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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 June 30, 2018
 
of
394643489_image0a07.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 August 8, 2018, 15,600,332 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 Income (Loss)
 
 
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)
 
June 30,
2018
 
December 31,
2017
Assets
 
 
 
Unrestricted cash and cash equivalents
$
49,604

 
$
41,484

Restricted cash and cash equivalents
28,869

 
29,174

Loans and fees receivable:
 

 
 

Loans and fees receivable, at fair value
8,286

 
11,109

Loans and fees receivable, gross
441,413

 
393,898

Allowances for uncollectible loans and fees receivable
(54,842
)
 
(62,970
)
Deferred revenue
(36,839
)
 
(36,956
)
Net loans and fees receivable
358,018

 
305,081

Property at cost, net of depreciation
2,908

 
3,229

Investment in equity-method investee
3,447

 
4,244

Deposits
283

 
252

Prepaid expenses and other assets
15,615

 
42,149

Total assets
$
458,744

 
$
425,613

Liabilities
 

 
 

Accounts payable and accrued expenses
$
109,668

 
$
115,737

Notes payable, at face value, net
268,343

 
226,238

Notes payable to related parties
40,000

 
40,000

Notes payable associated with structured financings, at fair value
6,797

 
9,240

Convertible senior notes
61,811

 
61,393

Income tax liability
4,454

 
9,132

Total liabilities
491,073

 
461,740

Commitments and contingencies (Note 9)


 


Equity
 

 
 

Common stock, no par value, 150,000,000 shares authorized: 15,341,425 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at June 30, 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
213,201

 
212,785

Accumulated other comprehensive income (loss)
348

 
(2,178
)
Retained deficit
(245,680
)
 
(246,640
)
Total shareholders’ equity
(32,131
)
 
(36,033
)
Noncontrolling interests
(198
)
 
(94
)
Total equity
(32,329
)
 
(36,127
)
Total liabilities and equity
$
458,744

 
$
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 June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Interest income:
 
 
 
 
 
 
 
Consumer loans, including past due fees
$
37,743

 
$
26,613

 
$
73,424

 
$
52,472

Other
41

 
43

 
86

 
144

Total interest income
37,784

 
26,656

 
73,510

 
52,616

Interest expense
(8,807
)
 
(6,419
)
 
(16,960
)
 
(12,236
)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
28,977

 
20,237

 
56,550

 
40,380

Fees and related income on earning assets
7,094

 
3,971

 
13,308

 
6,772

Net recovery of (losses upon) charge off of loans and fees receivable recorded at fair value
1,352

 
519

 
(439
)
 
8,370

Provision for losses on loans and fees receivable recorded at net realizable value
(16,476
)
 
(15,744
)
 
(32,467
)
 
(26,397
)
Net interest income, fees and related income on earning assets
20,947

 
8,983

 
36,952

 
29,125

Other operating income:
 

 
 

 
 
 
 
Servicing income
632

 
861

 
1,264

 
1,950

Other income
771

 
240

 
1,287

 
349

Equity in income of equity-method investee
531

 
404

 
540

 
738

Total other operating income
1,934

 
1,505

 
3,091

 
3,037

Other operating expense:
 

 
 

 
 
 
 
Salaries and benefits
5,602

 
5,733

 
11,900

 
11,513

Card and loan servicing
8,928

 
7,547

 
18,092

 
14,684

Marketing and solicitation
2,093

 
4,413

 
4,439

 
6,614

Depreciation
235

 
243

 
464

 
553

Other
5,446

 
5,776

 
9,146

 
10,677

Total other operating expense
22,304

 
23,712

 
44,041

 
44,041

Income (loss) before income taxes
577

 
(13,224
)
 
(3,998
)
 
(11,879
)
Income tax benefit
4,998

 
4,443

 
4,854

 
3,825

Net income (loss)
5,575

 
(8,781
)
 
856

 
(8,054
)
Net loss (income) attributable to noncontrolling interests
55

 
(3
)
 
104

 
(2
)
Net income (loss) attributable to controlling interests
$
5,630

 
$
(8,784
)
 
$
960

 
$
(8,056
)
Net income (loss) attributable to controlling interests per common share—basic
$
0.41

 
$
(0.63
)
 
$
0.07

 
$
(0.58
)
Net income (loss) attributable to controlling interests per common share—diluted
$
0.41

 
$
(0.63
)
 
$
0.07

 
$
(0.58
)

 
See accompanying notes.

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

 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
5,575

 
$
(8,781
)
 
$
856

 
$
(8,054
)
Other comprehensive income:
 

 
 

 
 
 
 
Foreign currency translation adjustment
4,871

 

 
2,526

 

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

 

 

 

Income tax expense related to other comprehensive income

 

 

 

Comprehensive income (loss)
10,446

 
(8,781
)
 
3,382

 
(8,054
)
Comprehensive loss (income) attributable to noncontrolling interests
55

 
(3
)
 
104

 
(2
)
Comprehensive income (loss) attributable to controlling interests
$
10,501

 
$
(8,784
)
 
$
3,486

 
$
(8,056
)

 

 

 

 

 

 

 

 

 

 

 

 

 
See accompanying notes.

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Atlanticus Holdings Corporation and Subsidiaries
Consolidated Statement of Shareholders’ Deficit
For the Six Months Ended June 30, 2018 (Unaudited)
(Dollars in thousands)
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
Shares Issued
 
Amount
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (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

 

 
457

 

 

 

 
457

Redemption and retirement of shares
(19,459
)
 

 
(41
)
 

 

 

 
(41
)
Other comprehensive income (loss)

 

 

 
2,526

 
960

 
(104
)
 
3,382

Balance at June 30, 2018
15,341,425

 
$

 
$
213,201

 
$
348

 
$
(245,680
)
 
$
(198
)
 
$
(32,329
)


See accompanying notes.

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Atlanticus Holdings Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
 
For the Six Months Ended June 30,
 
2018
 
2017
Operating activities
 
 
 
Net income (loss)
$
856

 
$
(8,054
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Depreciation, amortization and accretion, net
464

 
553

Losses upon charge off of loans and fees receivable recorded at fair value
439

 
2,324

Provision for losses on loans and fees receivable
32,467

 
26,397

Interest expense from accretion of discount on notes
437

 
383

Income from accretion of discount associated with receivables purchases
(36,681
)
 
(25,725
)
Unrealized gain on loans and fees receivable and underlying notes payable held at fair value
(2,938
)
 
(3,092
)
Amortization of deferred loan costs
709

 
346

Income from equity-method investments
(540
)
 
(738
)
Changes in assets and liabilities:
 

 
 

Increase in uncollected fees on earning assets
(2,965
)
 
(1,994
)
Decrease in income tax liability
(4,678
)
 
(4,040
)
(Increase) decrease in deposits
(32
)
 
200

(Decrease) increase in accounts payable and accrued expenses
(4,369
)
 
21,959

Other
27,484

 
1,893

Net cash provided by operating activities
10,653

 
10,412

Investing activities
 

 
 

Proceeds from equity-method investee
1,337

 
2,059

Investments in earning assets
(279,391
)
 
(211,523
)
Proceeds from earning assets
233,681

 
185,393

Purchases and development of property, net of disposals
(143
)
 
(79
)
Net cash used in investing activities
(44,516
)
 
(24,150
)
Financing activities
 

 
 

Noncontrolling interests contributions, net

 
7

Purchase and retirement of outstanding stock
(41
)
 
(18
)
Proceeds from borrowings
243,316

 
141,221

Repayment of borrowings
(201,939
)
 
(117,100
)
Net cash provided by financing activities
41,336

 
24,110

Effect of exchange rate changes on cash
342

 
313

Net increase in cash and cash equivalents
7,815

 
10,685

Cash and cash equivalents at beginning of period
70,658

 
92,641

Cash and cash equivalents at end of period
$
78,473

 
$
103,326

Supplemental cash flow information
 

 
 

Cash paid for interest
$
15,706

 
$
11,342

Net cash income tax (refunds) payments
$
(176
)
 
$
215

Supplemental non-cash information
 

 
 

Issuance of stock options and restricted stock
$
175

 
$
1,142

See accompanying notes.

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Atlanticus Holdings Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 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.

We show both an allowance for uncollectible loans and fees receivable and unearned fees (or “deferred revenue”) for our loans and fees receivable (i.e., as opposed to those carried at fair value). Our loans and fees receivable consist of smaller-balance, homogeneous loans, divided into two portfolio segments:  Credit and Other Investments; and Auto Finance. Each of these portfolio segments is further divided into pools based on common characteristics such as contract or acquisition channel. For each pool, we determine the necessary allowance for uncollectible loans and fees receivable by analyzing some or all of the following unique attributes for each type of receivable pool:  historical loss rates; current delinquency and roll-rate trends; vintage analyses based on the number of months an account has been in existence; the effects of changes in the economy on our customers; changes in underwriting criteria; and estimated recoveries. These reserves are considered in conjunction with (and potentially reduced by) any unearned fees and discounts that may be applicable for an outstanding loan receivable. A considerable amount of judgment is required to assess the ultimate amount of uncollectible loans and fees receivable, and we continuously evaluate and update our methodologies to determine the most appropriate allowance necessary. We may individually evaluate a receivable or pool of receivables for impairment if circumstances indicate that the receivable or pool of receivables may be at higher risk for non-performance than other receivables (e.g., if a particular retail or auto-finance partner has indications of non-performance (such as a bankruptcy) that could impact the underlying pool of receivables we purchased from the partner).

As of June 30, 2018 and December 31, 2017, the weighted average remaining accretion period for the $36.8 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 June 30, 2018

Credit Cards

Auto Finance

Other Unsecured Lending Products

Total
Allowance for uncollectible loans and fees receivable:

 

 

 

 
Balance at beginning of period

$
(20.8
)

$
(1.9
)

$
(35.6
)

$
(58.3
)
Provision for loan losses

(6.1
)

0.3


(10.7
)

(16.5
)
Charge offs

7.0


0.3


14.1


21.4

Recoveries



(0.2
)

(1.2
)

(1.4
)
Balance at end of period

$
(19.9
)

$
(1.5
)

$
(33.4
)

$
(54.8
)









For the Six Months Ended June 30, 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

(15.1
)

0.3


(17.7
)

(32.5
)
Charge offs

13.5


1.0


29.2


43.7

Recoveries

(0.1
)

(0.5
)

(2.4
)

(3.0
)
Balance at end of period

$
(19.9
)

$
(1.5
)

$
(33.4
)

$
(54.8
)

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As of June 30, 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
)
 
$
(0.4
)
Balance at end of period collectively evaluated for impairment
 
$
(19.9
)
 
$
(1.3
)
 
$
(33.2
)
 
$
(54.4
)
Loans and fees receivable:
 
 

 
 

 
 

 
 

Loans and fees receivable, gross
 
$
119.8

 
$
83.9

 
$
237.7

 
$
441.4

Loans and fees receivable individually evaluated for impairment
 
$

 
$
0.3

 
$
0.2

 
$
0.5

Loans and fees receivable collectively evaluated for impairment
 
$
119.8

 
$
83.6

 
$
237.5

 
$
440.9


For the Three Months Ended June 30, 2017

Credit Cards

Auto Finance

Other Unsecured Lending Products

Total
Allowance for uncollectible loans and fees receivable:

 

 

 

 
Balance at beginning of period

$
(1.8
)

$
(2.0
)

$
(35.7
)

$
(39.5
)
Provision for loan losses

(1.5
)

(0.4
)

(13.8
)

(15.7
)
Charge offs

0.8


0.8


14.4


16.0

Recoveries

(0.7
)

(0.4
)

(0.9
)

(2.0
)
Balance at end of period

$
(3.2
)

$
(2.0
)

$
(36.0
)

$
(41.2
)









For the Six Months Ended June 30, 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

(1.9
)

(0.8
)

(23.7
)

(26.4
)
Charge offs

1.2


1.6


29.0


31.8

Recoveries

(1.1
)

(0.7
)

(1.5
)

(3.3
)
Balance at end of period

$
(3.2
)

$
(2.0
)

$
(36.0
)

$
(41.2
)


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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 June 30, 2018 and December 31, 2017 is as follows:
Balance at June 30, 2018
 
Credit Cards
 
Auto Finance
 
Other Unsecured Lending Products
 
Total
30-59 days past due
 
$
3.4

 
$
6.1

 
$
8.7

 
$
18.2

60-89 days past due
 
3.0

 
1.8

 
7.1

 
11.9

90 or more days past due
 
7.4

 
1.2

 
13.4

 
22.0

Delinquent loans and fees receivable, gross
 
13.8

 
9.1

 
29.2

 
52.1

Current loans and fees receivable, gross
 
106.0

 
74.8

 
208.5

 
389.3

Total loans and fees receivable, gross
 
$
119.8

 
$
83.9

 
$
237.7

 
$
441.4

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

 
$
1.0

 
$

 
$
1.0


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, as of June 30, 2018 and December 31, 2017:
 
 
As of
 
 
June 30, 2018
 
December 31, 2017
 
 
Point-of-sale
 
Direct-to-consumer
 
Point-of-sale
 
Direct-to-consumer
Number of accounts on non-accrual status
 
11,377

 
8,789

 
11,432

 
6,681

Number of accounts on non-accrual status above that have been re-aged
 
1,283

 
311

 
915

 
80

Amount of receivables on non-accrual status (in thousands)
 
$
16,273

 
$
9,148

 
$
17,169

 
$
7,067

Amount of receivables on non-accrual status above that have been re-aged (in thousands)
 
$
2,327

 
$
341

 
$
1,570

 
$
86

Carrying value of receivables on non-accrual status (in thousands)
 
$
5,471

 
$
1,589

 
$
4,247

 
$
1,173

TDRs - Performing (carrying value, in thousands)*
 
$
3,361

 
$
894

 
$
2,368

 
$
508

TDRs - Nonperforming (carrying value, in thousands)*
 
$
2,110

 
$
695

 
$
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
 
 
June 30, 2018
 
June 30, 2017
 
 
Point-of-Sale
 
Direct-to-Consumer
 
Point-of-Sale
 
Direct-to-Consumer
Number of accounts
 
2,161

 
1,134

 
1,907
 
974
Loan balance at time of charge off (in thousands)
 
$
3,296

 
$
1,749

 
$2,409
 
$2,788

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 $5.3 million as of June 30, 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 866.2% for the three months ended June 30, 2018, and an effective income tax benefit rate of 121.4% for the six months ended June 30, 2018; this compares to effective income tax benefit rates of 33.6% and 32.2% for the three and six months ended June 30, 2017, respectively. Our negative effective income tax expense rate for the three months ended June 30, 2018, and our effective income tax benefit rate for the six months ended June 30, 2018, significantly differ from the statutory rate. This difference is caused primarily by the favorable effects on results during the three months ended June 30, 2018, of our settlement in such period of the Internal Revenue Service (“IRS”) examination of our 2008 tax return and the carryback of its resulting net operating losses to pre-2008 tax years. Our effective

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income tax benefit rates for the three and six months ended June 30, 2017, were below the statutory rate principally due to interest accruals on unpaid federal tax liabilities and valuation allowances established against net federal deferred tax assets that arose during those periods associated with our net losses incurred during those periods.
               
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 the three and six months ended June 30, 2018, we accrued $0.2 million and $0.4 million of net income tax-related interest and penalties, respectively. Also, during these periods, we reached a favorable settlement with the IRS concerning the level of our 2008 net operating losses eligible to be carried back to pre-2008 tax years for refunds. As a result, for the three and six months ended June 30, 2018, we reduced income tax expense based on the reversal of $1.5 million of accrued interest and penalties on over-assessed taxes we will not be required to pay under the terms of our settlement with the IRS.

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.  At March 31, 2018 (i.e., prior to our June 2018 settlement with the IRS), our net unpaid income tax assessment associated with the December 2014 settlement was $7.4 million, such amount excluding 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, if accepted, would have eliminated the $7.4 million assessment (and corresponding interest and penalties) under a negotiated provision of the December 2014 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 and accepted a settlement offer from IRS Appeals in June 2018 that reduced our $7.4 million net unpaid income tax assessment referenced above to $3.7 million, and in July 2018 we paid $5.4 million to the IRS to cover the $3.7 million unpaid income tax assessment and the interest that had accrued thereon. In due course, we expect the IRS to remove the aforementioned lien associated with the now-paid assessment.

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 June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Fees on credit products
$
5,498

 
$
2,007

 
$
10,403

 
$
3,103

Changes in fair value of loans and fees receivable recorded at fair value
513

 
1,002

 
495

 
1,565

Changes in fair value of notes payable associated with structured financings recorded at fair value
1,112

 
821

 
2,443

 
1,527

Rental revenue

 

 

 
148

Other
(29
)
 
141

 
(33
)
 
429

Total fees and related income on earning assets
$
7,094

 
$
3,971

 
$
13,308

 
$
6,772


The above changes in the fair value of loans and fees receivable recorded at fair value category exclude the impact of current period charge offs associated with these receivables which are separately stated in Net recovery of (losses upon) 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 servicing revenue 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 June 30, 2018
Credit and Other Investments
 
Auto Finance
 
Total
Interchange revenues, net (1)
$
695

 
$

 
$
695

Servicing income
338

 
294

 
632

Service charges and other customer related fees
89

 
(13
)
 
76

     Total Other income
1,122

 
281

 
1,403

 
 
 
 
 
 
Six months ended June 30, 2018
Credit and Other Investments
 
Auto Finance
 
Total
Interchange revenues, net (1)
$
1,139

 
$

 
$
1,139

Servicing income
740

 
524

 
1,264

Service charges and other customer related fees
114

 
34

 
148

     Total Other income
1,993

 
558

 
2,551

(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

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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 and changes 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.
        
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 June 30, 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 June 30, 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 six months ended June 30, 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.


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Summary operating segment information (in thousands) is as follows:
Three months ended June 30, 2018
 
 Credit and Other Investments
 
Auto Finance
 
Total
Interest income:
 
 
 
 
 
 
Consumer loans, including past due fees
 
$
30,302

 
$
7,441

 
$
37,743

Other
 
41

 

 
41

Total interest income
 
30,343

 
7,441

 
37,784

Interest expense
 
(8,462
)
 
(345
)
 
(8,807
)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
 
$
21,881

 
$
7,096

 
$
28,977

Fees and related income on earning assets
 
$
7,075

 
$
19

 
$
7,094

Servicing income
 
$
338

 
$
294

 
$
632

Equity in income of equity-method investee
 
$
531

 
$

 
$
531

(Loss) income before income taxes
 
$
(2,336
)
 
$
2,913

 
$
577

Income tax benefit (expense)
 
$
5,240

 
$
(242
)
 
$
4,998

 
 
 
 
 
 
 
Six months ended June 30, 2018
 
Credit and Other Investments
 
Auto Finance
 
Total
Interest income:
 
 
 
 
 
 
Consumer loans, including past due fees
 
$
58,864

 
$
14,560

 
$
73,424

Other
 
86

 

 
86

Total interest income
 
58,950

 
14,560

 
73,510

Interest expense
 
(16,354
)
 
(606
)
 
(16,960
)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
 
$
42,596

 
$
13,954

 
$
56,550

Fees and related income on earning assets
 
$
13,272

 
$
36

 
$
13,308

Servicing income
 
$
740

 
$
524

 
$
1,264

Equity in income of equity-method investee
 
$
540

 
$

 
$
540

(Loss) income before income taxes
 
$
(9,250
)
 
$
5,252

 
$
(3,998
)
Income tax benefit (expense)
 
$
5,639

 
$
(785
)
 
$
4,854

Total assets
 
$
387,342

 
$
71,402

 
$
458,744


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Three months ended June 30, 2017
 
Credit and Other Investments
 
Auto Finance
 
Total
Interest income:
 
 
 
 
 
 
Consumer loans, including past due fees
 
$
19,589

 
$
7,024

 
$
26,613

Other
 
43

 

 
43

Total interest income
 
19,632

 
7,024

 
26,656

Interest expense
 
(6,166
)
 
(253
)
 
(6,419
)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
 
$
13,466

 
$
6,771

 
$
20,237

Fees and related income on earning assets
 
$
3,943

 
$
28

 
$
3,971

Servicing income
 
$
644

 
$
217

 
$
861

Equity in income of equity-method investee
 
$
404

 
$

 
$
404

(Loss) income before income taxes
 
$
(15,137
)
 
$
1,913

 
$
(13,224
)
Income tax benefit (expense)
 
$
5,055

 
$
(612
)
 
$
4,443

 
 
 
 
 
 
 
Six months ended June 30, 2017
 
Credit and Other Investments
 
Auto Finance
 
Total
Interest income:
 
 
 
 
 
 
Consumer loans, including past due fees
 
$
38,419

 
$
14,053

 
$
52,472

Other
 
144

 

 
144

Total interest income
 
38,563

 
14,053

 
52,616

Interest expense
 
(11,760
)
 
(476
)
 
(12,236
)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
 
$
26,803

 
$
13,577

 
$
40,380

Fees and related income on earning assets
 
$
6,722

 
$
50

 
$
6,772

Servicing income
 
$
1,501

 
$
449

 
$
1,950

Depreciation of rental merchandise
 
$
(27
)
 
$

 
$
(27
)
Equity in income of equity-method investee
 
$
738

 
$

 
$
738

(Loss) income before income taxes
 
$
(15,524
)
 
$
3,645

 
$
(11,879
)
Income tax benefit (expense)
 
$
5,022

 
$
(1,197
)
 
$
3,825

Total assets
 
$
332,001

 
$
67,646

 
$
399,647


4.
Shareholders’ Equity

During the three and six months ended June 30, 2018, we repurchased and contemporaneously retired 12,453 and 19,459 shares of our common stock at an aggregate cost of $27,000 and $41,000, 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. During the six months ended June 30, 2017, we repurchased and contemporaneously retired 6,702 shares of our common stock at an aggregate cost of $18,000, pursuant to both open market and private purchases and the return of stock by holders of equity incentive awards to pay tax withholding obligations. No shares were repurchased during the three months ended June 30, 2017.

We had 1,459,233 loaned shares outstanding at June 30, 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 June 30, 2018 consists of our 66.7% interest in a joint venture formed to purchase a credit card receivable portfolio.


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In the following tables, we summarize (in thousands) balance sheet and results of operations data for our equity-method investee:
 
As of
 
June 30, 2018
 
December 31, 2017
Loans and fees receivable, at fair value
$
4,991

 
$
6,123

Total assets
$
5,192

 
$
6,392

Total liabilities
$
22

 
$
26

Members’ capital
$
5,170

 
$
6,366


 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Net interest income, fees and related income on earning assets
$
798

 
$
607

 
$
812

 
$
1,111

Net income
$
730

 
$
511

 
$
669

 
$
908

Net income attributable to our equity investment in investee
$
531

 
$
404

 
$
540

 
$
738

         
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 June 30, 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 June 30, 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
 
$

 
$

 
$
376,681

 
$
349,732

Loans and fees receivable, at fair value
 
$

 
$

 
$
8,286

 
$
8,286


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.”


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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 six months ended June 30, 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
495

 
1,565

Settlements
(3,309
)
 
(4,475
)
Impact of foreign currency translation
(9
)
 
32

Balance at June 30,
$
8,286

 
$
12,770

  
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 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 June 30, 2018 and December 31, 2017:
Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurements
 
Fair Value at June 30, 2018
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
Loans and fees receivable, at fair value
 
$
8,286

 
Discounted cash flows
 
Gross yield
 
15.6% to 29.1% (25.4%)
 
 
 

 
 
 
Principal payment rate
 
1.3% to 3.5% (2.4%)
 
 
 

 
 
 
Expected credit loss rate
 
10.1% to 12.0% (11.6%)
 
 
 

 
 
 
Servicing rate
 
12.0% to 15.1% (12.3%)
 
 
 

 
 
 
Discount rate
 
6.0% to 14.6% (13.2%)

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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%)

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 June 30, 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 June 30, 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
 
$

 
$

 
$
205,970

 
$
205,970

Amortizing debt facilities
 
$

 
$

 
$
62,373

 
$
62,373

Senior secured term loan
 
$

 
$

 
$
40,000

 
$
40,000

5.875% convertible senior notes
 
$

 
$
44,114

 
$

 
$
61,811

Liabilities carried at fair value
 
 

 
 

 
 

 
 

Notes payable associated with structured financings, at fair value
 
$

 
$

 
$
6,797

 
$
6,797


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



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Table of Contents

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 six months ended June 30, 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
(2,443
)
 
(1,527
)
Repayments on outstanding notes payable, net

 
(718
)
Ending balance, June 30,
$
6,797

 
$
10,031


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.

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 June 30, 2018 and December 31, 2017:
Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurements
 
Fair Value at June 30, 2018
 
Valuation Technique
 
Unobservable Input
 
Weighted Average
Notes payable associated with structured financings, at fair value
 
$
6,797

 
Discounted cash flows
 
Gross yield
 
26.9
%
 
 
 

 
 
 
Principal payment rate
 
2.4
%
 
 
 

 
 
 
Expected credit loss rate
 
12.0
%
 
 
 

 
 
 
Discount rate
 
14.6
%
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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Table of Contents

Other Relevant Data
 
Other relevant data (in thousands) as of June 30, 2018 and December 31, 2017 concerning certain assets and liabilities we carry at fair value are as follows:
As of June 30, 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
 
$
3,344

 
$
9,240

Aggregate fair value of loans and fees receivable that are reported at fair value
 
$
1,489

 
$
6,797

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)
 
$
3

 
$
8

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
 
$
50

 
$
217

 
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 June 30, 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
 
$
6,797

 
$
9,240



20

Table of Contents

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 June 30, 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 June 30, 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 June 30, 2018 and December 31, 2017.
 
Carrying Amounts at Fair Value as of
 
June 30, 2018
 
December 31, 2017
Amortizing securitization facility (stated maturity of December 2021), outstanding face amount of $101.3 million as of June 30, 2018 ($101.3 million as of December 31, 2017) bearing interest at a weighted average 7.2% interest rate at June 30, 2018 (6.7% at December 31, 2017), which is secured by credit card receivables and restricted cash aggregating $6.8 million as of June 30, 2018 ($9.2 million as of December 31, 2017) in carrying amount
$
6.8

 
$
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 $6.8 million in fair value of the structured financing facility included in the above table is $6.8 million, which means that we have no aggregate exposure to pre-tax equity loss associated with the above structured financing arrangement at June 30, 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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Table of Contents

Notes Payable, at Face Value and Notes Payable to Related Parties
 
Other notes payable outstanding as of June 30, 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
 
June 30, 2018
 
December 31, 2017
Revolving credit facilities at a weighted average interest rate equal to 7.6% at June 30, 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 $285.6 million as of June 30, 2018 ($216.0 million at December 31, 2017)
 
 
 
Revolving credit facility, not to exceed $40.0 million (expiring November 1, 2019) (1)
30.8


24.8

Revolving credit facility, not to exceed $50.0 million (expiring October 30, 2019) (2) (3)
49.3

 
49.4

Revolving credit facility, not to exceed $12.0 million (expiring December 21, 2019) (2) (3)
10.5


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)
40.0

 
65.0

Revolving credit facility, not to exceed $100.0 million (expiring June 11, 2020) (2)
58.1

 

Revolving credit facility, not to exceed $15.0 million (expiring June 25, 2020) (2) (3)
13.2

 
7.5

Amortizing facilities at a weighted average interest rate equal to 7.2% at June 30, 2018 (6.0% at December 31, 2017) secured by certain receivables and restricted cash with a combined aggregate carrying amount of $62.8 million as of June 30, 2018 ($77.9 million as of December 31, 2017)
 
 
 
Amortizing debt facility (repaid in March 2018) (2) (3) (5)

 
3.7

Amortizing debt facility (repaid in June 2018) (2) (3) (5)

 
18.3

Amortizing debt facility (expiring December 12, 2018) (2) (3)
1.9

 
6.0

Amortizing debt facility (expiring November 30, 2018) (2) (3) (5)
9.3


20.5