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Section 1: 10-Q (10-Q)

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
  
FORM 10-Q
 
For the quarterly period ended March 31, 2018
 
of
393507551_image0a06.jpg
ATLANTICUS HOLDINGS CORPORATION
 
a Georgia Corporation
IRS Employer Identification No. 58-2336689
SEC File Number 0-53717
 
Five Concourse Parkway, Suite 300
Atlanta, Georgia 30328
(770) 828-2000
 
Atlanticus’ common stock, no par value per share, is registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the “Act”) and is listed on the NASDAQ Global Select Market.
 
Atlanticus is not a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.
 
Atlanticus (1) is required to file reports pursuant to Section 13 of the Act, (2) has filed all reports required to be filed by Section 13 of the Act during the preceding 12 months and (3) has been subject to such filing requirements for the past 90 days.
 
Atlanticus has submitted electronically and posted on its corporate Web site every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.

Atlanticus is a smaller reporting company and is not a shell company or an emerging growth company.

As of May 9, 2018, 15,349,923 shares of common stock, no par value, of Atlanticus were outstanding, including 1,459,233 loaned shares to be returned.




Table of Contents

Table of Contents

Page
PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements (Unaudited)
 
 
Consolidated Balance Sheets
 
 
Consolidated Statements of Operations
 
 
Consolidated Statements of Comprehensive (Loss) Income
 
 
Consolidated Statement of Shareholders’ Deficit
 
 
Consolidated Statements of Cash Flows
 
 
Notes to Consolidated Financial Statements
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
Item 4.
Controls and Procedures
 
Part II. OTHER INFORMATION
 
Item 1.
Legal Proceedings
 
Item 1A.
Risk Factors
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 3.
Defaults Upon Senior Securities
 
Item 4.
Mine Safety Disclosure
 
Item 5.
Other Information
 
Item 6.
Exhibits
 
 
Signatures
 



 



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PART I--FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS

Atlanticus Holdings Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands)
 
March 31,
2018
 
December 31,
2017
Assets
 
 
 
Unrestricted cash and cash equivalents
$
35,414

 
$
41,484

Restricted cash and cash equivalents
31,240

 
29,174

Loans and fees receivable:
 

 
 

Loans and fees receivable, at fair value
9,413

 
11,109

Loans and fees receivable, gross
400,727

 
393,898

Allowances for uncollectible loans and fees receivable
(58,323
)
 
(62,970
)
Deferred revenue
(36,097
)
 
(36,956
)
Net loans and fees receivable
315,720

 
305,081

Property at cost, net of depreciation
3,021

 
3,229

Investment in equity-method investee
3,561

 
4,244

Deposits
272

 
252

Prepaid expenses and other assets
43,684

 
42,149

Total assets
$
432,912

 
$
425,613

Liabilities
 

 
 

Accounts payable and accrued expenses
$
114,709

 
$
115,737

Notes payable, at face value, net
242,130

 
226,238

Notes payable to related parties
40,000

 
40,000

Notes payable associated with structured financings, at fair value
7,909

 
9,240

Convertible senior notes
61,650

 
61,393

Income tax liability
9,465

 
9,132

Total liabilities
475,863

 
461,740

Commitments and contingencies (Note 9)


 


Equity
 

 
 

Common stock, no par value, 150,000,000 shares authorized: 15,353,878 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at March 31, 2018; and 15,291,884 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at December 31, 2017

 

Additional paid-in capital
213,025

 
212,785

Accumulated other comprehensive loss
(4,523
)
 
(2,178
)
Retained deficit
(251,310
)
 
(246,640
)
Total shareholders’ equity
(42,808
)
 
(36,033
)
Noncontrolling interests
(143
)
 
(94
)
Total equity
(42,951
)
 
(36,127
)
Total liabilities and equity
$
432,912

 
$
425,613


 
See accompanying notes.

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Atlanticus Holdings Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share data)
 
 
For the Three Months Ended March 31,
 
 
2018
 
2017
Interest income:
 
 
 
 
Consumer loans, including past due fees
 
$
35,681

 
$
25,859

Other
 
45

 
101

Total interest income
 
35,726

 
25,960

Interest expense
 
(8,153
)
 
(5,817
)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
 
27,573

 
20,143

Fees and related income on earning assets
 
6,214

 
2,801

(Losses upon) net recovery of charge off of loans and fees receivable recorded at fair value
 
(1,791
)
 
7,851

Provision for losses on loans and fees receivable recorded at net realizable value
 
(15,991
)
 
(10,653
)
Net interest income, fees and related income on earning assets
 
16,005

 
20,142

Other operating income:
 
 
 
 
Servicing income
 
632

 
1,089

Other income
 
516

 
109

Equity in income of equity-method investee
 
9

 
334

Total other operating income
 
1,157

 
1,532

Other operating expense:
 
 
 
 
Salaries and benefits
 
6,298

 
5,780

Card and loan servicing
 
9,164

 
7,137

Marketing and solicitation
 
2,346

 
2,201

Depreciation
 
229

 
310

Other
 
3,700

 
4,901

Total other operating expense
 
21,737

 
20,329

(Loss) income before income taxes
 
(4,575
)
 
1,345

Income tax expense
 
(144
)
 
(618
)
Net (loss) income
 
(4,719
)
 
727

Net loss attributable to noncontrolling interests
 
49

 
1

Net (loss) income attributable to controlling interests
 
$
(4,670
)
 
$
728

Net (loss) income attributable to controlling interests per common share—basic
 
$
(0.34
)
 
$
0.05

Net (loss) income attributable to controlling interests per common share—diluted
 
$
(0.34
)
 
$
0.05


 
See accompanying notes.

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Atlanticus Holdings Corporation and Subsidiaries
Consolidated Statements of Comprehensive (Loss) Income (Unaudited)
(Dollars in thousands)

 
 
For the Three Months Ended March 31,
 
 
2018
 
2017
Net (loss) income
 
$
(4,719
)
 
$
727

Other comprehensive loss:
 
 
 
 
Foreign currency translation adjustment
 
(2,345
)
 

Reclassifications of foreign currency translation adjustment to Other operating expense on the consolidated statements of operations
 

 

Income tax benefit related to other comprehensive loss
 

 

Comprehensive (loss) income
 
(7,064
)
 
727

Comprehensive loss attributable to noncontrolling interests
 
49

 
1

Comprehensive (loss) income attributable to controlling interests
 
$
(7,015
)
 
$
728


 

 

 

 

 

 

 

 

 

 

 

 

 
See accompanying notes.

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Atlanticus Holdings Corporation and Subsidiaries
Consolidated Statement of Shareholders’ Deficit
For the Three Months Ended March 31, 2018 (Unaudited)
(Dollars in thousands)
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
Shares Issued
 
Amount
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Retained Deficit
 
Noncontrolling Interests
 
Total Equity
Balance at December 31, 2017
15,291,884

 
$

 
$
212,785

 
$
(2,178
)
 
$
(246,640
)
 
$
(94
)
 
$
(36,127
)
Compensatory stock issuances, net of forfeitures
69,000

 

 

 

 

 

 

Amortization of deferred stock-based compensation costs

 

 
254

 

 

 

 
254

Redemption and retirement of shares
(7,006
)
 

 
(14
)
 

 

 

 
(14
)
Other comprehensive loss

 

 

 
(2,345
)
 
(4,670
)
 
(49
)
 
(7,064
)
Balance at March 31, 2018
15,353,878

 
$

 
$
213,025

 
$
(4,523
)
 
$
(251,310
)
 
$
(143
)
 
$
(42,951
)


See accompanying notes.

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Atlanticus Holdings Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
 
For the Three Months Ended March 31,
 
2018
 
2017
Operating activities
 
 
 
Net (loss) income
$
(4,719
)
 
$
727

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 

 
 

Depreciation, amortization and accretion, net
229

 
310

Losses upon charge off of loans and fees receivable recorded at fair value
1,791

 
1,093

Provision for losses on loans and fees receivable
15,991

 
10,653

Interest expense from accretion of discount on notes
216

 
178

Income from accretion of discount associated with receivables purchases
(18,020
)
 
(12,263
)
Unrealized gain on loans and fees receivable and underlying notes payable held at fair value
(1,313
)
 
(1,269
)
Amortization of deferred loan costs
390

 
126

Income from equity-method investments
(9
)
 
(334
)
Changes in assets and liabilities:
 

 
 

Increase in uncollected fees on earning assets
(802
)
 
(983
)
Increase in income tax liability
333

 
438

(Increase) decrease in deposits
(20
)
 
200

(Decrease) increase in accounts payable and accrued expenses
(4,323
)
 
3,530

Other
19

 
(9
)
Net cash (used in) provided by operating activities
(10,237
)
 
2,397

Investing activities
 

 
 

Proceeds from equity-method investee
692

 
1,066

Investments in earning assets
(125,768
)
 
(99,045
)
Proceeds from earning assets
116,164

 
93,961

Purchases and development of property, net of disposals
(21
)
 
(22
)
Net cash used in investing activities
(8,933
)
 
(4,040
)
Financing activities
 

 
 

Purchase and retirement of outstanding stock
(14
)
 
(18
)
Proceeds from borrowings
89,538

 
64,761

Repayment of borrowings
(73,996
)
 
(61,248
)
Net cash provided by financing activities
15,528

 
3,495

Effect of exchange rate changes on cash
(362
)
 
50

Net (decrease) increase in unrestricted cash
(4,004
)
 
1,902

Cash and cash equivalents at beginning of period
70,658

 
92,641

Cash and cash equivalents at end of period
$
66,654

 
$
94,543

Supplemental cash flow information
 

 
 

Cash paid for interest
$
8,718

 
$
6,698

Net cash income tax (refunds) payments
$
(189
)
 
$
180

Supplemental non-cash information
 

 
 

Issuance of stock options and restricted stock
$
169

 
$
1,005

See accompanying notes.

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Atlanticus Holdings Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2018 and 2017
 
1.
Description of Our Business
 
Our accompanying consolidated financial statements include the accounts of Atlanticus Holdings Corporation (the “Company”) and those entities we control. We are primarily focused on providing financial technology and related services. Through our subsidiaries, we provide technology and other support services to lenders who offer an array of financial products and services to consumers who may have been declined under traditional financing options. In most cases, we invest in the receivables originated by lenders who utilize our technology platform and other related services. As discussed further below, we reflect our business lines within two reportable segments:  Credit and Other Investments; and Auto Finance. See also Note 3, “Segment Reporting,” for further details.

Within our Credit and Other Investments segment, we facilitate consumer finance programs offered by our bank partners to originate consumer loans through multiple channels, including retail point-of-sale, direct mail solicitation, on-line and partnerships. In the retail credit (the “point-of-sale” operations) channel, we partner with retailers and service providers in various industries across the United States (“U.S.”) to enable them to provide credit to their customers for the purchase of goods and services. These services of our lending partners are often extended to consumers who may have been declined under traditional financing options. We specialize in supporting this “second look” credit service in various industries across the U.S. Additionally, we support lenders who market general purpose personal loans and credit cards directly to consumers (collectively, the “direct-to-consumer” operations) through additional channels enabling them to reach consumers through a diverse origination platform which includes direct mail, Internet-based marketing and through partnerships. Using our infrastructure and technology platform, we also provide loan servicing, including risk management and customer service outsourcing, for third parties.
Beyond these activities within our Credit and Other Investments segment, we continue to service portfolios of credit card receivables. One of our portfolios of credit card receivables is encumbered by non-recourse structured financing, and for this portfolio our principal remaining economic interest is the servicing compensation we receive as an offset against our servicing costs given that the likely future collections on the portfolio are insufficient to allow for full repayment of the financing.

Additionally, we report within our Credit and Other Investments segment: 1) the income earned from an investment in an equity-method investee that holds credit card receivables for which we are the servicer; and 2) gains or losses associated with investments previously made in consumer finance technology platforms. These include investments in companies engaged in mobile technologies, marketplace lending and other financial technologies. These investments are carried at the lower of cost or market valuation. None of these companies are publicly-traded and there are no material pending liquidity events.
 
Within our Auto Finance segment, our CAR subsidiary operations principally purchase and/or service loans secured by automobiles from or for, and also provide floor plan financing for, a pre-qualified network of independent automotive dealers and automotive finance companies in the buy-here, pay-here, used car business. We purchase auto loans at a discount and with dealer retentions or holdbacks that provide risk protection. Also within our Auto Finance segment, we are providing certain installment lending products in addition to our traditional loans secured by automobiles.

2.
Significant Accounting Policies and 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.
 
Basis of Presentation and Use of Estimates
 
We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the U.S. (“GAAP”). The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our consolidated financial statements, as well as the reported amounts of revenues and expenses during each reporting period. We base these estimates on information available to us as of the date of the financial statements. Actual results could differ materially from these estimates. Certain estimates, such as credit losses, payment rates, costs of funds, discount rates and the yields earned on credit card receivables, significantly affect the reported amount of credit card receivables that we report at

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fair value and our notes payable associated with structured financings, at fair value; these estimates likewise affect the changes in these amounts reflected within our fees and related income on earning assets line item on our consolidated statements of operations. Additionally, estimates of future credit losses have a significant effect on loans and fees receivable, net, as shown on our consolidated balance sheets, as well as on the provision for losses on loans and fees receivable within our consolidated statements of operations.
 
We have eliminated all significant intercompany balances and transactions for financial reporting purposes.

Loans and Fees Receivable
 
Our loans and fees receivable include loans and fees receivable, at fair value and loans and fees receivable, gross.

As of March 31, 2018 and December 31, 2017, the weighted average remaining accretion period for the $36.1 million and $37.0 million of deferred revenue reflected in the consolidated balance sheets was 12 months and 11 months, respectively.
A roll-forward (in millions) of our allowance for uncollectible loans and fees receivable by class of receivable is as follows: 
For the Three Months Ended March 31, 2018

Credit Cards

Auto Finance

Other Unsecured Lending Products

Total
Allowance for uncollectible loans and fees receivable:

 

 

 

 
Balance at beginning of period

$
(18.2
)

$
(2.3
)

$
(42.5
)

$
(63.0
)
Provision for loan losses

(9.0
)



(7.0
)

(16.0
)
Charge offs

6.5


0.7


15.1


22.3

Recoveries

(0.1
)

(0.3
)

(1.2
)

(1.6
)
Balance at end of period

$
(20.8
)

$
(1.9
)

$
(35.6
)

$
(58.3
)
As of March 31, 2018
 
Credit Cards
 
Auto Finance
 
Other Unsecured Lending Products
 
Total
Allowance for uncollectible loans and fees receivable:
 
 
 
 
 
 
 
 
Balance at end of period individually evaluated for impairment
 
$

 
$

 
$
(0.2
)
 
$
(0.2
)
Balance at end of period collectively evaluated for impairment
 
$
(20.8
)
 
$
(1.9
)
 
$
(35.4
)
 
$
(58.1
)
Loans and fees receivable:
 
 

 
 

 
 

 
 

Loans and fees receivable, gross
 
$
97.8

 
$
78.4

 
$
224.5

 
$
400.7

Loans and fees receivable individually evaluated for impairment
 
$

 
$
0.1

 
$
0.2

 
$
0.3

Loans and fees receivable collectively evaluated for impairment
 
$
97.8

 
$
78.3

 
$
224.3

 
$
400.4


For the Three Months Ended March 31, 2017

Credit Cards

Auto Finance

Other Unsecured Lending Products

Total
Allowance for uncollectible loans and fees receivable:

 

 

 

 
Balance at beginning of period

$
(1.4
)

$
(2.1
)

$
(39.8
)

$
(43.3
)
Provision for loan losses

(0.4
)

(0.4
)

(9.9
)

(10.7
)
Charge offs

0.4


0.8


14.6


15.8

Recoveries

(0.4
)

(0.3
)

(0.6
)

(1.3
)
Balance at end of period

$
(1.8
)

$
(2.0
)

$
(35.7
)

$
(39.5
)

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As of December 31, 2017
 
Credit Cards
 
Auto Finance
 
Other Unsecured Lending Products
 
Total
Allowance for uncollectible loans and fees receivable:
 
 
 
 
 
 
 
 
Balance at end of period individually evaluated for impairment
 
$

 
$
(0.2
)
 
$
(0.2
)
 
$
(0.4
)
Balance at end of period collectively evaluated for impairment
 
$
(18.2
)
 
$
(2.1
)
 
$
(42.3
)
 
$
(62.6
)
Loans and fees receivable:
 
 

 
 

 
 

 
 

Loans and fees receivable, gross
 
$
87.2

 
$
77.8

 
$
228.9

 
$
393.9

Loans and fees receivable individually evaluated for impairment
 
$

 
$
0.4

 
$
0.2

 
$
0.6

Loans and fees receivable collectively evaluated for impairment
 
$
87.2

 
$
77.4

 
$
228.7

 
$
393.3

    
An aging of our delinquent loans and fees receivable, gross (in millions) by class of receivable as of March 31, 2018 and December 31, 2017 is as follows:
Balance at March 31, 2018
 
Credit Cards
 
Auto Finance
 
Other Unsecured Lending Products
 
Total
30-59 days past due
 
$
2.8

 
$
4.3

 
$
7.1

 
$
14.2

60-89 days past due
 
2.7

 
1.4

 
5.9

 
10.0

90 or more days past due
 
6.9

 
1.3

 
14.7

 
22.9

Delinquent loans and fees receivable, gross
 
12.4

 
7.0

 
27.7

 
47.1

Current loans and fees receivable, gross
 
85.4

 
71.4

 
196.8

 
353.6

Total loans and fees receivable, gross
 
$
97.8

 
$
78.4

 
$
224.5

 
$
400.7

Balance of loans 90 or more days past due and still accruing interest and fees
 
$

 
$
1.1

 
$

 
$
1.1


Balance at December 31, 2017
Credit Cards
 
Auto Finance
 
Other Unsecured Lending Products
 
Total
30-59 days past due
$
3.2

 
$
6.4

 
$
9.0

 
$
18.6

60-89 days past due
3.3

 
2.1

 
7.1

 
12.5

90 or more days past due
4.9

 
1.9

 
15.7

 
22.5

Delinquent loans and fees receivable, gross
11.4

 
10.4

 
31.8

 
53.6

Current loans and fees receivable, gross
75.8

 
67.4

 
197.1

 
340.3

Total loans and fees receivable, gross
$
87.2

 
$
77.8

 
$
228.9

 
$
393.9

Balance of loans 90 or more days past due and still accruing interest and fees
$

 
$
1.6

 
$

 
$
1.6


Troubled Debt Restructurings. As part of ongoing collection efforts, once an account in our Credit and Other Investments segment is 90 days or more past due, the account is placed on a non-accrual status. Placement on a non-accrual status results in the elimination of the annual percentage rate (“APR”) charged to an account and a cessation of fee billing. Following this adjustment, if a customer demonstrates a willingness and ability to resume making monthly payments and meets certain additional criteria, we will re-age the customer’s account. When we re-age an account, we adjust the status of the account to bring a delinquent account current, but generally do not make any further modifications to the payment terms or amount owed. Once an account is placed on a non-accrual status, it is closed for further purchases. Accounts that are placed on a non-accrual status and thereafter make at least one payment qualify as troubled debt restructurings (“TDRs”).

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The following table details by class of receivable, the number and amount of modified loans, including TDRs that have been re-aged, of March 31, 2018 and December 31, 2017:
 
 
As of
 
 
March 31, 2018
 
December 31, 2017
 
 
Point-of-sale
 
Direct-to-consumer
 
Point-of-sale
 
Direct-to-consumer
Number of accounts on non-accrual status
 
11,711

 
8,650

 
11,432

 
6,681

Number of accounts on non-accrual status above that have been re-aged
 
1,135

 
157

 
915

 
80

Amount of receivables on non-accrual status (in thousands)
 
$
17,388

 
$
8,778

 
$
17,169

 
$
7,067

Amount of receivables on non-accrual status above that have been re-aged (in thousands)
 
$
2,048

 
$
171

 
$
1,570

 
$
86

Carrying value of receivables on non-accrual status (in thousands)
 
$
5,431

 
$
1,365

 
$
4,247

 
$
1,173

TDRs - Performing (carrying value, in thousands)*
 
$
3,563

 
$
856

 
$
2,368

 
$
508

TDRs - Nonperforming (carrying value, in thousands)*
 
$
1,868

 
$
509

 
$
1,879

 
$
665

*“TDRs - Performing” include accounts that are current on all amounts owed, while “TDRs - Nonperforming” include all accounts with past due amounts owed.

Given that the above TDRs have a high reserve rate prior to modification as TDRs, we do not separately reserve or impair these receivables outside of our general reserve process.

The following table details by class of receivable, the number of accounts and carrying value of loans that completed a modification (including those that were classified as TDRs) within the prior twelve months and subsequently charged off.
 
 
Twelve Months Ended
 
 
 March 31, 2018
 
March 31, 2017
 
 
Point-of-Sale
 
Direct-to-Consumer
 
Point-of-Sale
 
Direct-to-Consumer
Number of accounts
 
1,881

 
868

 
1,617
 
654
Loan balance at time of charge off (in thousands)
 
$
2,885

 
$
1,845

 
$1,860
 
$1,906

Prepaid Expenses and Other Assets

Prepaid expenses and other assets include amounts paid to third parties for marketing and other services as well as amounts owed to us by third parties. Prepaid amounts are expensed as the underlying related services are performed.  Also included are (1) commissions paid associated with our various office leases which we amortize into expense over the lease terms, (2) amounts due from a third party in respect of a servicing agreement totaling $31.6 million as of March 31, 2018, (3) ongoing deferred costs associated with service contracts and (4) investments in consumer finance technology platforms carried at the lower of cost or market valuation.

Accounts Payable and Accrued Expenses
    
Accounts payable and accrued expenses reflect both the billed and unbilled amounts owed at the end of a period for services rendered. Also included within accounts payable and accrued expenses are amounts which may be owed in respect of one of our portfolios.

Income Taxes

We experienced a negative effective income tax expense rate of 3.1% for the three months ended March 31, 2018, compared to an effective income tax expense rate of 45.9% for the three months ended March 31, 2017. Our negative effective income tax expense rate for the three months ended March 31, 2018, is below the statutory rate principally due to (1) interest we accrued during such period on unpaid federal tax liabilities and uncertain tax positions, (2) additions during such period to valuation allowances against our net federal deferred tax assets associated with our net loss incurred during such period, and (3) foreign tax expense incurred during such period. Our effective income tax expense rate for the three months ended March 31,

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2017 was above the statutory rate applicable during such period principally due to interest we accrued during such period on unpaid federal tax liabilities.
               
As implied above, we report income tax-related interest and penalties (including those associated with both our accrued liabilities for uncertain tax positions and unpaid tax liabilities) within our income tax benefit or expense line item on our consolidated statements of operations. We likewise report the reversal of income tax-related interest and penalties within such line item to the extent that we resolve our liabilities for uncertain tax positions or unpaid tax liabilities in a manner favorable to our accruals therefor. During both the three months ended March 31, 2018, and 2017, we included $0.2 million of net income tax-related interest and penalties within those periods’ respective income tax expense line items.

In December 2014, we reached a settlement with the IRS concerning the tax treatment of net operating losses we incurred in 2007 and 2008 and carried back to obtain refunds of federal income taxes paid in earlier years dating back to 2003. Our net unpaid income tax assessment associated with that settlement was $7.4 million at March 31, 2018; this amount excludes unpaid interest and penalties on the tax assessment, the accruals for which aggregated $4.3 million at March 31, 2018. Prior to our filing amended return claims that would have eliminated the $7.4 million assessment (and corresponding interest and penalties) under a negotiated provision of the IRS settlement, the IRS filed a lien (as is customarily the case), associated with the assessment. Subsequently, an IRS examination team denied our amended return claims, and we filed a protest with IRS Appeals. Following correspondence and conferences we held with IRS Appeals, we received a settlement offer from IRS Appeals in April 2018 that would reduce our $7.4 million net unpaid income tax assessment referenced above to $3.7 million. We currently are evaluating the settlement offer, and should we accept the offer, (1) our $3.7 million reduction in the unpaid income tax assessment and liability accrued therefor would be reversed into income (along with a commensurate portion of the $4.3 million we have accrued for interest and penalties associated with the $3.7 million settled accrual), and (2) we would expect to pay the remaining accrued income tax, interest and penalties liability to the IRS after the settlement is finalized.

Revenue Recognition and Revenue from Contracts with Customers

Consumer Loans, Including Past Due Fees

Consumer loans, including past due fees reflect interest income, including finance charges, and late fees on loans in accordance with the terms of the related customer agreements. Premiums and discounts paid or received associated with a loan are generally deferred and amortized over the average life of the related loans using the effective interest method. Finance charges and fees, net of amounts that we consider uncollectible, are included in loans and fees receivable and revenue when the fees are earned.

Fees and Related Income on Earning Assets

Fees and related income on earning assets primarily include:  (1) fees associated with our credit products, including the receivables underlying our U.S. point-of-sale finance and direct-to-consumer activities, and our historical credit card receivables; (2) changes in the fair value of loans and fees receivable recorded at fair value; (3) changes in fair value of notes payable associated with structured financings recorded at fair value; (4) revenues associated with rent payments on rental merchandise; and (5) gains or losses associated with our investments in securities. 

We assess fees on credit card accounts underlying our credit card receivables according to the terms of the related cardholder agreements and, except for annual membership fees, we recognize these fees as income when they are charged to the customers’ accounts. We accrete annual membership fees associated with our credit card receivables into income on a straight-line basis over the cardholder privilege period. Similarly, fees on our other credit products are recognized when earned, which coincides with the time they are charged to the customer’s account. Fees and related income on earning assets, net of amounts that we consider uncollectible, are included in loans and fees receivable and revenue when the fees are earned.

In periods where applicable, we accrue periodic billed rental amounts (net of allowances for uncollectible billings) into revenues over the rental period to which the billed amounts relate, and we defer recognition in revenues of any advanced customer rental payments until the rental period in which they are properly recognizable under the terms of the contract.


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The components (in thousands) of our fees and related income on earning assets are as follows:
 
 
Three months ended March 31,
 
 
2018
 
2017
Fees on credit products
 
$
4,905

 
$
1,096

Changes in fair value of loans and fees receivable recorded at fair value
 
(18
)
 
563

Changes in fair value of notes payable associated with structured financings recorded at fair value
 
1,331

 
706

Rental revenue
 

 
148

Other
 
(4
)
 
288

Total fees and related income on earning assets
 
$
6,214

 
$
2,801


The above changes in the fair value of loans and fees receivable recorded at fair value category exclude the impact of charge offs associated with these receivables which are separately stated in Net recovery of charge off of loans and fees receivable recorded at fair value on our consolidated statements of operations.  See Note 6, “Fair Values of Assets and Liabilities,” for further discussion of these receivables and their effects on our consolidated statements of operations.

Revenue from Contracts with Customers

In the first quarter of 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” under the modified retrospective transition method. We have determined that revenue from contracts with customers would primarily consist of interchange revenues in our Credit and Other Investments segment and other customer-related fees in both our Credit and Other Investments segment and our Auto Finance segment. Revenue from these contracts with customers is included as a component of Other income on our Consolidated Statements of Operations. Components (in thousands) of our revenue from contracts with customers is as follows:
Three months ended March 31, 2018
Credit and Other Investments
 
Auto Finance
 
Total
Interchange revenues, net (1)
$
444

 
$

 
$
444

Service charges and other customer related fees
25

 
47

 
72

     Total Other income
469

 
47

 
516

(1) Interchange revenue is presented net of customer reward expense
 
Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The guidance requires an assessment of credit losses based on expected rather than incurred losses (known as the current expected credit loss model). This generally will result in the recognition of allowances for losses earlier than under current accounting guidance for trade and other receivables, held to maturity debt securities and other instruments. The standard will be adopted on a prospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. We are currently in the process of reviewing accounting interpretations, expected data requirements and necessary changes to our loss estimation methods, processes and systems. This standard is expected to result in an increase to our allowance for loan losses given the change to expected losses for the estimated life of the financial asset. The extent of the increase will depend on the asset quality of the portfolio, and economic conditions and forecasts at adoption.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires lessees to recognize assets and liabilities for most leases, changing certain aspects of current lessor accounting, among other things. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The adoption of ASU 2016-02 will result in the Company recognizing a right-of-use asset and lease liability on the consolidated balance sheet based on the present value of remaining operating lease payments. Net future minimum lease payments totaled $12.2 million as of December 31, 2017. We do not expect the adoption of ASU 2016-02 to have a material impact on our consolidated financial statements due to the limited lease activity we are involved in.
        

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In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 establishes a principles-based model under which revenue from a contract is allocated to the distinct performance obligations within the contract and recognized in income as each performance obligation is satisfied. Additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract is also required. In August 2015, the FASB delayed the effective date by one year and the guidance was effective for annual and interim periods beginning January 1, 2018. Most revenue associated with financial instruments, including interest income, loan origination fees and credit card fees, is outside the scope of the guidance. We adopted this standard as of January 1, 2018 using the modified retrospective method of adoption. Our adoption of this standard did not have a material impact on our consolidated financial statements.
    
Subsequent Events
 
We evaluate subsequent events that occur after our consolidated balance sheet date but before our consolidated financial statements are issued. There are two types of subsequent events:  (1) recognized, or those that provide additional evidence with respect to conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements; and (2) nonrecognized, or those that provide evidence with respect to conditions that did not exist at the date of the balance sheet but arose subsequent to that date.  We have evaluated subsequent events occurring after March 31, 2018, and based on our evaluation we did not identify any recognized or nonrecognized subsequent events that would have required further adjustments to our consolidated financial statements.

3.
Segment Reporting
 
We operate primarily within one industry consisting of two reportable segments by which we manage our business. Our two reportable segments are: Credit and Other Investments, and Auto Finance.

As of both March 31, 2018 and December 31, 2017, we did not have a material amount of long-lived assets located outside of the U.S., and only a negligible portion of our revenues for the three months ended March 31, 2018 and 2017 were generated outside of the U.S.

We measure the profitability of our reportable segments based on their income after allocation of specific costs and corporate overhead; however, our segment results do not reflect any charges for internal capital allocations among our segments. Overhead costs are allocated based on headcounts and other applicable measures to better align costs with the associated revenues.

Summary operating segment information (in thousands) is as follows:
Three months ended March 31, 2018
 
Credit and Other Investments
 
Auto Finance
 
Total
Interest income:
 
 
 
 
 
 
Consumer loans, including past due fees
 
$
28,562

 
$
7,119

 
$
35,681

Other
 
45

 

 
45

Total interest income
 
28,607

 
7,119

 
35,726

Interest expense
 
(7,892
)
 
(261
)
 
(8,153
)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
 
$
20,715

 
$
6,858

 
$
27,573

Fees and related income on earning assets
 
$
6,197

 
$
17

 
$
6,214

Servicing income
 
$
402

 
$
230

 
$
632

Equity in income of equity-method investee
 
$
9

 
$

 
$
9

(Loss) income before income taxes
 
$
(6,914
)
 
$
2,339

 
$
(4,575
)
Income tax benefit (expense)
 
$
399

 
$
(543
)
 
$
(144
)
Total assets
 
$
365,882

 
$
67,030

 
$
432,912


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Three months ended March 31, 2017
 
Credit and Other Investments
 
Auto Finance
 
Total
Interest income:
 
 
 
 
 
 
Consumer loans, including past due fees
 
$
18,830

 
$
7,029

 
$
25,859

Other
 
101

 

 
101

Total interest income
 
18,931

 
7,029

 
25,960

Interest expense
 
(5,594
)
 
(223
)
 
(5,817
)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
 
$
13,337

 
$
6,806

 
$
20,143

Fees and related income on earning assets
 
$
2,779

 
$
22

 
$
2,801

Servicing income
 
$
857

 
$
232

 
$
1,089

Depreciation of rental merchandise
 
$
(27
)
 
$

 
$
(27
)
Equity in income of equity-method investee
 
$
334

 
$

 
$
334

(Loss) income before income taxes
 
$
(387
)
 
$
1,732

 
$
1,345

Income tax expense
 
$
(33
)
 
$
(585
)
 
$
(618
)
Total assets
 
$
306,721

 
$
64,402

 
$
371,123


4.
Shareholders’ Equity

During the three months ended March 31, 2018 and 2017, we repurchased and contemporaneously retired 7,006 and 6,702 shares of our common stock at an aggregate cost of $14,000 and $18,000, respectively, pursuant to both open market and private purchases and the return of stock by holders of equity incentive awards to pay tax withholding obligations.

We had 1,459,233 loaned shares outstanding at March 31, 2018 and December 31, 2017, which were originally lent in connection with our November 2005 issuance of convertible senior notes. We retire lent shares as they are returned to us.

5.
Investment in Equity-Method Investee
 
Our equity-method investment outstanding at March 31, 2018 consists of our 66.7% interest in a joint venture formed to purchase a credit card receivable portfolio.

In the following tables, we summarize (in thousands) balance sheet and results of operations data for our equity-method investee:
 
As of
 
March 31, 2018
 
December 31, 2017
Loans and fees receivable, at fair value
$
5,088

 
$
6,123

Total assets
$
5,366

 
$
6,392

Total liabilities
$
24

 
$
26

Members’ capital
$
5,342

 
$
6,366


 
Three months ended March 31,
 
2018
 
2017
Net interest income, fees and related income on earning assets
$
14

 
$
504

Net (loss) income
$
(61
)
 
$
397

Net income attributable to our equity investment in investee
$
9

 
$
334

         




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6.
Fair Values of Assets and Liabilities

Valuations and Techniques for Assets
 
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. The table below summarizes (in thousands) by fair value hierarchy the March 31, 2018 and December 31, 2017 fair values and carrying amounts of (1) our assets that are required to be carried at fair value in our consolidated financial statements and (2) our assets not carried at fair value, but for which fair value disclosures are required:
Assets – As of March 31, 2018 (1)
 
Quoted Prices in Active
Markets for Identical Assets (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Significant
Unobservable Inputs (Level 3)
 
Carrying Amount of Assets
Loans and fees receivable, net for which it is practicable to estimate fair value
 
$

 
$

 
$
328,404

 
$
306,307

Loans and fees receivable, at fair value
 
$

 
$

 
$
9,413

 
$
9,413


Assets – As of December 31, 2017 (1)
 
Quoted Prices in Active
Markets for Identical Assets (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Significant
Unobservable Inputs (Level 3)
 
Carrying Amount of Assets
Loans and fees receivable, net for which it is practicable to estimate fair value
 
$

 
$

 
$
324,945

 
$
293,972

Loans and fees receivable, at fair value
 
$

 
$

 
$
11,109

 
$
11,109

  
(1)
For cash, deposits and other short-term investments, the carrying amount is a reasonable estimate of fair value.

For those asset classes above that are required to be carried at fair value in our consolidated financial statements, gains and losses associated with fair value changes are detailed on our fees and related income on earning assets table within Note 2, “Significant Accounting Policies and Consolidated Financial Statement Components.”

For Level 3 assets carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) a reconciliation of the beginning and ending balances for the three months ended March 31, 2018 and 2017:
 
Loans and Fees Receivable, at
Fair Value
 
2018
 
2017
Balance at January 1,
$
11,109

 
$
15,648

Total gains—realized/unrealized:
 
 


Net revaluations of loans and fees receivable, at fair value
(18
)
 
563

Settlements
(1,691
)
 
(2,626
)
Impact of foreign currency translation
13

 
6

Balance at March 31,
$
9,413

 
$
13,591

  
The unrealized gains and losses for assets within the Level 3 category presented in the tables above include changes in fair value that are attributable to both observable and unobservable inputs. Impacts related to foreign currency translation are included as a component of other operating expense on the consolidated statements of operations.
 
Net Revaluation of Loans and Fees Receivable. We record the net revaluation of loans and fees receivable (including those pledged as collateral) in the fees and related income on earning assets category in our consolidated statements of operations, specifically as changes in fair value of loans and fees receivable recorded at fair value. The net revaluation of loans

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and fees receivable is based on the present value of future cash flows using a valuation model of expected cash flows and the estimated cost to service and collect those cash flows. We estimate the present value of these future cash flows using a valuation model consisting of internally developed estimates of assumptions third-party market participants would use in determining fair value, including estimates of net collected yield, principal payment rates, expected principal credit loss rates, costs of funds, discount rates and servicing costs. Accrued interest income on receivables underlying our asset classes that are carried at fair value in our consolidated financial statements is recorded in Interest income - Consumer loans, including past due fees in our Consolidated Statements of Operations.

For Level 3 assets carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) quantitative information about the valuation techniques and the inputs used in the fair value measurement as of March 31, 2018 and December 31, 2017:
Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurements
 
Fair Value at March 31, 2018
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
Loans and fees receivable, at fair value
 
$
9,413

 
Discounted cash flows
 
Gross yield
 
16.3% to 27.9% (25.8%)
 
 
 

 
 
 
Principal payment rate
 
1.2% to 3.1% (2.4%)
 
 
 

 
 
 
Expected credit loss rate
 
9.0% to 13.4% (12.3%)
 
 
 

 
 
 
Servicing rate
 
12.0% to 14.8% (12.3%)
 
 
 

 
 
 
Discount rate
 
6.0% to 14.4% (12.9%)

Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurements
 
Fair Value at December 31, 2017
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
Loans and fees receivable, at fair value
 
$
11,109

 
Discounted cash flows
 
Gross yield
 
15.8% to 27.4% (24.5%)
 
 
 

 
 
 
Principal payment rate
 
1.9% to 3.6% (2.6%)
 
 
 

 
 
 
Expected credit loss rate
 
9.4% to 10.4% (9.7%)
 
 
 

 
 
 
Servicing rate
 
10.2% to 12.3% (10.5%)
 
 
 

 
 
 
Discount rate
 
6.0% to 14.2% (12.8%)




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Valuations and Techniques for Liabilities
 
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 liability. The table below summarizes (in thousands) by fair value hierarchy the March 31, 2018 and December 31, 2017 fair values and carrying amounts of (1) our liabilities that are required to be carried at fair value in our consolidated financial statements and (2) our liabilities not carried at fair value, but for which fair value disclosures are required:
Liabilities – As of March 31, 2018
 
Quoted Prices in Active
Markets for Identical Assets (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Significant
Unobservable Inputs (Level 3)
 
Carrying Amount of Liabilities
Liabilities not carried at fair value
 
 
 
 
 
 
 
 
Revolving credit facilities
 
$

 
$

 
$
183,388

 
$
183,388

Amortizing debt facilities
 
$

 
$

 
$
58,742

 
$
58,742

Senior secured term loan
 
$

 
$

 
$
40,000

 
$
40,000

5.875% convertible senior notes
 
$

 
$
43,588

 
$

 
$
61,650

Liabilities carried at fair value
 
 

 
 

 
 

 
 

Notes payable associated with structured financings, at fair value
 
$

 
$

 
$
7,909

 
$
7,909


Liabilities - As of December 31, 2017
 
Quoted Prices in Active
Markets for Identical Assets (Level 1)
 
 Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Carrying Amount of Liabilities
Liabilities not carried at fair value
 
 

 
 

 
 

 
 

Revolving credit facilities
 
$

 
$

 
$
160,854

 
$
160,854

Amortizing debt facilities
 
$

 
$

 
$
65,384

 
$
65,384

Senior secured term loan
 
$

 
$

 
$
40,000

 
$
40,000

5.875% convertible senior notes
 
$

 
$
43,588

 
$

 
$
61,393

Liabilities carried at fair value
 
 

 
 

 
 

 
 

Notes payable associated with structured financings, at fair value
 
$

 
$

 
$
9,240

 
$
9,240


For our material Level 3 liabilities carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) a reconciliation of the beginning and ending balances for the three months ended March 31, 2018 and 2017.
 
Notes Payable Associated with
Structured Financings, at Fair Value
 
2018
 
2017
Beginning balance, January 1,
$
9,240

 
$
12,276

Total (gains) losses—realized/unrealized:
 

 
 

Net revaluations of notes payable associated with structured financings, at fair value
(1,331
)
 
(706
)
Repayments on outstanding notes payable, net

 
(439
)
Ending balance, March 31,
$
7,909

 
$
11,131


The unrealized gains and losses for liabilities within the Level 3 category presented in the table 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 liabilities.


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Net Revaluation of Notes Payable Associated with Structured Financings, at Fair Value. We record the net revaluations of notes payable associated with structured financings, at fair value, in the changes in fair value of notes payable associated with structured financings line item within the fees and related income on earning assets category of our consolidated statements of operations. The net revaluation of these notes is based on the present value of future cash flows utilized in repayment of the outstanding principal and interest under the facilities using a valuation model of expected cash flows net of the contractual service expenses within the facilities. We estimate the present value of these future cash flows using a valuation model consisting of internally developed estimates of assumptions third-party market participants would use in determining fair value, including:  estimates of net collected yield, principal payment rates and expected principal credit loss rates on the credit card receivables that secure the non-recourse notes payable; costs of funds; discount rates; and contractual servicing fees. Accrued interest expense on notes payable underlying our notes payable associated with structured financings, at fair value is recorded in Interest expense in our Consolidated Statements of Operations.

For material Level 3 liabilities carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) quantitative information about the valuation techniques and the inputs used in the fair value measurement as of March 31, 2018 and December 31, 2017:
Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurements
 
Fair Value at March 31, 2018
 
Valuation Technique
 
Unobservable Input
 
Weighted Average
Notes payable associated with structured financings, at fair value
 
$
7,909

 
Discounted cash flows
 
Gross yield
 
27.9
%
 
 
 

 
 
 
Principal payment rate
 
2.6
%
 
 
 

 
 
 
Expected credit loss rate
 
13.4
%
 
 
 

 
 
 
Discount rate
 
14.4
%

Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurements
 
Fair Value at December 31, 2017
 
Valuation Technique
 
Unobservable Input
 
Weighted Average
Notes payable associated with structured financings, at fair value
 
$
9,240

 
Discounted cash flows
 
Gross yield
 
25.9
%
 
 
 

 
 
 
Principal payment rate
 
2.5
%
 
 
 

 
 
 
Expected credit loss rate
 
9.4
%
 
 
 

 
 
 
Discount rate
 
14.2
%


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Other Relevant Data
 
Other relevant data (in thousands) as of March 31, 2018 and December 31, 2017 concerning certain assets and liabilities we carry at fair value are as follows:
As of March 31, 2018
 
Loans and Fees
Receivable at
Fair Value
 
Loans and Fees Receivable Pledged as Collateral under Structured Financings at Fair Value
Aggregate unpaid principal balance within loans and fees receivable that are reported at fair value
 
$
4,088

 
$
10,222

Aggregate fair value of loans and fees receivable that are reported at fair value
 
$
1,504

 
$
7,909

Aggregate fair value of receivables carried at fair value that are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies)
 
$
2

 
$
12

Aggregate excess of balance of unpaid principal receivables within loans and fees receivable that are reported at fair value and are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies) over the fair value of such loans and fees receivable
 
$
85

 
$
303

 
As of December 31, 2017
 
Loans and Fees
Receivable at
Fair Value
 
Loans and Fees
Receivable Pledged as Collateral under Structured Financings at Fair Value
Aggregate unpaid principal balance within loans and fees receivable that are reported at fair value
 
$
4,416

 
$
11,349

Aggregate fair value of loans and fees receivable that are reported at fair value
 
$
1,869

 
$
9,240

Aggregate fair value of receivables carried at fair value that are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies)
 
$
5

 
$
17

Aggregate excess of balance of unpaid principal receivables within loans and fees receivable that are reported at fair value and are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies) over the fair value of such loans and fees receivable
 
$
107

 
$
369


Notes Payable
 
Notes Payable Associated with Structured Financings, at Fair Value as of March 31, 2018
 
Notes Payable Associated with Structured Financings, at Fair Value as of December 31, 2017
Aggregate unpaid principal balance of notes payable
 
$
101,314

 
$
101,314

Aggregate fair value of notes payable
 
$
7,909

 
$
9,240



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7.
Notes Payable
 
Notes Payable Associated with Structured Financings, at Fair Value
 
Scheduled (in millions) in the table below are (1) the carrying amount of our structured financing note secured by certain credit card receivables and reported at fair value as of March 31, 2018 and December 31, 2017, (2) the outstanding face amount of our structured financing note secured by certain credit card receivables and reported at fair value as of March 31, 2018 and December 31, 2017, and (3) the carrying amount of the credit card receivables and restricted cash that provide the exclusive means of repayment for the note (i.e., lenders have recourse only to the specific credit card receivables and restricted cash underlying each respective facility and cannot look to our general credit for repayment) as of March 31, 2018 and December 31, 2017.
 
Carrying Amounts at Fair Value as of
 
March 31, 2018
 
December 31, 2017
Amortizing securitization facility (stated maturity of December 2021), outstanding face amount of $101.3 million as of March 31, 2018 ($101.3 million as of December 31, 2017) bearing interest at a weighted average 7.0% interest rate at March 31, 2018 (6.7% at December 31, 2017), which is secured by credit card receivables and restricted cash aggregating $7.9 million as of March 31, 2018 ($9.2 million as of December 31, 2017) in carrying amount
$
7.9

 
$
9.2

 
Contractual payment allocations within this credit card receivables structured financing provide for a priority distribution of cash flows to us to service the credit card receivables, a distribution of cash flows to pay interest and principal due on the notes, and a distribution of all excess cash flows (if any) to us. The structured financing facility included in the above table is amortizing down along with collections of the underlying receivables and there are no provisions within the debt agreement that allow for acceleration or bullet repayment of the facility prior to its scheduled expiration date. The aggregate carrying amount of the credit card receivables and restricted cash that provide security for the $7.9 million in fair value of the structured financing facility included in the above table is $7.9 million, which means that we have no aggregate exposure to pre-tax equity loss associated with the above structured financing arrangement at March 31, 2018.
 
Beyond our role as servicer of the underlying assets within the credit cards receivables structured financing, we have provided no other financial or other support to the structure, and we have no explicit or implicit arrangements that could require us to provide financial support to the structure.


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Notes Payable, at Face Value and Notes Payable to Related Parties
 
Other notes payable outstanding as of March 31, 2018 and December 31, 2017 that are secured by the financial and operating assets of either the borrower, another of our subsidiaries or both, include the following, scheduled (in millions); except as otherwise noted, the assets of our holding company (Atlanticus Holdings Corporation) are subject to creditor claims under these scheduled facilities:
 
As of
 
March 31, 2018
 
December 31, 2017
Revolving credit facilities at a weighted average interest rate equal to 8.3% at March 31, 2018 (7.8% at December 31, 2017) secured by the financial and operating assets of CAR and/or certain receivables and restricted cash with a combined aggregate carrying amount of $243.0 million as of March 31, 2018 ($216.0 million at December 31, 2017)
 
 
 
Revolving credit facility, not to exceed $40.0 million (expiring November 1, 2019) (1)
24.6


24.8

Revolving credit facility, not to exceed $50.0 million (expiring October 30, 2019) (2) (3)
49.2

 
49.4

Revolving credit facility, not to exceed $12.0 million (expiring December 21, 2019) (2) (3)
11.8


3.8

Revolving credit facility, not to exceed $20.0 million (expiring December 31, 2019) (2) (3)
19.7

 
19.8

Revolving credit facility, not to exceed $90.0 million (expiring February 8, 2022) (2) (4)
80.0

 
65.0

Amortizing facilities at a weighted average interest rate equal to 6.3% at March 31, 2018 (6.0% at December 31, 2017) secured by certain receivables and restricted cash with a combined aggregate carrying amount of $73.1 million as of March 31, 2018 ($77.9 million as of December 31, 2017)
 
 
 
Amortizing debt facility (repaid March 31, 2018) (2) (3) (5)

 
3.7

Amortizing debt facility (expiring June 30, 2018) (2) (3) (5)
9.2

 
18.3

Amortizing debt facility (expiring December 12, 2018) (2) (3)
4.0

 
6.0

Amortizing debt facility (expiring September 14, 2018) (2) (3)
5.0

 
7.5

Amortizing debt facility (expiring November 30, 2018) (2) (3) (5)
14.9


20.5

Amortizing debt facility (expiring April 22, 2019) (2) (3) (5)
26.1


10.0

Other facilities
 
 
 
Senior secured term loan from related parties (expiring November 21, 2018) that is secured by certain assets of the Company with an annual interest rate equal to 9.0% (4)
40.0

 
40.0

Total notes payable before unamortized debt issuance costs and discounts
284.5

 
268.8

Unamortized debt issuance costs and discounts
2.4

 
2.6

Total notes payable outstanding, net
$
282.1

 
$
266.2

 

(1)
Loan is subject to certain affirmative covenants, including a coverage ratio, a leverage ratio and a collateral performance test, the failure of which could result in required early repayment of all or a portion of the outstanding balance by our CAR Auto Finance operations.
(2)
Loans are subject to certain affirmative covenants tied to default rates and other performance metrics the failure of which could result in required early repayment of the remaining unamortized balances of the notes.
(3)
These notes reflect modifications to either extend the maturity date, increase the loaned amount or both.
(4)
See below for additional information.
(5)
Loans are comprised of four tranches with the same lenders. Terms and conditions are substantially identical with the exception of maturity date as indicated in the table above.
    

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On November 26, 2014, we and certain of our subsidiaries entered into a Loan and Security Agreement with Dove Ventures, LLC, a Nevada limited liability company (“Dove”). The agreement provides for a senior secured term loan facility in an amount of up to $40.0 million at any time outstanding. The Loan and Security Agreement was fully drawn with $40.0 million outstanding as of March 31, 2018. In November 2017, the agreement was amended to extend the maturity date of the term loan to November 21, 2018. All other terms remain unchanged.

Our obligations under the agreement are guaranteed by certain subsidiary guarantors and secured by a pledge of certain assets of ours and the subsidiary guarantors. The loans bear interest at the rate of 9.0% per annum, payable monthly in arrears. The principal amount of these loans is payable in a single installment on November 21, 2018 (as amended). The agreement includes customary affirmative and negative covenants, as well as customary representations, warranties and events of default. Subject to certain conditions, we can prepay the principal amounts of these loans without premium or penalty.

Dove is a limited liability company owned by three trusts. David G. Hanna is the sole shareholder and the President of the corporation that serves as the sole trustee of one of the trusts, and David G. Hanna and members of his immediate family are the beneficiaries of this trust. Frank J. Hanna, III is the sole shareholder and the President of the corporation that serves as the sole trustee of the other two trusts, and Frank J. Hanna, III and members of his immediate family are the beneficiaries of these other two trusts.

In February 2017, we (through a wholly owned subsidiary) established a program under which we sell certain receivables to a consolidated trust in exchange for notes issued by the trust. The notes are secured by the receivables and other assets of the trust. Simultaneously with the establishment of the program, the trust issued a series of variable funding notes and sold an aggregate amount of up to $90.0 million (of which $80.0 million was outstanding as of March 31, 2018) to an unaffiliated third party pursuant to a facility that can be drawn upon to the extent of outstanding eligible receivables. Interest rates on the notes range from 8.0% to 14.0%.

The facility matures on February 8, 2022 and is subject to certain affirmative covenants and collateral performance tests, the failure of which could result in required early repayment of all or a portion of the outstanding balance of notes. The facility also may be prepaid subject to payment of a prepayment fee.
 
8.
Convertible Senior Notes
 
In November 2005, we issued $300.0 million aggregate principal amount of 5.875% convertible senior notes due November 30, 2035 (“5.875% convertible senior notes”). The 5.875% convertible senior notes are unsecured, subordinate to existing and future secured obligations and structurally subordinate to existing and future claims of our subsidiaries’ creditors. These notes (net of repurchases since the issuance dates) are reflected within convertible senior notes on our consolidated balance sheets.   No put rights exist under our 5.875% convertible senior notes.  
    
The following summarizes (in thousands) components of our consolidated balance sheets associated with our convertible senior notes:
 
As of
 
March 31, 2018
 
December 31, 2017
Face amount of 5.875% convertible senior notes
$
88,280


$
88,280

Discount
(26,630
)

(26,887
)
Net carrying value
$
61,650


$
61,393

Carrying amount of equity component included in additional paid-in capital
$
108,714


$
108,714

Excess of instruments’ if-converted values over face principal amounts
$


$


9.
Commitments and Contingencies
 
General
 
Under finance products available in the point-of-sale and direct-to-consumer channels, consumers have the ability to borrow up to the maximum credit limit assigned to each individual’s account.  Unfunded commitments under these products aggregated $453.4 million at March 31, 2018. We have never experienced a situation in which all borrowers have exercised their entire available lines of credit at any given point in time, nor do we anticipate this will ever occur in the future.  Moreover,

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there would be a concurrent increase in assets should there be any exercise of these lines of credit.  We also have the effective right to reduce or cancel these available lines of credit at any time.
 
Additionally our CAR operations provide floor-plan financing for a pre-qualified network of independent automotive dealers and automotive finance companies in the buy-here, pay-here used car business.  The financings allow dealers and finance companies to borrow up to the maximum pre-approved credit limit allowed in order to finance ongoing inventory needs.  These loans are secured by the underlying auto inventory and, in certain cases where we have other lending products outstanding with the dealer, are secured by the collateral under those lending arrangements as well, including any outstanding dealer reserves. As of March 31, 2018, CAR had unfunded outstanding floor-plan financing commitments totaling $8.8 million.  Each draw against unused commitments is reviewed for conformity to pre-established guidelines.
 
Under agreements with third-party originating and other financial institutions, we have pledged security (collateral) related to their issuance of consumer credit and purchases thereunder, of which $8.7 million remains pledged as of March 31, 2018 to support various ongoing contractual obligations. 

Under agreements with third-party originating and other financial institutions, we have agreed to indemnify the financial institutions for certain liabilities associated with the services we provide on behalf of the financial institutions—such indemnification obligations generally being limited to instances in which we either (a) have been afforded the opportunity to defend against any potentially indemnifiable claims or (b) have reached agreement with the financial institutions regarding settlement of potentially indemnifiable claims. As of March 31, 2018, we have assessed the likelihood of any potential payments related to the aforementioned contingencies as remote. We will accrue liabilities related to these contingencies in any future period if and in which we assess the likelihood of an estimable payment as probable.

We also are subject to certain minimum payments under cancelable and non-cancelable lease arrangements. For further information regarding these commitments, see Note 8, “Leases” to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017.

Litigation

See Note 11, “Commitments and Contingencies” to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 for information regarding outstanding litigation.
    
Additionally, we are involved in various other legal proceedings that are incidental to the conduct of our business, none of which are expected to be material to us.
 
10.
Net (Loss) Income Attributable to Controlling Interests Per Common Share
 
The following table sets forth the computations of net loss per common share (in thousands, except per share data): 
 
 
For the Three Months Ended March 31,
 
 
2018
 
2017
Numerator:
 
 
 
 
Net (loss) income attributable to controlling interests
 
$
(4,670
)
 
$
728

Denominator:
 
 

 
 

Basic (including unvested share-based payment awards) (1)
 
13,899

 
13,944

Effect of dilutive stock compensation arrangements (2)
 

 
33

Diluted (including unvested share-based payment awards) (1)
 
13,899

 
13,977

Net (loss) income attributable to controlling interests per common share—basic
 
$
(0.34
)
 
$
0.05

Net (loss) income attributable to controlling interests per common share—diluted
 
$
(0.34
)
 
$
0.05


(1)
Shares related to unvested share-based payment awards included in our basic and diluted share counts were 184,196 for the three months ended March 31, 2018, compared to 345,385 for the three months ended March 31, 2017.
(2)
The effect of dilutive stock compensation arrangements is shown only for informational purposes where we are in a net loss position.  In such situations, the effect of including outstanding options and restricted stock would be anti-dilutive, and they are thus excluded from all loss period calculations.

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For the three months ended March 31, 2018 and 2017, there were no shares potentially issuable and thus includible in the diluted net income attributable to controlling interests per common share calculations pursuant to our 5.875% convertible senior notes. However, in future reporting periods during which our closing stock price is above the $24.61 conversion price for the 5.875% convertible senior notes, and depending on the closing stock price at conversion, the maximum potential dilution under the conversion provisions of such notes is 3.6 million shares, which could be included in diluted share counts in net income per common share calculations. See Note 8, “Convertible Senior Notes,” for a further discussion of these convertible securities.

11.
Stock-Based Compensation
 
We currently have two stock-based compensation plans, the Second Amended and Restated Employee Stock Purchase Plan (the “ESPP”) and the Second Amended and Restated 2014 Equity Incentive Plan (the “2014 Plan”).  As of March 31, 2018, 103,702 shares remained available for issuance under the ESPP and 1,024,515 shares remained available for issuance under the 2014 Plan.

Exercises and vestings under our stock-based compensation plans resulted in $0 in income tax-related charges to additional paid-in capital during the three months ended March 31, 2018 and 2017.

Restricted Stock
 
During the three months ended March 31, 2018 and 2017, we granted 69,000 and 57,000 shares of restricted stock (net of any forfeitures), respectively, with aggregate grant date fair values of $0.2 million and $0.2 million, respectively. We incurred expenses of $0.1 million and $0.2 million during the three months ended March 31, 2018 and 2017, respectively, related to restricted stock awards. When we grant restricted stock, we defer the grant date value of the restricted stock and amortize that value (net of the value of anticipated forfeitures) as compensation expense with an offsetting entry to the additional paid-in capital component of our consolidated shareholders’ equity. Our restricted stock awards typically vest over a range of 12 to 60 months (or other term as specified in the grant) and are amortized to salaries and benefits expense ratably over applicable vesting periods. As of March 31, 2018, our unamortized deferred compensation costs associated with non-vested restricted stock awards were $0.2 million with a weighted-average remaining amortization period of 0.4 years.

Stock Options
 
Our 2014 Plan provides that we may grant options on or shares of our common stock (and other types of equity awards) to members of our Board of Directors, employees, consultants and advisors. The exercise price per share of the options must be 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 are determined by the Compensation Committee of the Board of Directors. We had expense of $0.2 million and $0.3 million related to stock option-related compensation costs during the three months ended March 31, 2018 and 2017, respectively. When applicable, 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. The table below includes additional information about outstanding options:
 
March 31, 2018
 
Number of
Shares
 
Weighted-
Average
Exercise Price
 
Weighted-
Average of Remaining
Contractual Life (in years)
 
Aggregate
Intrinsic
Value
Outstanding at December 31, 2017
2,619,334

 
$
3.04

 
 
 
 

Issued

 
$

 

 
 
Exercised

 
$

 

 


Cancelled/Forfeited
(4,667
)
 
$
3.04

 

 


Outstanding at March 31, 2018
2,614,667

 
$
3.04

 
3.1
 
$

Exercisable at March 31, 2018
1,010,815

 
$
2.95

 
2.1
 
$


We had $0.7 million and $0.9 million of unamortized deferred compensation costs associated with non-vested stock options as of March 31, 2018 and December 31, 2017, respectively.


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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     The following discussion should be read in conjunction with our consolidated financial statements and the related notes included therein, where certain terms have been defined.
 
This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements. We base these forward-looking statements on our current plans, expectations and beliefs about future events. There are risks, including the factors discussed in “Risk Factors” in Part II, Item 1A and elsewhere in this report, that our actual experience will differ materially from these expectations.  For more information, see “Forward-Looking Information” below.
In this report, except as the context suggests otherwise, the words “Company,” “Atlanticus Holdings Corporation,” “Atlanticus,” “we,” “our,” “ours,” and “us” refer to Atlanticus Holdings Corporation and its subsidiaries and predecessors.

OVERVIEW
 
We utilize proprietary analytics and a flexible technology platform to enable financial institutions to provide various credit and related financial services and products to or associated with the financially underserved consumer credit market. Currently, within our Credit and Other Investments segment, we are applying the experiences gained and infrastructure built from servicing over $25 billion in consumer loans over our 22-year operating history to support lenders who originate a range of consumer loan products. These products include retail credit, personal loans, and credit cards marketed through multiple channels, including retail point-of-sale, direct mail solicitation, Internet-based marketing, and partnerships with third parties. In the point-of-sale channel, we partner with retailers and service providers in various industries across the U.S. to allow them to provide credit to their customers for the purchase of a variety of goods and services including consumer electronics, furniture, elective medical procedures, healthcare, educational services and home-improvements. Our flexible technology platform allows our lending partners to integrate our paperless process and instant decision-making platform with the technology infrastructure of participating retailers and service providers. These services of our lending partners are often extended to consumers who may have been declined under traditional financing options. We specialize in supporting this “second-look” credit service. Additionally, we support lenders who market general purpose personal loans and credit cards directly to consumers through additional channels, which enables them to reach consumers through a diverse origination platform that includes direct mail, Internet-based marketing and our retail partnerships. Our technology platform and proprietary analytics enable lenders to make instant credit decisions utilizing hundreds of inputs from multiple sources and thereby offer credit to consumers overlooked by traditional providers of credit. By offering a range of products through a multitude of channels, we enable lenders to provide the right type of credit, whenever and wherever the consumer has a need. In most cases, we invest in the receivables originated by lenders who utilize our technology platform and other related services.

Using our infrastructure and technology platform, we also provide loan servicing, including risk management and customer service outsourcing, for third parties. Also through our Credit and Other Investments segment, we engage in testing and limited investment in consumer finance technology platforms as we seek to capitalize on our expertise and infrastructure.

Beyond these activities within our Credit and Other Investments segment, we invest in and service portfolios of credit card receivables. One of our portfolios of credit card receivables is encumbered by non-recourse structured financing, and for this portfolio our principal remaining economic interest is the servicing compensation we receive as an offset against our servicing costs given that the likely future collections on the portfolio are insufficient to allow for full repayment of the financing.
Additionally, we report within our Credit and Other Investments segment: (1) the income earned from an investment in an equity-method investee that holds credit card receivables for which we are the servicer; and (2) gains or losses associated with investments previously made in consumer finance technology platforms. These include investments in companies engaged in mobile technologies, marketplace lending and other financial technologies. These investments are carried at the lower of cost or market valuation. None of these companies are publicly-traded and there are no material pending liquidity events.
 
The recurring cash flows we receive within our Credit and Other Investments segment principally include those associated with (1) point-of-sale and direct-to-consumer receivables, (2) servicing compensation and (3) credit card receivables portfolios that are unencumbered or where we own a portion of the underlying structured financing facility.


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We believe that our point-of-sale and direct-to-consumer receivables are generating, and will continue to generate, attractive returns on assets, thereby facilitating debt financing under terms and conditions (including advance rates and pricing) that will support attractive returns on equity, and we continue to pursue growth in this area.

Within our Auto Finance segment, our CAR subsidiary operations principally purchase and/or service loans secured by automobiles from or for, and also provide floor plan financing for, a pre-qualified network of independent automotive dealers and automotive finance companies in the buy-here, pay-here, used car business. We purchase auto loans at a discount and with dealer retentions or holdbacks that provide risk protection. Also within our Auto Finance segment, we are providing certain installment lending products in addition to our traditional loans secured by automobiles.
We closely monitor and manage our expenses based on current product offerings (and in recent years have significantly reduced our overhead infrastructure which was built to accommodate higher managed receivables levels and a much greater number of accounts serviced). As such, we are maintaining our infrastructure and incurring increased overhead and other costs in order to expand point-of-sale and direct-to-consumer finance and credit solutions and new product offerings that we believe have the potential to grow into our existing infrastructure and allow for long-term shareholder returns.

Subject to the availability of capital at attractive terms and pricing, we plan to continue to evaluate and pursue a variety of activities, including:  (1) investments in additional financial assets associated with point-of-sale and direct-to-consumer finance and credit activities as well as the acquisition of interests in receivables portfolios; (2) investments in other assets or businesses that are not necessarily financial services assets or businesses; and (3) the repurchase of our convertible senior notes and other debt or our outstanding common stock.


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CONSOLIDATED RESULTS OF OPERATIONS


 
 
 
 
 
Income
 
For the Three Months Ended March 31,
 
Increases (Decreases)
(In Thousands)
2018
 
2017
 
from 2017 to 2018
Total interest income
$
35,726

 
$
25,960

 
$
9,766

Interest expense
(8,153
)
 
(5,817
)
 
(2,336
)
Fees and related income on earning assets:
 
 
 
 
 
Fees on credit products
4,905

 
1,096

 
3,809

Changes in fair value of loans and fees receivable recorded at fair value
(18
)
 
563

 
(581
)
Changes in fair value of notes payable associated with structured financings recorded at fair value
1,331

 
706

 
625

Rental revenue

 
148

 
(148
)
Other
(4
)
 
288

 
(292
)
Other operating income:
 
 
 
 
 
Servicing income
632

 
1,089

 
(457
)
Other income
516

 
109

 
407

Equity in income equity-method investee
9

 
334

 
(325
)
Total
$
34,944

 
$
24,476

 
$
10,468

Net losses upon (recovery of) charge off of loans and fees receivable recorded at fair value
1,791

 
(7,851
)
 
(9,642
)
Provision for losses on loans and fees receivable recorded at net realizable value
15,991

 
10,653

 
(5,338
)
Other operating expenses:
 
 
 
 
 
Salaries and benefits
6,298

 
5,780

 
(518
)
Card and loan servicing
9,164

 
7,137

 
(2,027
)
Marketing and solicitation
2,346

 
2,201

 
(145
)
Depreciation, primarily related to rental merchandise
229

 
310

 
81

Other
3,700

 
4,901

 
1,201

Net (loss) income
(4,719
)
 
727

 
(5,446
)
Net loss attributable to noncontrolling interests
49

 
1

 
48

Net (loss) income attributable to controlling interests
(4,670
)
 
728

 
(5,398
)

Three Months Ended March 31, 2018, Compared to Three Months Ended March 31, 2017
 
Total interest income. Total interest income consists primarily of finance charges and late fees earned on point-of-sale and direct-to-consumer receivables, credit card and auto finance receivables. Period-over-period results primarily relate to growth in point-of-sale finance and direct-to-consumer products, the receivables of which increased from $225.6 million as of March 31, 2017 to $322.3 million as of March 31, 2018. These increases were partially offset, however, by continued net liquidations of our historical credit card receivable portfolios over the past year. We are currently experiencing continued period-over-period growth in point-of-sale and direct-to-consumer receivables and to a lesser extent in our CAR receivables—growth which we expect to result in net period-over-period growth in our total interest income for these operations throughout 2018. Future periods’ growth is also dependent on the addition of new retail partners to expand the reach of point-of-sale operations as well as growth within existing partnerships and continued growth and marketing within the direct-to-consumer receivables. Despite anticipated increases in point-of-sale and direct-to-consumer receivables, continued net liquidations of our historical credit card receivables will continue to offset some of the expected increases but are not expected to result in overall net declines in interest income period-over-period.

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Interest expense. Variations in interest expense are due to our debt facilities being repaid commensurate with net liquidations of the underlying credit card, auto finance and installment loan receivables that serve as collateral for the facilities offset by new borrowings associated with growth in point-of-sale and direct-to-consumer receivables and CAR operations as evidenced within Note 7, “Notes Payable,” to our consolidated financial statements. Outstanding notes payable associated with our point-of-sale and direct-to-consumer operations increased from $119.4 million as of March 31, 2017 to $219.9 million as of March 31, 2018. We anticipate additional debt financing over the next few quarters as we continue to acquire receivables, and as such, we expect our quarterly interest expense to be above that experienced in the prior periods for these operations.
 
Fees and related income on earning assets.  The significant factors affecting our differing levels of fees and related income on earning assets include:

    increases in fees on credit products, primarily associated with growth in direct-to-consumer products and to a lesser degree by growth in point-of-sale finance products, offset somewhat by general net declines in historical credit card receivables; and
the effects of changes in the fair values of credit card receivables recorded at fair value and notes payable associated with structured financings recorded at fair value as described below.

We expect increasing levels of direct-to-consumer fee income throughout 2018 as we continue to invest in new credit card receivables as part of our direct-to-consumer operations, offset somewhat by diminishing fee income associated with our existing portfolios of liquidating credit card receivables. Additionally, for credit card accounts for which we use fair value accounting, we expect our change in fair value of credit card receivables recorded at fair value and our change in fair value of notes payable associated with structured financings recorded at fair value amounts to gradually diminish (absent significant changes in the assumptions used to determine these fair values) in the future. These amounts, however, are subject to potentially high levels of volatility if we experience changes in the quality of our credit card receivables or if there are significant changes in market valuation factors (e.g., interest rates and spreads) in the future. Such volatility will be muted somewhat, however, by the offsetting nature of the receivables and underlying debt being recorded at fair value and with the expected reductions in the face amounts of such outstanding receivables and debt as we experience further historical credit card receivables liquidations and associated debt amortizing repayments. Further, as discussed above, we do not expect meaningful levels of rental revenue as existing rent-to-own contracts have effectively concluded with no new acquisitions expected. This decline in rental revenues will serve to offset some of the aforementioned growth we expect in our credit card fee income.

Servicing income.  We earn servicing income by servicing loan portfolios for third parties (including our equity-method investee). Additionally, we will receive periodic compensation for processing reimbursements to consumers with respect to one of our portfolios. Unless and/or until we grow the number of contractual servicing relationships we have with third parties or our current relationships grow their loan portfolios, we will not experience significant growth and income within this category, and we currently expect to experience continued declines in this category of revenue relative to revenue earned in prior periods.
 
Other income.  Historically included within our other income category are ancillary and interchange revenues, which are now relatively insignificant for us due to previous credit card account closures and net credit card receivables portfolio liquidations. Given recent growth associated with new credit card offerings and related receivables, we expect ancillary and interchange revenues to grow modestly throughout the year. Also included within our other income category are gains or losses associated with investments previously made in consumer finance technology platforms carried at the lower of cost or market valuation.
    
Equity in income of equity-method investee.  Because our equity-method investee uses the fair value option to account for its financial assets and liabilities, changes in fair value estimates can cause some volatility in the earnings of this investee. Because of continued liquidations in the credit card receivables portfolio of our equity-method investee, absent additional investments in our existing or in new equity-method investees in the future, we expect gradually declining effects from our equity-method investment on our operating results.
 
Net losses upon (recovery of) charge off of loans and fees receivable recorded at fair value. This account reflects charge offs (net of recoveries) of the face amount of credit card receivables we record at fair value on our consolidated balance sheet. We have experienced a general trending decline in, and we expect future trending declines in, these charge-offs as we continue to liquidate our historical credit card receivables. Additionally, net recovery in the three months ended March 31, 2017 reflects the effects of reimbursements received in respect of one of our portfolios which were not replicated in the three months ended March 31, 2018. In the three months ended March 31, 2017, these reimbursements exceeded the charge-offs experienced within the portfolio during the period as the reimbursements are not directly associated with the timing of actual

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charge-offs. The timing of these reimbursements cannot be reliably determined and we currently do not expect that these reimbursements will result in a net recovery of losses upon charge-off in 2018.

Provision for losses on loans and fees receivable recorded at net realizable value.  Our provision for losses on loans and fees receivable recorded at net realizable value covers, with respect to such receivables, changes in estimates regarding our 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. We have experienced a period-over-period increase in this category between the three months ended March 31, 2018 and 2017 primarily reflecting the effects of volume associated with point-of-sale and direct-to-consumer finance receivables (i.e., growth of new product receivables and their subsequent maturation), rather than specific credit quality changes or deterioration, which also impacted our provision for losses on loans and fees receivable recorded at net realizable value to a lesser degree. See Note 2, “Significant Accounting Policies and Consolidated Financial Statement Components,” to our consolidated financial statements and the discussions of our Credit and Other Investments and Auto Finance segments for further credit quality statistics and analysis.

Total other operating expense. Total other operating expense variances for the three months ended March 31, 2018, relative to the three months ended March 31, 2017, reflect the following:
 
increases in card and loan servicing expenses in the three months ended March 31, 2018 when compared to the three months ended March 31, 2017 due to growth in receivables associated with our investments in point-of-sale and direct-to-consumer receivables which grew from $225.6 million outstanding to $322.3 million outstanding at March 31, 2017 and March 31, 2018, respectively, offset by the continued net liquidations in our historical credit card portfolios, the receivables of which declined from $21.9 million outstanding to $15.6 million outstanding at March 31, 2017 and March 31, 2018, respectively;
slight increases in marketing and solicitation costs for the three months ended March 31, 2018 primarily due to volume-related increases in costs attributable to the growth in our retail point-of-sale and direct-to-consumer portfolios. We expect that increased origination and brand marketing support will result in overall increases in year-over-year costs during 2018 although the frequency and timing of marketing efforts could result in reductions in quarter-over-quarter marketing costs; and
declines in other expenses primarily related to realized translation gains and losses recognized during both periods.

Certain operating costs are variable based on the levels of accounts and receivables we service (both for our own account and for others) and the pace and breadth of our growth in receivables. However, a number of our operating costs are fixed and until recently have comprised a larger percentage of our total costs based on the ongoing contraction of our historical credit card receivables. This trend is gradually reversing as we continue to grow our earning assets (including loans and fees receivable) based principally on growth of point-of-sale and direct-to-consumer receivables and to a lesser extent, growth within our CAR operations. This is evidenced by the growth we experienced in our managed receivables levels relative to minimal growth in the fixed portion of our card and loan servicing expenses as well as our salaries and benefits costs as we were able to better utilize our fixed costs to grow our asset base. We continue to perform extensive reviews of all areas of our businesses for cost savings opportunities to better align our costs with our portfolio of managed receivables.
 
Notwithstanding our ongoing cost-control efforts and focus, we expect increased levels of expenditures associated with anticipated growth in point-of-sale and direct-to-consumer personal loan and credit card-related operations. These expenses will primarily relate to the variable costs of marketing efforts and card and loan servicing expenses associated with new receivable acquisitions. While we have greater control over our variable expenses, it is difficult (as explained above) for us to appreciably reduce our fixed and other costs associated with an infrastructure (particularly within our Credit and Other Investments segment) that was built to support levels of managed receivables that are significantly higher than both our current levels and the levels that we expect to see in the near future. At this point, our Credit and Other Investments segment cash inflows are sufficient to cover its direct variable costs and a portion, but not all, of its share of overhead costs (including, for example, corporate-level executive and administrative costs and our convertible senior notes interest costs). As such, if we are unable to contain overhead costs or expand revenue-earning activities to levels commensurate with such costs, then, depending upon the earnings generated from our Auto Finance segment and our liquidating credit card portfolios, we may experience continuing pressure on our ability to achieve consistent profitability.
 
Noncontrolling interests.  We reflect the ownership interests of noncontrolling holders of equity in our majority-owned subsidiaries as noncontrolling interests in our consolidated statements of operations. Unless we enter into significant new majority-owned subsidiary ventures with noncontrolling interest holders in the future, we expect to have negligible noncontrolling interests in our majority-owned subsidiaries and negligible allocations of income or loss to noncontrolling interest holders in future quarters.
 

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Income Taxes. We experienced a negative effective income tax expense rate of 3.1% for the three months ended March 31, 2018, compared to an effective income tax expense rate of 45.9% for the three months ended March 31, 2017. Our negative effective income tax expense rate for the three months ended March 31, 2018, is below the statutory rate principally due to (1) interest we accrued during such period on unpaid federal tax liabilities and uncertain tax positions, (2) additions during such period to valuation allowances against our net federal deferred tax assets associated with our net loss incurred during such period, and (3) foreign tax expense incurred during such period. Our effective income tax expense rate for the three months ended March 31, 2017, was above the statutory rate applicable during such period principally due to interest we accrued during such period on unpaid federal tax liabilities.
               
As implied above, we report income tax-related interest and penalties (including those associated with both our accrued liabilities for uncertain tax positions and unpaid tax liabilities) within our income tax benefit or expense line item on our consolidated statements of operations. We likewise report the reversal of income tax-related interest and penalties within such line item to the extent that we resolve our liabilities for uncertain tax positions or unpaid tax liabilities in a manner favorable to our accruals therefor. During both the three months ended March 31, 2018, and 2017, we included $0.2 million of net income tax-related interest and penalties within those periods’ respective income tax expense line items.

In December 2014, we reached a settlement with the IRS concerning the tax treatment of net operating losses we incurred in 2007 and 2008 and carried back to obtain refunds of federal income taxes paid in earlier years dating back to 2003. Our net unpaid income tax assessment associated with that settlement was $7.4 million at March 31, 2018; this amount excludes unpaid interest and penalties on the tax assessment, the accruals for which aggregated $4.3 million at March 31, 2018. Prior to our filing amended return claims that would have eliminated the $7.4 million assessment (and corresponding interest and penalties) under a negotiated provision of the IRS settlement, the IRS filed a lien (as is customarily the case), associated with the assessment. Subsequently, an IRS examination team denied our amended return claims, and we filed a protest with IRS Appeals. Following correspondence and conferences we held with IRS Appeals, we received a settlement offer from IRS Appeals in April 2018 that would reduce our $7.4 million net unpaid income tax assessment referenced above to $3.7 million. We currently are evaluating the settlement offer, and should we accept the offer, (1) our $3.7 million reduction in the unpaid income tax assessment and liability accrued therefor would be reversed into income (along with a commensurate portion of the $4.3 million we have accrued for interest and penalties associated with the $3.7 million settled accrual), and (2) we would expect to pay the remaining accrued income tax, interest and penalties liability to the IRS after the settlement is finalized.

Credit and Other Investments Segment

     Our Credit and Other Investments segment includes our activities relating to our servicing of and our investments in the point-of-sale, direct-to-consumer personal finance and credit card operations, our various credit card receivables portfolios, as well as other product testing and investments that generally utilize much of the same infrastructure. The types of revenues we earn from our investments in receivables portfolios and services primarily include finance charges, fees and the accretion of discounts associated with the point-of-sale receivables or annual fees on our direct-to-consumer receivables.

We record (i) the finance charges, discount accretion and late fees assessed on our Credit and Other Investments segment receivables in the interest income - consumer loans, including past due fees category on our consolidated statements of operations, (ii) the rental revenue, over-limit, annual, activation, monthly maintenance, returned-check, cash advance and other fees in the fees and related income on earning assets category on our consolidated statements of operations, and (iii) the charge offs (and recoveries thereof) within our provision for losses on loans and fees receivable on our consolidated statements of operations (fo