales of our common stock and the share lending
  agreement.




In
addition, the stock markets from time to time experience extreme price and
volume fluctuations that may be unrelated or disproportionate to the operating
performance of companies. These broad fluctuations may adversely affect the
trading price of our common stock, regardless of our actual operating
performance.




Future sales of
our common stock or equity-related securities in the public market, including
sales of our common stock pursuant to share lending agreements or short sales
transactions by purchasers of convertible notes securities, could adversely
affect the trading price of our common stock and our ability to raise funds in
new stock offerings.Sales of significant amounts of our common stock or
equity-related securities in the public market, including sales pursuant to
share lending agreements, or the perception that such sales will occur, could
adversely affect prevailing trading prices of our common stock and could impair
our ability to raise capital through future offerings of equity or
equity-related securities. No prediction can be made as to the effect, if any,
that future sales of shares of common stock or the availability of shares of
common stock for future sale, including sales of our common stock in short sales
transactions by purchasers of our convertible notes, will have on the trading
price of our common stock.




We have the
ability to issue preferred shares, warrants, convertible debt and other
securities without shareholder approval. Our common shares may be
subordinate to classes of preferred shares issued in the future in the payment
of dividends and other distributions made with respect to common shares,
including distributions upon liquidation or dissolution. Our articles of
incorporation permit our board of directors to issue preferred shares without
first obtaining shareholder approval. If we issued preferred shares, these
additional securities may have dividend or liquidation preferences senior to the
common shares. If we issue convertible preferred shares, a subsequent conversion
may dilute the current common shareholders’ interest. We have similar abilities
to issue convertible debt, warrants and other equity securities.




Our executive
officers, directors and parties related to them, in the aggregate, control a
majority of our voting stock and may have the ability to control matters
requiring shareholder approval. Our executive officers, directors
and parties related to them own a large enough stake in us to have an influence
on, if not control of, the matters presented to shareholders. As a result, these
shareholders may have the ability to control matters requiring shareholder
approval, including the election and removal of directors, the approval of
significant corporate transactions, such as any reclassification,
reorganization, merger, consolidation or sale of all or substantially all of our
assets and the control of our management and affairs. Accordingly, this
concentration of ownership may have the effect of delaying, deferring or
preventing a change of control of us, impede a merger, consolidation, takeover
or other business combination involving us or discourage a potential acquirer
from making a tender offer or otherwise attempting to obtain control of us,
which in turn could have an adverse effect on the market price of our common
stock.




Note
Regarding Risk Factors




The risk
factors presented above are all of the ones that we currently consider material.
However, they are not the only ones facing our company. Additional risks not
presently known to us, or which we currently consider immaterial, may also
adversely affect us. There may be risks that a particular investor views
differently from us, and our analysis might be wrong. If any of the risks that
we face actually occur, our business, financial condition and operating results
could be materially adversely affected and could differ materially from any
possible results suggested by any forward-looking statements that we have made
or might make. In such case, the trading price of our common stock could
decline, and you could lose part or all of your investment. We expressly disclaim any obligation
to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by
law.


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ITEM 6.
            EXHIBITS





ExhibitNumber
                                          
                                          Description
      of Exhibit
                                          
                                          Incorporated
      by reference from
                                            CompuCredit’s
      SEC filings unless
                                            otherwise
      indicated:31.1
                                          
                                          Certification
      of Principal Executive Officer pursuant to Rule 13a-14(a).
                                          
                                          Filed
      herewith31.2
                                          
                                          Certification
      of Principal Financial Officer pursuant to Rule 13a-14(a).
                                          
                                          Filed
      herewith32.1
                                          
                                          Certification
      of Principal Executive Officer andPrincipal
      Financial Officer pursuant to 18 U.S.C. Section 1350.
                                          
                                          Filed
      herewith




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SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




COMPUCREDIT
      CORPORATIONMay
      11, 2009
                
                By
                /s/
      J.PAUL WHITEHEAD, IIIJ.Paul
      Whitehead, IIIChief
      Financial Officer(duly
      authorized officer and principal financial
  officer)