10-Q 1 hpy0630201410q.htm 10-Q HPY 06.30.2014 10Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________ 
FORM 10-Q
__________________________________ 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File No. 001-32594
______________________________________________ 
HEARTLAND PAYMENT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
22-3755714
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
90 Nassau Street, Princeton, New Jersey 08542
(Address of principal executive offices) (Zip Code)
(609) 683-3831
(Registrant’s telephone number, including area code)
____________________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  YES    o  NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  YES    o  NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
  
Accelerated filer
 
o
 
 
 
 
 
 
 
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  YES    x  NO
As of August 4, 2014, there were 35,983,445 shares of the registrant’s Common Stock, $0.001 par value, outstanding.
 



INDEX
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
       ended June 30, 2014 and 2013 (unaudited)
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
 
 
 
Item 6.



PART I. FINANCIAL INFORMATION
Item 1.
Condensed Financial Statements
Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
 
June 30,
2014
 
December 31,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
53,839

 
$
71,932

Funds held for customers
131,448

 
127,375

Receivables, net
212,559

 
200,040

Investments
4,112

 
4,101

Inventory
10,351

 
11,087

Prepaid expenses
17,898

 
15,284

Current tax assets
17,789

 
10,426

Current deferred tax assets, net
7,715

 
9,548

Total current assets
455,711

 
449,793

Capitalized customer acquisition costs, net
66,433

 
61,027

Property and equipment, net
155,770

 
147,388

Goodwill
204,737

 
190,978

Intangible assets, net
50,103

 
49,857

Deposits and other assets, net
1,206

 
1,262

Total assets
$
933,960

 
$
900,305

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Due to sponsor banks
$
58,774

 
$
19,109

Accounts payable
70,767

 
70,814

Customer fund deposits
131,448

 
127,375

Processing liabilities
107,108

 
130,871

Current portion of accrued buyout liability
12,901

 
13,943

Accrued expenses and other liabilities
28,941

 
49,861

Total current liabilities
409,939

 
411,973

Deferred tax liabilities, net
43,910

 
40,600

Reserve for unrecognized tax benefits
6,739

 
5,633

Long-term borrowings
200,000

 
150,000

Long-term portion of accrued buyout liability
28,367

 
25,436

Total liabilities
688,955

 
633,642

Commitments and contingencies (Note 11)

 

 
 
 
 
Equity
 
 
 
Common stock, $0.001 par value, 100,000,000 shares authorized, 35,936,313 and 37,485,486 shares issued at June 30, 2014 and December 31, 2013; 35,936,313 and 36,950,886 outstanding at June 30, 2014 and December 31, 2013
36

 
37

Additional paid-in capital
240,209

 
245,055

Accumulated other comprehensive loss
(143
)
 
(88
)
Retained earnings
424

 
35,960

Treasury stock, at cost (534,600 shares at December 31, 2013)

 
(20,489
)
Total stockholders’ equity
240,526

 
260,475

Noncontrolling interests
4,479

 
6,188

Total equity
245,005

 
266,663

Total liabilities and equity
$
933,960

 
$
900,305

See accompanying notes to condensed consolidated financial statements.

1


Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Total revenues
$
582,859

 
$
546,624

 
$
1,106,142

 
$
1,047,863

Costs of services:
 
 
 
 
 
 
 
Interchange
367,773

 
345,233

 
685,869

 
652,305

Dues, assessments and fees
55,686

 
51,649

 
105,354

 
98,981

Processing and servicing
67,048

 
58,376

 
135,657

 
117,773

Customer acquisition costs
12,368

 
9,983

 
22,618

 
20,716

Depreciation and amortization
6,679

 
4,522

 
12,491

 
8,612

Total costs of services
509,554

 
469,763

 
961,989

 
898,387

General and administrative
43,374

 
43,531

 
87,860

 
89,371

Total expenses
552,928

 
513,294

 
1,049,849

 
987,758

Income from operations
29,931

 
33,330

 
56,293

 
60,105

Other income (expense):
 
 
 
 
 
 
 
Interest income
30

 
32

 
62

 
66

Interest expense
(1,258
)
 
(1,269
)
 
(2,308
)
 
(2,503
)
Other, net
420

 
(70
)
 
288

 
(160
)
Total other expense
(808
)
 
(1,307
)
 
(1,958
)
 
(2,597
)
Income from continuing operations before income taxes
29,123

 
32,023

 
54,335

 
57,508

Provision for income taxes
12,552

 
12,342

 
22,852

 
22,182

Net income from continuing operations
16,571

 
19,681

 
31,483

 
35,326

Income from discontinued operations, net of income tax of $—,
$—, $— and $2,135

 

 

 
3,970

Net income
16,571

 
19,681

 
31,483

 
39,296

Less: Net (loss) income attributable to noncontrolling interests
 
 
 
 
 
 
 
         Continuing operations
(881
)
 

 
(1,709
)
 

         Discontinued operations

 

 

 
56

Net income attributable to Heartland
$
17,452

 
$
19,681

 
$
33,192

 
$
39,240

 
 
 
 
 
 
 
 
Amounts attributable to Heartland:
 
 
 
 
 
 
 
Net income from continuing operations
$
17,452

 
$
19,681

 
$
33,192

 
$
35,326

Income from discontinued operations, net of income tax
and noncontrolling interests

 

 

 
3,914

Net income attributable to Heartland
$
17,452

 
$
19,681

 
$
33,192

 
$
39,240

 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.49

 
$
0.54

 
$
0.91

 
$
0.96

Income from discontinued operations

 

 

 
0.11

Basic earnings per share
$
0.49

 
$
0.54

 
$
0.91

 
$
1.07

 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.48

 
$
0.53

 
$
0.89

 
$
0.93

Income from discontinued operations

 

 

 
0.10

Diluted earnings per share
$
0.48

 
$
0.53

 
$
0.89

 
$
1.03

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
35,936

 
36,153

 
36,350

 
36,698

Diluted
36,734

 
37,439

 
37,250

 
38,108

 
 
 
 
 
 
 
 
Dividends declared per share:
$
0.085

 
$
0.07

 
$
0.17

 
$
0.14


See accompanying notes to condensed consolidated financial statements.

2


Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(unaudited)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net income
$
16,571

 
$
19,681

 
$
31,483

 
$
39,296

Other comprehensive income (loss):
 
 
 
 
 
 
 
Reclassification of gains on investments net of income tax of
$103, $—, $103 and $—
(164
)
 

 
(164
)
 

Unrealized gains on investments, net of income tax of $1, $—, $10 and $4
2

 
1

 
14

 
4

Unrealized gains on derivative financial instruments, net of income tax
of $27, $53, $55 and $96
48

 
83

 
95

 
163

Foreign currency translation adjustment

 

 

 
(54
)
Comprehensive income
16,457

 
19,765

 
31,428

 
39,409

Less: Comprehensive (loss) income attributable to noncontrolling interests
(881
)
 

 
(1,709
)
 
40

Comprehensive income attributable to Heartland
$
17,338

 
$
19,765

 
$
33,137

 
$
39,369


See accompanying notes to condensed consolidated financial statements.

3



Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Equity
(In thousands)
(unaudited)
 
Heartland Stockholders’ Equity
 
 
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 

Retained
Earnings
 
Treasury Stock
 
Noncontrolling Interests
 
Total
Equity
 
Shares
 
Amount
 
Six Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2013
36,856

 
$
38

 
$
222,705

 
$
(399
)
 
$
7,629

 
$
(20,187
)
 
$
1,375

 
$
211,161

Issuance of common stock–
options exercised
752

 
1

 
7,808

 

 

 

 

 
7,809

Issuance of common stock –
RSU’s vested
254

 

 
(4,667
)
 

 

 

 

 
(4,667
)
Excess tax benefit on employee
share-based compensation

 

 
6,536

 

 

 

 

 
6,536

Repurchase of common stock
(1,092
)
 

 

 

 

 
(34,217
)
 

 
(34,217
)
Retirement of treasury stock

 
(2
)
 
(10,024
)
 

 
(39,974
)
 
50,000

 

 

Share-based compensation

 

 
7,138

 

 

 

 

 
7,138

Changes in equity from sale of
discontinued operation

 

 

 
83

 

 

 
(1,415
)
 
(1,332
)
Other comprehensive income
(loss)

 

 

 
129

 

 

 
(16
)
 
113

Dividends on common stock

 

 

 

 
(5,151
)
 

 

 
(5,151
)
Net income for the period

 

 

 

 
39,240

 

 
56

 
39,296

Balance, June 30, 2013
36,770

 
$
37

 
$
229,496

 
$
(187
)
 
$
1,744

 
$
(4,404
)
 
$

 
$
226,686

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2014
36,951

 
$
37

 
$
245,055

 
$
(88
)
 
$
35,960

 
$
(20,489
)
 
$
6,188

 
$
266,663

Issuance of common stock–
options exercised
126

 

 
1,337

 

 

 

 

 
1,337

Issuance of common stock –
RSU’s vested
207

 

 
(4,751
)
 

 

 

 

 
(4,751
)
Excess tax benefit on employee
share-based compensation

 

 
3,394

 

 

 

 

 
3,394

Repurchase of common stock
(1,348
)
 

 

 

 

 
(54,455
)
 

 
(54,455
)
Retirement of treasury stock

 
(1
)
 
(12,368
)
 

 
(62,575
)
 
74,944

 

 

Share-based compensation

 

 
7,542

 

 

 

 

 
7,542

Other comprehensive loss

 

 

 
(55
)
 

 

 

 
(55
)
Dividends on common stock

 

 

 

 
(6,153
)
 

 

 
(6,153
)
Net income (loss) for the period

 

 

 

 
33,192

 

 
(1,709
)
 
31,483

Balance, June 30, 2014
35,936

 
$
36

 
$
240,209

 
$
(143
)
 
$
424

 
$

 
$
4,479

 
$
245,005


See accompanying notes to condensed consolidated financial statements.

4


Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited) 
 
Six Months Ended June 30,
 
2014
 
2013
Cash flows from operating activities
 
 
 
Net income
$
31,483

 
$
39,296

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of capitalized customer acquisition costs
24,930

 
22,478

Other depreciation and amortization
20,854

 
16,268

Addition to loss reserves
2,057

 
1,282

Provision (recoveries) for doubtful receivables
2,003

 
(187
)
Deferred taxes
7,260

 
5,447

Share-based compensation
7,542

 
7,138

Gain on sale of assets
(259
)
 
(3,786
)
Write off of fixed assets and other
479

 
133

Changes in operating assets and liabilities:
 
 
 
Increase in receivables
(14,197
)
 
(56,662
)
Decrease (increase) in inventory
740

 
(272
)
Payment of signing bonuses, net
(18,179
)
 
(12,080
)
Increase in capitalized customer acquisition costs
(12,157
)
 
(10,121
)
Increase in prepaid expenses
(2,524
)
 
(2,085
)
Increase in current tax assets
(3,969
)
 
(7,336
)
Decrease (increase) in deposits and other assets
36

 
(692
)
Excess tax benefits on employee share-based compensation
(3,394
)
 
(6,536
)
Increase in reserve for unrecognized tax benefits
1,106

 
748

Increase (decrease) in due to sponsor banks
39,665

 
(36,904
)
(Decrease) increase in accounts payable
(51
)
 
6,494

Decrease in accrued expenses and other liabilities
(25,271
)
 
(14,026
)
(Decrease) increase in processing liabilities
(25,821
)
 
82,188

Payouts of accrued buyout liability
(7,956
)
 
(10,450
)
Increase in accrued buyout liability
9,845

 
8,359

Net cash provided by operating activities
34,222

 
28,694

Cash flows from investing activities
 
 
 
Purchase of investments
(16,017
)
 
(1,224
)
Sales of investments
2,215

 

Maturities of investments

 
816

Increase in funds held for customers
9,736

 
21,096

Increase (decrease) in customer fund deposits
4,073

 
(21,089
)
Proceeds from sale of business

 
19,343

Acquisitions of businesses, net of cash acquired
(20,493
)
 

Capital expenditures
(25,952
)
 
(23,445
)
Net cash used in investing activities
(46,438
)
 
(4,503
)
Cash flows from financing activities
 
 
 
Proceeds from borrowings
60,000

 
9,000

Principal payments on borrowings
(10,000
)
 
(10,000
)
Proceeds from exercise of stock options
1,337

 
7,809

Excess tax benefits on employee share-based compensation
3,394

 
6,536

Repurchases of common stock
(54,455
)
 
(34,217
)
Dividends paid on common stock
(6,153
)
 
(5,151
)
Net cash used in financing activities
(5,877
)
 
(26,023
)
 
 
 
 
Net decrease in cash
(18,093
)
 
(1,832
)
Effect of exchange rates on cash

 
1

Cash at beginning of year
71,932

 
50,581

Cash at end of period
$
53,839

 
$
48,750

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
1,808

 
$
2,147

Income taxes
18,454

 
23,331

See accompanying notes to condensed consolidated financial statements.

5


Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements
(unaudited)
1. Organization and Operations
Basis of Financial Statement Presentation— The accompanying condensed consolidated financial statements include those of Heartland Payment Systems, Inc. (the “Company,” “we,” “us,” or “our”) and its wholly-owned subsidiaries, Heartland Ovation Payroll, Inc. (“Ovation”), Heartland Payment Solutions, Heartland Acquisition LLC (“Network Services”), and as of September 11, 2013, Leaf Acquisition, LLC (which holds 66.67% of the outstanding capital stock of Leaf Holdings, Inc. (collectively, “Leaf")), and until January 31, 2013, its previously 70% owned subsidiary Collective POS Solutions Ltd. (“CPOS”). The Company entered into an agreement during the fourth quarter of 2012 to sell CPOS. The transaction was settled on January 31, 2013 and the Company recorded a gain on the sale in the first quarter of 2013. The Company presented CPOS as a discontinued operation in the accompanying condensed consolidated financial statements. See Note 15, Discontinued Operations for more detail. See Note 2. Summary of Significant Accounting Policies − Subsequent Events − for a description of a transaction involving Leaf noncontrolling interests.

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. All intercompany balances and transactions with the Company's subsidiaries have been eliminated upon consolidation.

The accompanying condensed consolidated financial statements are unaudited. In the opinion of the Company's management, the unaudited condensed consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the Company's financial position at June 30, 2014, its results of operations, changes in equity and cash flows for the six months ended June 30, 2014 and 2013. Results of operations reported for interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2014. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2013. The December 31, 2013 Condensed Consolidated Balance Sheet was derived from the audited 2013 consolidated financial statements.

Out of Period Adjustments—In the second quarter of 2014, the Company recorded out-of-period adjustments decreasing its revenue and increasing bad debt expense (included in Processing and Servicing in its Condensed Consolidated Statements of Income) by $1.4 million and $0.9 million, respectively. These adjustments related to immaterial errors that originated in the prior year in our Heartland School Solutions business. These adjustments included revenue which was incorrectly recorded in prior periods and a reassessment of the collectability of certain customer accounts receivable. These out-of-period adjustments reduced earnings before income taxes and net income in the second quarter of 2014 by $2.3 million and $1.4 million, respectively, and reduced diluted earnings per share by $0.04. The Company has considered existing guidance in evaluating whether a restatement of prior financial statements is required as a result of these misstatements. The guidance requires corrections of errors to be recorded by restatement of prior periods, if material. The Company has quantitatively and qualitatively assessed the materiality of the errors and concluded that the errors were not material to its earnings for the year ended December 31, 2013 and to its forecast of earnings for the year ending December 31, 2014, and accordingly, did not warrant restatement of prior period financial statements.

Business Description—The Company’s primary business is to provide card payment processing services to merchants throughout the United States, and until January 31, 2013 in Canada (See Note 15, Discontinued Operations for more detail). This involves providing end-to-end electronic payment processing services to merchants by facilitating the exchange of information and funds between them and cardholders' financial institutions. To accomplish this, the Company undertakes merchant set-up and training, transaction authorization and electronic draft capture, clearing and settlement, merchant accounting, merchant assistance and support, and risk management. Card payment processing services also includes selling and renting point-of-sale devices. The Company also provides additional services, including those provided through subsidiaries, such as:

School nutrition, point-of-sale solutions, and associated payment solutions, including online prepayment solutions to kindergarten through 12th grade ("K to 12") schools throughout the United States provided by Heartland School Solutions,
Full-service payroll processing and related tax filing services throughout the United States provided by Heartland Ovation Payroll,

6

Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

Payment processing, higher education loan services and open- and closed-loop payment solutions to colleges and universities throughout the United States and Canada provided by Campus Solutions, and
Prepaid Card and Other including stored-value card solutions throughout the United States and Canada provided by Micropayments, and marketing solutions including loyalty and gift cards throughout the United States, provided through Heartland Marketing Solutions.

Over 73% of the Company's revenue is derived from processing and settling bankcard transactions, primarily related to the Visa and MasterCard networks, for its merchant customers. Because the Company is not a ''member bank'' as defined by Visa and MasterCard, in order to process and settle these bankcard transactions for its merchants, the Company has entered into sponsorship agreements with member banks. Visa and MasterCard rules restrict the Company from performing funds settlement or accessing merchant settlement funds and require that these funds be in the possession of the member bank until the merchant is funded. A sponsorship agreement permits the Company to route Visa and MasterCard bankcard transactions under the member bank's control and identification numbers to clear credit and signature debit bankcard transactions through Visa and MasterCard. A sponsorship agreement also enables the Company to settle funds between cardholders and merchants by delivering funding files to the member bank, which in turn transfers settlement funds to the merchants' bank accounts. These restrictions place the settlement assets and obligations under the control of the member bank.
The sponsorship agreements with the member banks require, among other things, that the Company abide by the bylaws and regulations of the Visa and MasterCard networks, and certain sponsor banks require a cash balance in a deposit account. If the Company were to breach a sponsorship agreement and under certain other circumstances, the sponsor banks may terminate the agreement and, under the terms of the agreement, the Company would have 180 days to identify an alternative sponsor bank. The Company is generally dependent on its sponsor banks, Visa and MasterCard for notification of any compliance breaches. As of June 30, 2014, the Company has not been notified of any such issues by its sponsor banks, Visa or MasterCard.

At June 30, 2014, the Company is party to three bank sponsorship agreements.

On February 8, 2012, the Company entered into a sponsorship agreement with Wells Fargo Bank, N.A. ("WFB"). The WFB sponsorship agreement will be in effect until February 8, 2016 and will automatically renew for successive three-year periods unless either party provides six months written notice of non-renewal to the other party. Processing for small and mid-sized merchants (referred to as "Small and Midsized Enterprises," or “SME merchants”) under the WFB sponsorship commenced in August 2012, when that activity was transferred from its previous sponsor, KeyBank, National Association.

In November 2009, the Company entered into a sponsorship agreement with The Bancorp Bank ("TBB") to sponsor processing for the Company's Network Services merchants. The agreement with TBB expires in February 2015 and will automatically renew for successive one-year periods unless either party provides six months written notice of non-renewal to the other party.

On October 1, 2013, the Company transferred sponsorship and processing for a portfolio of SME merchants from Heartland Bank to TBB. The Company was party to a prior sponsorship agreement with Heartland Bank, an unrelated third party, to sponsor SME merchant processing. In March 2013, the Company notified Heartland Bank of its intention to terminate the sponsorship agreement and made arrangements for continuing sponsorship with TBB under the terms of the November 2009 sponsorship agreement.

On March 24, 2011, the Company entered into a sponsorship agreement with Barclays Bank Delaware to sponsor processing for certain of the Company's large national merchants. The agreement with Barclays Bank Delaware expires in March 2016 and will automatically renew for successive one-year periods unless either party provides 6 months written notice of non-renewal to the other party.

The following is a breakout of the Company’s total Visa and MasterCard settled card processing volume for the month ending June 30, 2014 by percentage processed under its individual bank sponsorship agreements:


7

Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

 
% of
June 2014
Sponsor Bank
Bankcard Processing
Volume
Wells Fargo Bank, N.A.
63%
The Bancorp Bank
25%
Barclays Bank Delaware
12%

The Company also provides card transaction processing for DFS Services, LLC ("Discover") and is designated as an
acquirer by Discover. The agreement with Discover allows the Company to acquire, process and fund transactions directly
through Discover's network without the need of a bank sponsor. The Company processes Discover transactions similarly to
how it processes Visa and MasterCard transactions. The Company must comply with Discover acquirer operating regulations
and uses its sponsor banks to assist in funding its merchants' Discover transactions.

Under a sales and servicing program agreement with American Express Travel Related Services Company, Inc.
("American Express") the Company: (a) provides solicitation services by signing new-to-American Express merchants directly
with American Express; (b) provides transactional support services on behalf of American Express to the Company's American
Express accepting merchants; and (c) provides processing, settlement, customer support and reporting to merchants, similar to
the services provided for the merchants' Visa, MasterCard and Discover transactions. In May 2014, the Company began offering a new American Express Card Acceptance Program to new merchants and existing merchants who previously were not American Express accepting merchants. The Company expects to convert a majority of its existing merchants currently processing under the former sales and servicing agreement with American Express to the new Program.  As a participant in the new Program, supplanting the previous reference (c), the Company will acquire, contract, and establish pricing, as well as provide customer service to merchants, similar to the transaction processing services we provide through Discover, Visa and MasterCard.

2. Summary of Significant Accounting Policies

Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates include, among other things, the accrued buyout liability, capitalized customer acquisition costs, goodwill, loss reserves, certain accounts payable and accrued expenses and certain tax assets and liabilities, as well as the related valuation allowances, if any. Actual results could differ from those estimates.

Cash and Cash Equivalents—At June 30, 2014, cash included approximately $34.7 million of processing-related cash in transit and collateral, compared to approximately $32.1 million of processing-related cash in transit and collateral at December 31, 2013. Processing-related cash in transit and collateral includes funds in transit associated with timing differences arising between the amounts the Company's sponsor banks receive from the bankcard networks and the amounts funded by the Company’s merchants. Processing-related cash in transit and collateral also includes merchant deposits, collateral deposits, and funds in transit relating to timing differences for the Company's non-card payment processing businesses.

Receivables—The Company's primary receivables are from its bankcard processing merchants. In addition to receivables for transaction fees the Company charges its merchants for processing transactions, these receivables include amounts resulting from the Company's practice of advancing interchange fees to most of its SME merchants during the month and collecting those fees at the beginning of the following month. The Company does not advance interchange fees to its Network Services merchants. Network Services merchants are invoiced monthly, on payment terms of 30 days net from date of invoicing. Receivables from merchants also include receivables from the sale of point of sale terminal equipment.

The timing for presentment of transaction funding files to the bankcard networks results in the Company's sponsor banks receiving settlement cash one day before payment is made to merchants, thereby increasing funding obligations to its SME merchants, which are carried in processing liabilities. The Company funds interchange advances/receivables to SME merchants first from this settlement cash received from bankcard networks, then from the Company's available cash or by incurring a liability to its sponsor banks. At June 30, 2014, the Company funded merchant advances of $1.5 million from its available cash. The Company did not fund any merchant advances from available cash at December 31, 2013. The amount due

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Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

to sponsor banks for funding merchant advances was $57.0 million at June 30, 2014 and $17.8 million at December 31, 2013. The Company pays its sponsor banks the prime rate on these payables. The liability to sponsor banks is repaid at the beginning of the following month out of the fees the Company collects from its merchants.

Receivables also include amounts resulting from the pre-funding of Discover and American Express transactions to the Company's merchants. These amounts are recovered the next business day following the date of processing the transaction.

Receivables also include amounts resulting from the sale, installation, training and repair of payment system hardware and software for Campus Solutions, Heartland School Solutions and Prepaid Card and Other systems. These receivables are mostly invoiced on terms of 30 days net from date of invoicing.

Receivables are stated net of allowance for doubtful accounts. The Company estimates its allowance based on experience with its merchants, customers, and sales force and its judgment as to the likelihood of their ultimate payment. The Company also considers collection experience and makes estimates regarding collectability based on trends in the aging. Historically, the Company has not experienced significant charge offs for its merchant and customer receivables.

Investments and Funds Held for Customers—Investments, including those carried on the Condensed Consolidated Balance Sheets as Funds held for customers, consist primarily of equity investments, bond funds and certificates of deposit. Funds held for customers also include overnight bank deposits. The majority of investments carried in Funds held for customers are available-for-sale and recorded at fair value based on quoted market prices. Certificates of deposit are classified as held to maturity and recorded at cost. In the event of a sale, cost is determined on a specific identification basis. At June 30, 2014, funds held for customers included cash and cash equivalents of $103.4 million and investments available for sale of $28.0 million.

The asset, funds held for customers, and the liability, customer fund deposits, include: (1) amounts collected from customers prior to funding their payroll liabilities, as well as related tax and fiduciary liabilities for those customers, and (2) amounts collected by Campus Solutions in its capacity as loan servicer, which will be remitted to the customer/owner of the student loans the following month.

Capitalized Customer Acquisition Costs, net—Capitalized customer acquisition costs consist of (1) up-front signing bonus payments made to Relationship Managers and sales managers (the Company's sales force, which are referred to as "salespersons") for the establishment of new merchant relationships, and (2) a deferred acquisition cost representing the estimated cost of buying out the residual commissions of vested salespersons. Capitalized customer acquisition costs represent incremental, direct customer acquisition costs that are recoverable through gross margins associated with merchant contracts. The capitalized customer acquisition costs are amortized using a method which approximates a proportional revenue approach over the initial three-year term of the merchant contract.

The up-front signing bonus paid for new SME bankcard, payroll and loyalty marketing accounts is based on the estimated gross margin for the first year of the merchant contract. The signing bonus, amount capitalized, and related amortization are adjusted after the first year to reflect the actual gross margin generated by the merchant contract during that year. The deferred customer acquisition cost asset is accrued over the first year of SME bankcard, payroll and loyalty marketing merchant processing, consistent with the build-up in the accrued buyout liability, as described below.

Management evaluates the capitalized customer acquisition costs for impairment on an annual basis by comparing, on a pooled basis by vintage month of origination, the expected future net cash flows from underlying merchant relationships to the carrying amount of the capitalized customer acquisition costs. If the estimated future net cash flows are lower than the recorded carrying amount, indicating an impairment of the value of the capitalized customer acquisition costs, the impairment loss will be charged to operations. The Company believes that no impairment has occurred as of June 30, 2014.

Accrued Expenses and Other Liabilities— Accrued expenses and other liabilities on the Condensed Consolidated
Balance Sheets includes deferred revenue of $5.1 million and $18.2 million at June 30, 2014 and December 31, 2013,
respectively, which is primarily related to the Company's Heartland School Solutions and Campus Solutions businesses for both periods, and its Payroll business for December 31, 2013.

Also included in accrued expenses and other liabilities is $2.3 million and $3.4 million at June 30, 2014 and December 31, 2013, respectively, relating to the allocation of purchase price to an unfavorable processing contract associated

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Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

with the September 30, 2011 acquisition of School-Link Technologies, Inc in the Company's Heartland School Solutions business. During the six months ended June 30, 2014 and 2013, the Company amortized $1.1 million and $1.3 million, respectively of this accrued liability against the cash processing costs paid under that contract. During the six months ended June 30, 2013, the Company recorded an adjustment to the carrying value of this unfavorable processing contract of $1.6 million to adjust the liability to reflect the latest estimate of the expected cash processing costs to be paid over the remainder of the contract. The amortization for the six months ended June 30, 2014 and 2013 and adjustment to the carrying value were included in cost of services in our Condensed Consolidated Statements of Income.

Processing Liabilities—Processing liabilities result primarily from the Company's card processing activities. Processing liabilities primarily reflect funds in transit associated with differences arising between the amounts the Company's sponsor banks receive from the bankcard networks and the amounts funded to the Company's merchants. Such differences arise from timing differences, interchange expense, merchant advances, merchant reserves and chargeback processing. These differences result in payables or receivables. If the settlement received from the bankcard networks precedes the funding obligation to the merchant, the Company records a processing liability. Conversely, if funding to the merchant precedes the settlement from the bankcard networks, the Company records a receivable from the bankcard network. The amounts are generally collected or paid the following business day.

Chargebacks arise due to disputes between a cardholder and a merchant resulting from the cardholder's dissatisfaction with merchandise quality or the merchant's service, and the disputes may not always be resolved in the merchant's favor. In some of these cases, the transaction is ''charged back'' to the merchant and the purchase price is refunded to the cardholder by the credit card-issuing institution. If the merchant is unable to fund the refund, the Company is liable for the full amount of the transaction. The Company's obligation to stand ready to perform is minimal. The Company maintains a deposit or the pledge of a letter of credit from certain merchants as an offset to potential contingent liabilities that are the responsibility of such merchants. The Company evaluates its ultimate risk and records an estimate of potential loss for chargebacks based upon an assessment of actual historical loss rates compared to recent bankcard processing volume levels. The Company believes that the liability recorded as loss reserves approximates fair value.

Accrued Buyout Liability—The Company's Relationship Managers and sales managers are paid residual commissions based on the gross margin generated by monthly SME merchant processing activity. The Company has the right, but not the obligation, to buy out some or all of these commissions, and intends to do so periodically. Such purchases of the commissions are at a fixed multiple of the last twelve months' commissions. Because of the Company's intent and ability to execute purchases of the residual commissions, and the mutual understanding between the Company and the Relationship Managers and sales managers, the Company has accounted for this deferred compensation arrangement pursuant to the substantive nature of the plan. The Company therefore records the amount that it would have to pay (the ''settlement cost'') to buy out non-servicing related commissions in their entirety from vested Relationship Managers and sales managers, and an accrual, based on their progress towards vesting, for those unvested Relationship Managers and sales managers who are expected to vest in the future. As noted above, as the liability increases over the first year of a SME merchant contract, the Company also records a related deferred acquisition cost asset for currently vested Relationship Managers and sales managers. The accrued buyout liability associated with unvested Relationship Managers and sales managers is not included in the deferred acquisition cost asset since future services are required in order to vest. Subsequent changes in the estimated accrued buyout liability due to merchant attrition, same-store sales growth or contraction and changes in gross margin are included in the same income statement caption as customer acquisition costs expense.

Relationship Managers and sales managers earn portfolio equity on their newly installed payroll and loyalty marketing merchant accounts based on the residual commissions they earn on those accounts. The accrued buyout liability and deferred acquisition cost asset are accrued in the same manner as the SME bankcard merchant portfolio equity.

The accrued buyout liability is based on merchants under contract at the balance sheet date, the gross margin generated by those merchants over the prior twelve months, and the contractual buyout multiple. The liability related to a new merchant is therefore zero when the merchant is installed, and increases over the twelve months following the installation date. The same procedure is applied to unvested commissions over the expected vesting period, but is further adjusted to reflect the Company's estimate that 31% of unvested Relationship Managers and sales managers become vested, which represents the Company's historical vesting rate.

The classification of the accrued buyout liability between current and non-current liabilities on the Condensed Consolidated Balance Sheets is based upon the Company's estimate of the amount of the accrued buyout liability that it

10

Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

reasonably expects to pay over the next twelve months. This estimate is developed by calculating the cumulative annual average percentage that total historical buyout payments represent of the accrued buyout liability. That percentage is applied to the period-end accrued buyout liability to determine the current portion.

Revenue—The Company classifies its revenues into five categories: (i) Card Payment Processing, (ii) Heartland School Solutions, (iii) Heartland Ovation Payroll, (iv) Campus Solutions and (v) Prepaid Card and Other. The Company recognizes revenue when (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been performed; (3) the price is fixed or determinable; and (4) collectability is reasonably assured.
Card Payment Processing revenue primarily consists of discount, per-transaction and periodic (primarily monthly) fees from the processing of Visa, MasterCard, American Express and Discover transactions for SME merchants and per-transaction fees for the authorization and settlement of transactions for Network Services merchants. Also included in this category are American Express and Discover servicing fees, merchant service fees, fees for processing chargebacks, termination fees on terminated contracts and fees from selling, renting and deploying point-of-sale devices. Interchange fees, which are the Company’s most significant expense, are set by the card networks and paid to the card issuing banks. For the majority of SME card processing revenue, the Company does not offset processing revenues and interchange fees because its business practice is to advance the interchange fees to most SME merchants when settling their daily transactions (thus paying the full amount of the transaction to the merchant), and then to collect the full discount fees from merchants on the first business day of the next month. The Company has merchant portability, credit risk, and the ultimate responsibility to the merchant and, as such, revenue is reported at the time of settlement on a gross basis. Payment processing services are transaction based and priced either as a fixed fee per transaction or as a percentage of the transaction value. The fees are charged for the processing services provided and do not include the gross sales price paid by the ultimate buyer to the merchant. For SME merchants to whom the Company does not advance interchange, it records card processing revenues net of interchange fees. As Network Services does not advance interchange fees to its merchants, the Company records its card processing revenues net of interchange fees.

The Company evaluates its contractual arrangements for indications that multiple element arrangements may exist. For contracts with multiple deliverables, the Company records revenue based on vendor specific objective evidence of selling price where applicable, or based on the best estimate of the selling price.

Heartland School Solutions revenues include fees from sales and maintenance of cafeteria point-of-sale solutions and associated payment solutions, including online prepayment solutions, back office management and hardware and technical support. Revenues are recorded at the time of shipment, over the maintenance period, or at the provision of services.

Heartland Ovation Payroll revenue includes fees charged for payroll processing services, including check printing, direct deposit, related federal, state and local tax deposits and providing accounting documentation and interest income earned on funds held for customers. Revenues are recorded at the time service is provided.

Campus Solutions revenue includes fees associated with providing solutions to support administrative services for higher education, including student loan payment processing, delinquency and default services, refund management, tuition payment plans, electronic billing and payment, tax document services, and business outsourcing. Campus Solutions revenue also includes fees from the sale and maintenance of open- and closed-loop payment hardware and software solutions for college or university campuses to process small value electronic transactions. Revenues are recorded at the time of shipment, over the maintenance period, or at the provision of services.

Prepaid Card and Other revenues include Micropayments fees from selling hardware and software for unattended online wireless credit card based payment systems, and unattended value top up systems for off-line closed-loop smart (chip) card based payment systems. Also included in this category are Heartland Marketing Solutions fees from selling mobile and card-based marketing services, gift cards and rewards services. Revenues are recorded at the time of shipment, over the maintenance period, or at the provision of services.

Loss Contingencies and Legal ExpensesThe Company records a liability for loss contingencies when the liability is probable and the amount is reasonably estimable. Legal fees associated with loss contingencies are recorded when the legal fees are incurred.
The Company records recoveries from its insurance providers when cash is received from the provider.


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Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

Other Income (Expense)Other income (expense) consists of interest income on cash and investments, the interest cost on the Company's borrowings, the gains or losses on the disposal of assets and other non-operating income or expense items.

Other income (expense) also includes the pretax charges or recoveries related to the provision for Processing System Intrusion costs. See Note 11, Commitments and Contingencies for information on the Processing System Intrusion.

Income Taxes—The Company accounts for income taxes by recognizing deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements and the tax basis of assets and liabilities using enacted tax rates.
The provision for income taxes for the three and six months ended June 30, 2014 and 2013 and the resulting effective tax rates were as follows:
 
Three Months Ended June 30,
 
Six Months Ended
 June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Provision for income taxes
$
12,552

 
$
12,342

 
$
22,852

 
$
22,182

Effective tax rate
43.1
%
 
38.5
%
 
42.1
%
 
38.6
%

The increase in the effective tax rate for the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013 reflects the impact of providing a valuation allowance against deferred tax assets resulting from operating losses recorded by Leaf. As of June 30, 2014, Leaf was less than 80 percent owned and projected losses in the near term. See Note 2. Summary of Significant Accounting Policies − Subsequent Events − for a description of a transaction involving Leaf noncontrolling interests.

The Company's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter the Company updates its estimate of the annual effective tax rate, and if the Company's estimated tax rate changes, it makes a cumulative adjustment in that period.

The Company regularly evaluates its tax positions for additional unrecognized tax benefits and associated interest and penalties, if applicable. There are many factors that are considered when evaluating these tax positions including: interpretation of tax laws, recent tax litigation on a position, past audit or examination history, and subjective estimates and assumptions, which have been deemed reasonable by management. However, if management's estimates are not representative of actual outcomes, the Company's results could be materially impacted. The Company does not expect any material changes to unrecognized tax benefits in the next twelve months. At June 30, 2014, the reserve for unrecognized tax benefits related to uncertain tax positions was $6.7 million, of which $4.6 million would, if recognized, impact the effective tax rate. At December 31, 2013, the reserve for unrecognized tax benefits related to uncertain tax positions was $5.6 million, of which $3.8 million would, if recognized, impact the effective tax rate.

Share–Based Compensation— In the fourth quarters of 2012 and 2013, the Company's Board of Directors approved grants of performance-based Restricted Share Units with grant-specific vesting and performance target terms as shown in the following table:
 
 
 
4th Quarter 2012
 
4th Quarter 2013
 
RSU's Granted
 
60,507
 
115,223
 
Vested during 2014
 
 
 
Vesting during 2015
 
50%
 
 
Vesting during 2016
 
50%
 
 
Vesting during 2017
 
 
50%
 
Vesting during 2018
 
 
50%
 
Grant Performance Target
 
(a)
 
(b)
(a)
These Restricted Share Units would vest only if the Company achieves a Pro Forma diluted earnings per share compound annual growth rate ("CAGR") of fifteen percent (15%) for the two-year period ending December 31, 2014.

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Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

For each 1% that the CAGR actually achieved for the two year period ending on December 31, 2014 is above the 15% target, the number of shares underlying the Restricted Share Units awarded would be increased by 2.08%; provided, however, that the maximum increase in the number of shares that may be awarded is 125%. Likewise, for each 1% that the CAGR actually achieved for the two-year period ending on December 31, 2014 is below the 15% target, the number of shares underlying the Restricted Share Units awarded would be decreased by 1.31%. If the target CAGR is missed by 67% or more, then the number of shares awarded is zero. The Company records expense on these Restricted Share Units based on achieving the 15% target.
(b)
These Restricted Share Units will vest only if the Company achieves a pro forma diluted earnings per share growth rate of forty percent (40%) over the three-year period ending December 31, 2016. For each 1% that the growth rate actually achieved for the three-year period ending on December 31, 2016 is above the 40% target, the number of shares underlying the Restricted Share Units awarded would be increased by 1.20%; provided, however, that the maximum increase in the number of shares that may be awarded is 150%. Likewise, for each 1% that the growth rate actually achieved for the three-year period ending on December 31, 2016 is below the 40% target, the number of shares underlying the Restricted Share Units awarded would be decreased by 1.50%. If the target growth rate is missed by 50% or more, then the number of shares awarded is zero. The Company has recorded expense on these Restricted Share Units based on achieving the 40% target.

Pro Forma diluted earnings per share for (a) and (b) performance targets will be calculated excluding non-operating gains and losses, if any, and excluding the after-tax impact of share-based compensation expense. The closing price of the Company's common stock on the grant date equals the grant date fair value of these nonvested Restricted Share Units awards and will be recognized as compensation expense over their vesting periods.

In the fourth quarter of 2012, the Company's Board of Directors approved target grants of 60,793 Relative Total Shareholder Return Restricted Share Units (referred to as “TSRs”). These TSRs are nonvested share awards for which vesting percentages and ultimate number of units vesting will be calculated based on the total shareholder return of our common stock as compared to the total shareholder return of 86 peers. The payout schedule can produce vesting percentages ranging from 0% to 225%. Total shareholder return will be calculated based upon the average closing price for the 30 calendar day period ending December 9, 2015, divided by the closing price on December 10, 2012. The target number of units is based on achieving a total shareholder return equal to the 65th percentile of the peer group. The Company recorded expense on these TSRs based on achieving the target. A lattice valuation model was applied to measure the grant date fair value of these TSRs.

In the fourth quarter of 2013, the Company's Compensation Committee approved target grants of 57,598 Relative TSRs. These Relative TSRs are nonvested share awards for which vesting percentages and ultimate number of units vesting will be calculated based on the total shareholder return of the Company's common stock as compared to the total shareholder return of 91 peer companies. The payout schedule can produce vesting percentages ranging from 0% to 200%. Total shareholder return will be calculated based upon the average closing price for the 30 calendar day period ending December 6, 2016, divided by the closing price on December 6, 2013. The target number of units is based on achieving a total shareholder return equal to the 65th percentile of the peer group. The Company recorded expense on these TSRs based on achieving the target. A lattice valuation model was applied to measure the grant date fair value of these Relative TSRs.

In the fourth quarter of 2013, the Compensation Committee approved target grants of 59,533 Absolute Total
Shareholder Return Restricted Share Units (referred to as “Absolute TSRs”). These Absolute TSRs are nonvested share awards
for which vesting percentages and ultimate number of units vesting will be calculated based on the Company's three or four
year total shareholder return of our common stock. The payout schedule can produce vesting percentages ranging from 0% to
200%. Total shareholder return will be calculated based upon the average closing price for the 30 calendar day period ending December 6, 2016 or December 6, 2017, divided by the closing price on December 6, 2013. The target number of units is based on achieving a total shareholder return of 33% over three years or 46% over four years. The Company recorded expense on these Absolute TSRs based on achieving the target. A lattice valuation model was applied to measure the grant date fair value of these Absolute TSRs.

Earnings per Share— Basic earnings per share was computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share was computed based on the weighted average outstanding common shares plus equivalent shares assuming exercise of stock options and vesting of Restricted Share Units, where dilutive.


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Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

Common Stock Repurchases. On November 2, 2012, the Company's Board of Directors authorized the repurchase of up to $50 million of the Company's outstanding common stock. These repurchases were completed during the second quarter of 2013. On May 8, 2013, the Company's Board of Directors authorized the repurchase of up to $75 million of the Company's outstanding common stock. These repurchases were completed during the second quarter of 2014. On May 8, 2014, the Company's Board of Directors authorized the repurchase of up to $75 million of the Company's outstanding common stock. As of June 30, 2014, the Company has not repurchased any shares under the May 8, 2014 authorization. Repurchases under these programs were made through the open market in accordance with applicable laws and regulations. The Company intends to fund any repurchases with cash flow from operations, existing cash on the balance sheet, and other sources including the Company's Revolving Credit Facility (as defined in Note 10 herein) and the proceeds from exercise of stock options. The manner, timing and amount of repurchases, if any, will be determined by management and will depend on a variety of factors, including price, corporate and regulatory requirements, market conditions and other corporation liquidity requirements. The repurchase program may be modified or discontinued at any time.
 
Repurchase Programs by Authorization Date
 
 
Activity For the Six Months Ended June 30, 2014
November 2012
 
May 2013
 
May 2014
 
Total
Shares repurchased

 
1,347,817

 

 
1,347,817

 
Cost of shares repurchased (in thousands)

 
$54,455
 

 
$54,455
 
Average cost per share

 
$40.40
 

 
$40.40
 
Remaining authorization (in thousands)

 

 
$75,000
 
$75,000
 
 
 
 
 
 
 
 
 
 
Activity For the Six months Ended June 30, 2013
 
 
 
 
 
 
 
Shares repurchased
952,183

 
139,800

 

 
1,091,983

 
Cost of shares repurchased (in thousands)
$29,813
 
$4,404
 

 
$34,217
 
Average cost per share
$31.31
 
$31.50
 

 
$31.33
 
 
 
 
 
 
 
 
 
 
Activity For the Year Ended December 31, 2013
 
 
 
 
 
 
 
 
Shares repurchased
952,183

 
534,600

 

 
1,486,783

 
Cost of shares repurchased (in thousands)
$29,813
 
$20,488
 

 
$50,301
 
Average cost per share
$31.31
 
$38.32
 

 
$33.83
 

The Company's board of directors previously resolved to retire all common shares repurchased and include the retired shares in the authorized and unissued shares of the Company. At the time of share retirement, the excess of the purchase price of the treasury stock over the stated value is allocated between additional paid-in-capital and retained earnings. It is expected that future retirements of common shares repurchased will be recorded as repurchase authorizations are completed.

Derivative Financial Instruments—The Company utilizes derivative instruments to manage interest rate risk on certain borrowings under its Credit Agreement (as defined in Note 10 herein). The Company recognizes the fair value of derivative financial instruments in the Condensed Consolidated Balance Sheets in investments, or accrued expenses and other liabilities. Changes in fair value of derivative instruments are recognized immediately in earnings unless the derivative is designated and qualifies as a hedge of future cash flows. For derivatives that qualify as hedges of future cash flows, the effective portion of changes in fair value is recorded in other comprehensive income and reclassified into interest expense in the same periods during which the hedged item affects earnings. Any ineffectiveness of cash flow hedges would be recognized in other income (expense) in the Condensed Consolidated Statements of Income during the period of change.
The Company has entered into fixed-pay amortizing interest rate swaps as a hedge of future cash flows on certain variable rate debt outstanding under its credit facility. These interest rate swaps convert the related notional amount of variable rate debt to fixed rate. The following table summarizes the components of the interest rate swaps.
 
 
June 30, 2014
 
December 31, 2013
 
 
(In thousands)
Notional value
 
$
20,000

 
$
25,000

Fair value (a)
 
(262
)
 
(411
)
Deferred tax benefit
 
105

 
153

(a) Recorded as a liability in accrued expenses and other liabilities

Noncontrolling Interests— Noncontrolling interests represent noncontrolling stockholders' share of the equity and after-tax net loss of Leaf and after-tax net income of CPOS until it was sold in a transaction settled on January 31, 2013. See Note 15, Discontinued Operations for more detail.

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Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

Noncontrolling stockholders' share of after-tax net loss of Leaf is included in Net income (loss) attributable to noncontrolling interests from continuing operations in the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2014 . The minority stockholders’ interests included in noncontrolling interests in the June 30, 2014 and December 31, 2013 Consolidated Balance Sheet is $4.5 million and $6.2 million, respectively, and reflects the original investments by these minority stockholders' in Leaf, along with their proportionate share of losses of Leaf. Noncontrolling stockholders' share of after-tax net income of CPOS is included in Net income (loss) attributable to noncontrolling interests from discontinued operations in the Condensed Consolidated Statements of Income for the six months ended June 30, 2013. See Note 2. Summary of Significant Accounting Policies − Subsequent Events − for a description of a transaction involving Leaf noncontrolling interests.
Subsequent Events—The Company evaluated subsequent events through the issuance date with respect to the condensed consolidated financial statements as of and for the six months ended June 30, 2014.
On July 29, 2014, the Company entered into an agreement to acquire TouchNet Information Systems, Inc. ("TouchNet"), an integrated commerce solutions provider to higher-education institutions. The Company is paying $375 million to acquire TouchNet. The transaction is expected to close in the third quarter of 2014, subject to regulatory approvals and customary closing conditions. TouchNet will become part of the Company's Campus Solutions business.
On August 6, 2014, the Company entered into a Stock Purchase Agreement with the noncontrolling stockholders of Leaf under which it acquired all shares of Leaf common stock held by the noncontrolling shareholders. As a result of this transaction, Leaf becomes a wholly-owned subsidiary of the Company.
New Accounting Pronouncements—From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standards setting bodies that are adopted by us as of the specified effective date.

In July 2013, the FASB issued an accounting standard update which provides guidance on the risks that are permitted to be hedged in a fair value or cash flow hedge. Among those risks for financial assets and financial liabilities is the risk of changes in a hedged item's fair value or a hedged transaction's cash flows attributable to changes in the designated benchmark interest rate (referred to as interest rate risk). This update is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The implementation of this update did not have a material effect on the Company's condensed consolidated financial statements.

In July 2013, the FASB issued an accounting standard update which provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments in this update are expected to reduce diversity in practice by providing guidance on the presentation of unrecognized tax benefits and will reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The amendments in this update are effective for fiscal years and interim periods within those years, beginning after December 15, 2013, with early adoption permitted. The amendments would be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The implementation of this update did not have a material effect on the Company's condensed consolidated financial statements.

In April 2014, the FASB issued updated guidance on reporting discontinued operations. Under this updated guidance, a discontinued operation will include a disposal of a major part of an entity’s operations and financial results such as a separate major line of business or a separate major geographical area of operations. The guidance raises the threshold to be a major operation but no longer precludes discontinued operations presentation where there is significant continuing involvement or cash flows with a disposed component of an entity. The guidance expands disclosures to include cash flows where there is significant continuing involvement with a discontinued operation and the pre-tax profit or loss of disposal transactions not reported as discontinued operations. The updated guidance is effective prospectively for interim and annual reporting periods beginning on or after December 15, 2014, with early application permitted. The effect on the Company’s condensed consolidated financial statements is still being evaluated and will depend on the nature of future disposal transactions, if any.

In May 2014, the FASB issued guidance on revenue from contracts with customers, which requires an entity to recognize revenue from the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance addresses in particular contracts

15

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Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

with more than one performance obligation as well as the accounting for some costs to obtain or fulfill a contract with a customer and provides for additional disclosures with respect to revenues and cash flows arising from contracts with customers. With respect to public entities, this update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 and early adoption is not permitted. The effect on the Company’s condensed consolidated financial statements is still being evaluated.

3. Acquisitions

2013 Acquisition:

Leaf Holdings, Inc.
On September 11, 2013, the Company purchased 66.67% of the outstanding capital stock of Leaf for a $14.5 million cash payment. The cash purchase price was financed from operating cash flows.

The transaction was accounted for under the purchase method of accounting. Beginning on September 11, 2013, Leaf's results of operations are included in the Company's results of operations. The allocation of the total purchase price was as follows: $18.5 million to goodwill, $6.9 million to intangible assets, $4.1 million to net tangible liabilities and $6.8 million to noncontrolling interest. Pro forma results of operations have not been presented because the effect of this acquisition was not material. Goodwill is not expected to be deductible for income tax reporting.

The weighted average amortization life for the 2013 acquired finite lived intangible assets related to acquisition of Leaf are as follows:
 
Weighted-average amortization life
 
 
 
(In years)
 
 
Software
7.0
 
 
Patents
5.0
 
 
Overall
6.9
 

2014 Acquisitions:

Liquor Point of Sale
On February 14, 2014, the Company purchased the assets of Merchant Software Corporation (referred to as
"Liquor POS") for a $3.3 million cash payment. The cash purchase price was financed from operating cash flows.

The transaction was accounted for under the purchase method of accounting. Beginning on February 15, 2014, Liquor POS results of operations are included in the Company's results of operations. The allocation of the total purchase price was as follows: $2.2 million to goodwill, $1.2 million to intangible assets, and $0.1 million to net tangible liabilities. Pro forma results of operations have not been presented because the effect of this acquisition was not material. Goodwill is expected to be deductible for income tax reporting.

The weighted average amortization life for the 2014 acquired finite lived intangible assets related to acquisition of Liquor POS are as follows:
 
Weighted-average amortization life
 
 
 
(In years)
 
 
Customer relationships
10.0
 
 
Software
7.0
 
 
Non-compete agreements
5.0
 
 
Patents
5.0
 
 
Overall
8.9
 

MCS Software
On April 1, 2014, the Company purchased the net assets of MCS Software for a $17.3 million cash payment. The cash purchase price was financed under the Company's Credit Facility and from operating cash flows. The acquisition further expands the Company's Heartland School Solutions business.


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Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

The transaction was accounted for under the purchase method of accounting. Beginning April 1, 2014, MCS Software's results of operations are included in the Company's results of operations. The allocation of the total purchase price was as follows: $13.6 million to goodwill, $3.8 million to intangible assets and $0.1 million to net tangible liabilities. The fair values of the MCS assets acquired and liabilities assumed were estimated as of their acquisition date. The fair values are preliminary, based on estimates, and may be adjusted as more information becomes available and valuations are finalized. Pro forma results of operations have not been presented because the effect of this acquisition was not material. Goodwill is expected to be deductible for income tax reporting.

The weighted average amortization life for the 2014 acquired finite lived intangible assets related to acquisition of MCS Software are as follows:
 
Weighted-average amortization life
 
 
 
(In years)
 
 
Customer relationships
14.0
 
 
Software
4.1
 
 
Non-compete agreements
5.0
 
 
Overall
10.0
 

4. Receivables
A summary of receivables by major class was as follows at June 30, 2014 and December 31, 2013:
 
June 30,
2014
 
December 31,
2013
 
(In thousands)
Accounts receivable from merchants
$
184,071

 
$
172,147

Accounts receivable from bankcard networks
27,786

 
26,842

Accounts receivable from others
2,482

 
2,083

 
214,339

 
201,072

Less allowance for doubtful accounts
(1,780
)
 
(1,032
)
Total receivables, net
$
212,559

 
$
200,040

 
 
 
 

Included in accounts receivable from others are amounts due from employees (predominantly salespersons) which were $1.1 million at June 30, 2014 and December 31, 2013, respectively. Accounts receivable related to bankcard networks are primarily amounts which were pre-funded to merchants for processing Discover and American Express bankcard transactions.
A summary of the activity in the allowance for doubtful accounts for the three and six months ended June 30, 2014 and 2013 was as follows:
 
Three Months Ended
June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Beginning balance
$
1,157

 
$
944

 
$
1,032

 
$
1,438

Out-of-Period adjustment (a)
875

 

 
875

 

Additions (reductions) to allowance
791

 
104

 
1,128

 
(202
)
Charges against allowance
(1,043
)
 
(133
)
 
(1,255
)
 
(321
)
Ending balance
$
1,780

 
$
915

 
$
1,780

 
$
915

(a) See Note 1, Organization and Operations for a discussion of an Out-of-Period Adjustment.

5. Funds Held for Customers and Investments
A summary of funds held for customers and investments, including the cost, gross unrealized gains (losses) and estimated fair value for investments held to maturity and investments available-for-sale by major security type and class of security were as follows at June 30, 2014 and December 31, 2013:

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Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In thousands)
June 30, 2014
 
 
 
 
 
 
 
Funds Held for Customers
 
 
 
 
 
 
 
Conservative income bond fund - available for sale
$
28,000

 
$
22

 
$

 
$
28,022

Cash held for payroll customers
85,691

 

 

 
85,691

Cash held for Campus Solutions customers
17,735

 

 

 
17,735

Total funds held for customers
$
131,426

 
$
22

 
$

 
$
131,448

 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
Investments held to maturity - Certificates of deposit (a)
$
33

 
$

 
$

 
33

Total investments
$
33

 
$

 
$

 
33

(a) Certificate of deposit has a remaining term of 2 months.
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In thousands)
December 31, 2013
 
 
 
 
 
 
 
Funds Held for Customers
 
 
 
 
 
 
 
Conservative income bond fund - available for sale
$
12,000

 
$
10

 
$

 
$
12,010

Fixed income bond fund - available for sale
968

 
254

 

 
1,222

Cash held for payroll customers
88,376

 

 

 
88,376

Cash held for Campus Solutions customers
25,767

 

 

 
25,767

Total funds held for customers
$
127,111

 
$
264

 
$

 
$
127,375

 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
Investments held to maturity - Certificates of deposit
$
33

 
$

 
$

 
$
33

Total investments
$
33

 
$

 
$

 
$
33


Also included in Investments on the Consolidated Balance Sheet are other investments, at cost. As of June 30, 2014 and December 31, 2013, other investments, at cost, include a $4.0 million investment in the equity of ATX Innovation, Inc. ("Tabbedout").

During the six months ended June 30, 2014 and during the twelve months ended December 31, 2013, the Company did not experience any other-than-temporary losses on its investments.

During the six months ended June 30, 2014, the Company sold available for sale securities for $2.2 million and realized a gain on this sale of $0.3 million which was recognized in the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2014.

6. Capitalized Customer Acquisition Costs, Net
A summary of net capitalized customer acquisition costs as of June 30, 2014 and December 31, 2013 was as follows:
 
June 30,
2014
 
December 31,
2013
 
(In thousands)
Capitalized signing bonuses
$
92,417

 
$
86,886

Less accumulated amortization
(45,782
)
 
(43,775
)
 
46,635

 
43,111

Capitalized customer deferred acquisition costs
50,005

 
45,241

Less accumulated amortization
(30,207
)
 
(27,325
)
 
19,798

 
17,916

Capitalized customer acquisition costs, net
$
66,433

 
$
61,027

A summary of the activity in capitalized customer acquisition costs, net for the three and six month periods ended June 30, 2014 and 2013 was as follows:

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Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Balance at beginning of period
$
62,628

 
$
55,747

 
$
61,027

 
$
56,425

Plus additions to:
 
 
 
 
 
 
 
Capitalized signing bonuses, net
10,124

 
6,300

 
18,179

 
12,080

Capitalized customer deferred acquisition costs
6,626

 
5,323

 
12,157

 
10,121

 
16,750

 
11,623

 
30,336

 
22,201

Less amortization expense on:
 
 
 
 
 
 
 
Capitalized signing bonuses, net
(7,524
)
 
(6,794
)
 
(14,654
)
 
(13,895
)
Capitalized customer deferred acquisition costs
(5,421
)
 
(4,428
)
 
(10,276
)
 
(8,583
)
 
(12,945
)
 
(11,222
)
 
(24,930
)
 
(22,478
)
Balance at end of period
$
66,433

 
$
56,148

 
$
66,433

 
$
56,148

Net signing bonus adjustments from estimated amounts to actual were $(1.1) million for both the three months ended June 30, 2014 and 2013, and $(2.1) million and $(1.9) million, respectively, for the six months ended June 30, 2014 and 2013. Net signing bonus adjustments are netted against additions in the table above. Negative signing bonus adjustments occur when the actual gross margin generated by the merchant contract during the first year is less than the estimated gross margin for that year, resulting in the overpayment of the up-front signing bonus and would be recovered from the relevant salesperson. Positive signing bonus adjustments result from the prior underpayment of signing bonuses and would be paid to the relevant salesperson.

Fully amortized signing bonuses of $6.1 million and $6.6 million were written off during the three month periods ended June 30, 2014 and 2013, respectively, and $12.5 million and $12.7 million, respectively, were written off during the six month periods ended June 30, 2014 and 2013. In addition, fully amortized customer deferred acquisition costs of $3.9 million and $3.4 million, respectively, were written off during the three months ended June 30, 2014 and 2013, and $7.4 million and $6.6 million, respectively, were written off during the six months ended June 30, 2014 and 2013.

The Company believes that no impairment of capitalized customer acquisition costs has occurred as of June 30, 2014.

7. Intangible Assets and Goodwill
Intangible Assets — Intangible assets consisted of the following as of June 30, 2014 and December 31, 2013:
 
June 30, 2014
 
Amortization Life and Method
 
Gross
Assets
 
Accumulated
Amortization
 
Net Assets
 
 
(In thousands)
 
 
Finite Lived Assets:
 
 
 
 
 
 
 
Customer relationships
$
52,552

 
$
16,964

 
$
35,588

 
3 to 18 years—proportional cash flow
Merchant portfolio
4,095

 
2,863

 
1,232

 
7 years—proportional cash flow
Software
22,590

 
12,259

 
10,331

 
1 to 5 years—straight line
Non-compete agreements
4,957

 
2,315

 
2,642

 
3 to 5 years—straight line
Other
400

 
90

 
310

 
2 to 9 years—straight line
 
$
84,594

 
$
34,491

 
$
50,103

 
 
 
December 31, 2013
 
Amortization Life and Method
 
Gross
Assets
 
Accumulated
Amortization
 
Net Assets
 
 
(In thousands)
 
 
Finite Lived Assets:
 
 
 
 
 
 
 
Customer relationships
$
49,814

 
$
14,107

 
$
35,707

 
3 to 18 years—proportional cash flow
Merchant portfolio
4,095

 
2,703

 
1,392

 
7 years—proportional cash flow
Software
20,750

 
10,934

 
9,816

 
2 to 5 years—straight line
Non-compete agreements
4,489

 
1,880

 
2,609

 
3 to 5 years—straight line
Other
385

 
52

 
333

 
2 to 9 years—straight line
 
$
79,533

 
$
29,676

 
$
49,857

 
 
 
 
 
 
 
 
 
 

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Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

Amortization expense related to the intangible assets was $2.5 million and $2.2 million, respectively, for the three months ended June 30, 2014 and 2013 and $4.8 million and $4.5 million for the six months ended June 30, 2014 and 2013, respectively. The estimated amortization expense related to intangible assets in twelve month increments is as follows:

For the Twelve Months Ended June 30,
 
(In thousands)
2015
$
9,682

2016
8,673

2017
7,237

2018
5,808

2019
5,078

Thereafter
13,625

 
$
50,103


Goodwill — The changes in the carrying amount of goodwill by segment for the six months ended June 30, 2014 and 2013 were as follows:
 
Card Payment Processing
 
Heartland Ovation Payroll
 
Heartland School Solutions
 
Campus Solutions
 
Other
 
Total
Balance at January 1, 2013
$
43,701

 
$
30,831

 
$
53,350

 
$
33,679

 
$
6,501

 
$
168,062

 
Goodwill acquired during the period

 

 

 

 

 

 
Other

 
524

 

 
1,967

 

 
2,491

Balance at June 30, 2013
43,701

 
31,355

 
53,350

 
35,646

 
6,501

 
170,553

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014
64,320

 
31,018

 
53,350

 
35,789

 
6,501

 
190,978

 
Goodwill acquired during the period
2,247

 

 
13,592

 

 

 
15,839

 
Other (a)
(2,080
)
 

 

 

 

 
(2,080
)
Balance at June 30, 2014
$
64,487

 
$
31,018

 
$
66,942

 
$
35,789

 
$
6,501

 
$
204,737

(a) Reflects adjustments to allocations of purchase price
Percentage of total reportable segments' assets that were goodwill as of June 30, 2014 and 2013 is as follows:
 
 
Percent of Goodwill to Reportable Segments' Total Assets
 
 
 
June 30, 2014
 
June 30, 2013
 
 
Card
11.0%
 
8.0%
 
 
Payroll
18.6%
 
20.8%
 
 
Heartland School Solutions
77.2%
 
78.0%
 
 
Campus Solutions
49.0%
 
52.7%
 
 
Other
33.4%
 
43.5%
 

8. Processing Liabilities
Processing liabilities result primarily from the Company's card processing activities and include merchant deposits maintained to offset potential liabilities arising from merchant chargebacks. A summary of processing liabilities and loss reserves was as follows at June 30, 2014 and December 31, 2013:
 
June 30, 2014
 
December 31, 2013
 
(In thousands)
Merchant bankcard processing
$
98,787

 
$
121,143

Merchant deposits
6,559

 
8,223

Loss reserves
1,762

 
1,505

 
$
107,108

 
$
130,871


In addition to the merchant deposits listed above, the Company held letters of credit related to merchant card payment processing totaling $250,000 and $260,000 at June 30, 2014 and December 31, 2013, respectively.

The Company's merchants have the liability for any charges properly reversed by the cardholder through a mechanism known as a chargeback. If the merchant is unable to pay this amount, the Company will be liable to the card brand networks

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Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

for the reversed charges. The Company has determined that the fair value of its obligation to stand ready to perform is minimal. The Company requires personal guarantees and merchant deposits from certain merchants to minimize its obligation.

We typically receive chargebacks from the card networks within four months after the later of (1) the date the transaction is processed or (2) the delivery of the product or service to the cardholder. As the majority of the Company's SME merchant transactions involve the delivery of the product or service at the time of the transaction, a reasonable basis for determining an estimate of the Company's exposure to chargebacks is the last four months' processing volume on the SME portfolio, which was $27.0 billion and $24.4 billion for the four months ended June 30, 2014 and December 31, 2013, respectively. However, for the four months ended June 30, 2014 and December 31, 2013, the Company was presented with $12.5 million and $11.7 million, respectively, in chargebacks by issuing banks. In the six months ended June 30, 2014 and 2013, the Company incurred merchant credit losses of $1.0 million and $0.5 million, respectively, on total SME card processing volumes processed of $38.4 billion and $36.7 billion, respectively. These credit losses are included in processing and servicing costs in the Company's Condensed Consolidated Statements of Income and Comprehensive Income.

The loss recorded by the Company for chargebacks associated with any individual merchant is typically small, due both to the relatively small size and the processing profile of the Company's SME merchants. However, from time to time the Company will encounter instances of merchant fraud, and the resulting chargeback losses may be considerably more significant to the Company. The Company has established a contingent reserve for estimated currently existing credit and fraud losses on its Condensed Consolidated Balance Sheets, amounting to $1.8 million at June 30, 2014 and $1.5 million at December 31, 2013. This reserve is determined by performing an analysis of the Company's historical loss experience applied to current processing volume and exposures.

A summary of the activity in the loss reserve for the three and six months ended June 30, 2014 and 2013 was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Beginning balance
$
1,672

 
$
1,955

 
$
1,505

 
$
1,955

Additions to reserve
1,191

 
480

 
2,057

 
1,233

Charges against reserve (a)
(1,101
)
 
(480
)
 
(1,800
)
 
(1,233
)
Ending balance
$
1,762

 
$
1,955

 
$
1,762

 
$
1,955

(a)
Included in these amounts are Heartland Ovation Payroll segment losses of $120,000 and $18,000, respectively, for the three months ended June 30, 2014 and 2013, and $197,000 and $75,000, respectively, for the six months ended June 30, 2014 and 2013.

9. Accrued Buyout Liability

A summary of the accrued buyout liability was as follows as of June 30, 2014 and December 31, 2013:
 
June 30,
2014
 
December 31,
2013
 
(In thousands)
Vested Relationship Managers and sales managers
$
39,503

 
$
38,082

Unvested Relationship Managers and sales managers
1,765

 
1,297

 
41,268

 
39,379

Less current portion
(12,901
)
 
(13,943
)
Long-term portion of accrued buyout liability
$
28,367

 
$
25,436


In calculating the accrued buyout liability for unvested Relationship Managers and sales managers, the Company has assumed that 31% of the unvested Relationship Managers and sales managers will vest in the future, which represents the Company’s historical vesting rate. A 5% increase to 36% in the expected vesting rate would have increased the accrued buyout liability for unvested Relationship Managers and sales managers by $0.2 million and $0.1 million at June 30, 2014 and December 31, 2013, respectively.
A summary of the activity in the accrued buyout liability for the three and six months ended June 30, 2014 and 2013 was as follows:

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Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

     
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Beginning balance
$
41,300