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Section 1: 10-Q (FORM 10-Q)

atlc20180930_10q.htm
 

 

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

  

FORM 10-Q

 

For the quarterly period ended September 30, 2018

 

of

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 every Interactive Data File required to be submitted 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 November 6, 2018, 15,376,574 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)

1

 

 

Consolidated Balance Sheets

1

 

 

Consolidated Statements of Operations

2

 

 

Consolidated Statements of Comprehensive Loss

3

 

 

Consolidated Statement of Shareholders’ Deficit

4

 

 

Consolidated Statements of Cash Flows

5

 

 

Notes to Consolidated Financial Statements

6

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

28

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

45

 

Item 4.

Controls and Procedures

45

 

Part II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

46

 

Item 1A.

Risk Factors

46

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

55

 

Item 3.

Defaults Upon Senior Securities

55

 

Item 4.

Mine Safety Disclosure

55

 

Item 5.

Other Information

56

 

Item 6.

Exhibits

56

    Signatures 57

 

 

Table of Contents

 

 

PART I--FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

Atlanticus Holdings Corporation and Subsidiaries

Consolidated Balance Sheets (Unaudited)

(Dollars in thousands)

 

   

September 30,

   

December 31,

 
   

2018

   

2017

 
                 

Assets

               
Unrestricted cash and cash equivalents   $ 29,296     $ 41,484  
Restricted cash and cash equivalents     30,109       29,174  

Loans and fees receivable:

               
Loans and fees receivable, at fair value     7,125       11,109  
Loans and fees receivable, gross     480,891       393,898  
Allowances for uncollectible loans and fees receivable     (68,258 )     (62,970 )
Deferred revenue     (40,615 )     (36,956 )
Net loans and fees receivable     379,143       305,081  
Property at cost, net of depreciation     2,724       3,229  
Investments in equity-method investees     2,852       4,244  
Deposits     488       252  
Prepaid expenses and other assets     16,113       42,149  
Income tax asset     284        
Total assets   $ 461,009     $ 425,613  

Liabilities

               
Accounts payable and accrued expenses   $ 107,254     $ 115,737  
Notes payable, at face value     293,298       226,238  

Notes payable to related parties

    40,000       40,000  
Notes payable associated with structured financings, at fair value     6,220       9,240  
Convertible senior notes     61,975       61,393  
Income tax liability           9,132  
Total liabilities     508,747       461,740  
Commitments and contingencies (Note 9)                

Equity

               
Common stock, no par value, 150,000,000 shares authorized: 15,372,542 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at September 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     212,808       212,785  
Accumulated other comprehensive loss     1,502       (2,178 )
Retained deficit     (261,772 )     (246,640 )
Total shareholders’ equity     (47,462 )     (36,033 )
Noncontrolling interests     (276 )     (94 )
Total equity     (47,738 )     (36,127 )
Total liabilities and equity   $ 461,009     $ 425,613  

 

See accompanying notes.

 

1

Table of Contents

 

 

Atlanticus Holdings Corporation and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(Dollars in thousands, except per share data)

 

   

For the Three Months Ended September 30,

   

For the Nine Months Ended September 30,

 
   

2018

   

2017

   

2018

   

2017

 

Interest income:

                               

Consumer loans, including past due fees

  $ 41,901     $ 28,985     $ 115,325     $ 81,457  

Other

    51       34       137       178  

Total interest income

    41,952       29,019       115,462       81,635  

Interest expense

    (9,281 )     (7,268 )     (26,241 )     (19,504 )

Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable

    32,671       21,751       89,221       62,131  

Fees and related income on earning assets

    9,536       4,166       22,844       10,938  

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

    (1,957 )     2,393       (2,396 )     10,763  

Provision for losses on loans and fees receivable recorded at net realizable value

    (32,798 )     (24,087 )     (65,265 )     (50,484 )

Net interest income, fees and related income on earning assets

    7,452       4,223       44,404       33,348  

Other operating income:

                               

Servicing income

    382       1,034       1,646       2,984  

Other Income

    898       590       2,185       939  

Equity in income (loss) of equity-method investees

    (49 )     164       491       902  

Total other operating income

    1,231       1,788       4,322       4,825  

Other operating expense:

                               

Salaries and benefits

    5,838       5,589       17,738       17,102  

Card and loan servicing

    9,286       8,394       27,378       23,078  

Marketing and solicitation

    3,649       2,930       8,088       9,544  

Depreciation

    234       236       698       789  

Other

    5,725       3,352       14,871       14,029  

Total other operating expense

    24,732       20,501       68,773       64,542  

Loss before income taxes

    (16,049 )     (14,490 )     (20,047 )     (26,369 )

Income tax benefit (expense)

    (121 )     22       4,733       3,847  

Net loss

    (16,170 )     (14,468 )     (15,314 )     (22,522 )

Net (income) loss attributable to noncontrolling interests

    78       1       182       (1 )

Net loss attributable to controlling interests

  $ (16,092 )   $ (14,467 )   $ (15,132 )   $ (22,523 )

Net loss attributable to controlling interests per common share—basic

  $ (1.16 )   $ (1.04 )   $ (1.09 )   $ (1.61 )

Net loss attributable to controlling interests per common share—diluted

  $ (1.16 )   $ (1.04 )   $ (1.09 )   $ (1.61 )

 

See accompanying notes.

 

2

Table of Contents

 

 

Atlanticus Holdings Corporation and Subsidiaries

Consolidated Statements of Comprehensive Loss (Unaudited)

(Dollars in thousands)

 

    For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
   

2018

   

2017

   

2018

   

2017

 

Net loss

  $ (16,170 )   $ (14,468 )   $ (15,314 )   $ (22,522 )

Other comprehensive income:

                               

Foreign currency translation adjustment

    1,154       (1,721 )     3,680       (1,721 )
Reclassifications of foreign currency translation adjustment to Other operating expense on the consolidated statements of operations                        
Income tax expense related to other comprehensive income           625             625  

Comprehensive loss

    (15,016 )     (15,564 )     (11,634 )     (23,618 )

Comprehensive loss (income) attributable to noncontrolling interests

    78       1       182       (1 )

Comprehensive loss attributable to controlling interests

  $ (14,938 )   $ (15,563 )   $ (11,452 )   $ (23,619 )

 

See accompanying notes.

 

3

Table of Contents

 

 

Atlanticus Holdings Corporation and Subsidiaries

Consolidated Statement of Shareholders’ Deficit

For the Nine Months Ended September 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 )

Stock options exercises and proceeds related thereto

    14,000             32                         32  

Compensatory stock issuances, net of forfeitures

    346,177                                      

Amortization of deferred stock-based compensation costs

                708                         708  

Redemption and retirement of shares

    (279,519 )           (717 )                       (717 )

Other comprehensive income (loss)

                      3,680       (15,132 )     (182 )     (11,634 )

Balance at September 30, 2018

    15,372,542     $     $ 212,808     $ 1,502     $ (261,772 )   $ (276 )   $ (47,738 )

 

See accompanying notes.

 

4

Table of Contents

 

 

Atlanticus Holdings Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

   

For the Nine Months Ended September 30,

 
   

2018

   

2017

 

Operating activities

               

Net loss

  $ (15,314 )   $ (22,522 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Depreciation, amortization and accretion, net

    698       789  

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

    2,396       (10,763 )

Provision for losses on loans and fees receivable

    65,265       50,484  

Interest expense from accretion of discount on notes

    661       592  

Income from accretion of discount associated with receivables purchases

    (55,445 )     (41,961 )

Unrealized gain on loans and fees receivable and underlying notes payable held at fair value

    (5,617 )     (4,504 )

Amortization of deferred loan costs

    1,131       628  

Income from equity-method investments

    (491 )     (902 )

Changes in assets and liabilities:

               

(Increase) decrease in uncollected fees on earning assets

    (6,744 )     12,206  

Decrease in income tax liability

    (9,417 )     (4,084 )

(Increase) decrease in deposits

    (237 )     199  

(Decrease) increase in accounts payable and accrued expenses

    (5,680 )     21,846  

Other

    27,143       (14,023 )

Net cash used in operating activities

    (1,651 )     (12,015 )

Investing activities

               

Proceeds from equity-method investees

    1,883       2,882  

Investments in earning assets

    (429,899 )     (335,664 )

Proceeds from earning assets

    352,948       282,064  

Purchases and development of property, net of disposals

    (193 )     (229 )

Net cash used in investing activities

    (75,261 )     (50,947 )

Financing activities

               

Noncontrolling interests contributions, net

          7  

Proceeds from exercise of stock options

    32        

Purchase and retirement of outstanding stock

    (717 )     (286 )

Proceeds from borrowings

    337,565       243,945  

Repayment of borrowings

    (271,715 )     (176,417 )

Net cash provided by financing activities

    65,165       67,249  

Effect of exchange rate changes on cash

    494       313  

Net (decrease) increase in cash and cash equivalents

    (11,253 )     4,600  

Cash and cash equivalents at beginning of period

    70,658       92,641  

Cash and cash equivalents at end of period

  $ 59,405     $ 97,241  

Supplemental cash flow information

               

Cash paid for interest

  $ 25,528     $ 19,214  

Net cash income tax payments

  $ 4,684     $ 238  

Supplemental non-cash information

               

Issuance of stock options and restricted stock

  $ 678     $ 1,364  

Notes payable associated with capital leases

  $     $  

 

See accompanying notes.

 

5

Table of Contents

 

Atlanticus Holdings Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 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 through partner relationships. 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 that includes retail point-of-sale, direct mail solicitation and partnerships with third parties. 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 historical credit card receivables. One of our historical 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.

 

6

 

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 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.

 

7

 

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 September 30, 2018 and December 31, 2017, the weighted average remaining accretion period for the $40.6 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 September 30, 2018

 

Credit Cards

   

Auto Finance

   

Other Unsecured Lending Products

   

Total

 

Allowance for uncollectible loans and fees receivable:

                               

Balance at beginning of period

  $ (19.9 )   $ (1.5 )   $ (33.4 )   $ (54.8 )

Provision for loan losses

    (14.0 )     0.3       (19.1 )     (32.8 )

Charge offs

    7.4       0.4       13.1       20.9  

Recoveries

    (0.2 )     (0.2 )     (1.2 )     (1.6 )

Balance at end of period

  $ (26.7 )   $ (1.0 )   $ (40.6 )   $ (68.3 )

 

For the nine months ended September 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

    (29.1 )     0.6       (36.8 )     (65.3 )

Charge offs

 

20.9

      1.4       42.3       64.6  

Recoveries

    (0.3 )     (0.7 )     (3.6 )     (4.6 )

Balance at end of period

  $ (26.7 )   $ (1.0 )   $ (40.6 )   $ (68.3 )

 

8

 

As of September 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   $     $ (0.1 )   $     $ (0.1 )
Balance at end of period collectively evaluated for impairment   $ (26.7 )   $ (0.9 )   $ (40.6 )   $ (68.2 )

Loans and fees receivable:

                               
Loans and fees receivable, gross   $ 146.8     $ 85.3     $ 248.8     $ 480.9  
Loans and fees receivable individually evaluated for impairment   $     $ 0.2     $ 0.1     $ 0.3  
Loans and fees receivable collectively evaluated for impairment   $ 146.8     $ 85.1     $ 248.7     $ 480.6  

 

For the three months ended September 30, 2017

 

Credit Cards

   

Auto Finance

   

Other Unsecured Lending Products

   

Total

 

Allowance for uncollectible loans and fees receivable:

                               

Balance at beginning of period

  $ (3.2 )   $ (2.0 )   $ (36.0 )   $ (41.2 )

Provision for loan losses

    (6.2 )     (0.2 )     (17.7 )     (24.1 )

Charge offs

    0.7       0.5       13.2       14.4  

Recoveries

    (0.1 )     (0.3 )     (0.8 )     (1.2 )

Balance at end of period

  $ (8.8 )   $ (2.0 )   $ (41.3 )   $ (52.1 )

 

For the nine months ended September 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

    (8.1 )     (1.0 )     (41.4 )     (50.5 )

Charge offs

    1.9       2.1       42.2       46.2  

Recoveries

    (1.2 )     (1.0 )     (2.3 )     (4.5 )

Balance at end of period

  $ (8.8 )   $ (2.0 )   $ (41.3 )   $ (52.1 )

 

9

 

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 September 30, 2018 and December 31, 2017 is as follows:

 

As of September 30, 2018

 

Credit Cards

   

Auto Finance

   

Other Unsecured Lending Products

   

Total

 
30-59 days past due   $ 4.6     $ 7.6     $ 9.0     $ 21.2  
60-89 days past due     4.1       2.2       7.6       13.9  
90 or more days past due     9.1       1.5       16.7       27.3  
Delinquent loans and fees receivable, gross     17.8       11.3       33.3       62.4  
Current loans and fees receivable, gross     129.0       74.0       215.5       418.5  
Total loans and fees receivable, gross   $ 146.8     $ 85.3     $ 248.8     $ 480.9  
Balance of loans greater than 90-days delinquent still accruing interest and fees   $     $ 1.3     $     $ 1.3  

 

As of 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 greater than 90-days delinquent 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”).

 

10

 

The following table details by class of receivable, the number and amount of modified loans, including TDRs that have been re-aged, as of September 30, 2018 and December 31, 2017:

 

   

As of

 
   

September 30, 2018

   

December 31, 2017

 
   

Point-of-sale

   

Direct-to-consumer

   

Point-of-sale

   

Direct-to-consumer

 

Number of accounts on non-accrual status

    13,477       10,041       11,432       6,681  

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

    1,359       504       915       80  

Amount of receivables on non-accrual status (in thousands)

  $ 19,352     $ 10,858     $ 17,169     $ 7,067  
Amount of receivables on non-accrual status above that have been re-aged (in thousands)   $ 2,541     $ 524     $ 1,570     $ 86  

Carrying value of receivables on non-accrual status (in thousands)

  $ 5,425     $ 1,889     $ 4,247     $ 1,173  

TDRs - Performing (carrying value, in thousands)*

  $ 3,306     $ 1,129     $ 2,368     $ 508  

TDRs - Nonperforming (carrying value, in thousands)*

  $ 2,119     $ 760     $ 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

 
   

September 30, 2018

   

September 30, 2017

 
   

Point-of-sale

   

Direct-to-consumer

   

Point-of-sale

   

Direct-to-consumer

 

Number of accounts

    6,027       3,088       5,400       1,003  

Loan balance at time of charge off (in thousands)

  $ 7,385     $ 2,633     $ 5,113     $ 1,581  

 

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 $5.2 million as of September 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 0.8% for the three months ended September 30, 2018, and an effective income tax benefit rate of 23.6% for the nine months ended September 30, 2018; this compares to effective income tax benefit rates of 0.2% and 14.6% for the three and nine months ended September 30, 2017, respectively. Our negative effective income tax expense rate for the three months ended September 30, 2018 differs from the statutory rate, primarily due to the unfavorable effects of our (1) accruals of local, state and foreign income taxes, (2) accruals of interest on liabilities for uncertain tax positions and unpaid taxes, and (3) increase in our valuation allowance associated with net federal deferred tax assets that arose due to our net loss incurred in this period.  A variety of factors influenced our effective income tax benefit rate for the nine months ended September 30, 2018, including (1) an increase in our valuation allowance for the net losses incurred during the period, (2) our accruals of local, state and foreign taxes, and (3) significant net reductions in our accruals of interest on liabilities for uncertain tax positions and unpaid taxes, primarily due to the favorable effects of our settlement in such period of the IRS examination of our 2008 tax return and the carryback of its resulting net operating losses to pre-2008 tax years. Our effective income tax benefit rates for the three and nine months ended September 30, 2017 were below the statutory rate principally due to (1) interest and penalties we accrued on unpaid federal tax liabilities and (2) our establishment of, and increases in, our valuation allowances during such periods against our net federal deferred tax assets that arose during such periods associated with our net loss incurred during such periods.  

 

11

               

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 nine months ended September 30, 2018, we accrued a net $0.2 million and $0.6 million of income tax-related interest and penalties, respectively. In June 2018, 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 nine months ended September 30, 2018, we reduced income tax expense based on the reversal of $1.6 million of accrued interest on over-assessed taxes we will not be required to pay under the terms of our June 2018 settlement with the IRS, further background on which is set forth below.

 

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 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. In July 2018, we paid $5.4 million to the IRS to cover the $3.7 million unpaid income tax assessment and most of the interest that had accrued thereon; subsequently, during the three months ended September 30, 2018, the IRS refunded $0.5 million of our $5.4 million payment. Accordingly, although we have paid all assessed income taxes related to this matter, we still have an outstanding accrued liability for some of the interest and for failure-to-pay penalties related to this matter. We are pursuing complete abatement of the failure-to-pay penalties and removal of the aforementioned lien.

 

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.

 

12

 

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

 

   

For the three months

ended September 30,

   

For the nine months

ended September 30,

 
   

2018

   

2017

   

2018

   

2017

 

Fees on credit products

  $ 6,823     $ 3,248     $ 17,226     $ 6,351  

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

    2,102       1,153       2,597       2,718  

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

    577       259       3,020       1,786  

Rental revenue

                      148  

Other

    34       (494 )     1       (65 )

Total fees and related income on earning assets

  $ 9,536     $ 4,166     $ 22,844     $ 10,938  

 

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 (losses upon) 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 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:

 

   

Credit and

                 

Three months ended September 30, 2018

 

Other Investments

   

Auto Finance

   

Total

 
Interchange revenues, net (1)   $ 707     $     $ 707  

Servicing income

    122       260       382  

Service charges and other customer related fees

    174       17       191  

Total Other income

  $ 1,003     $ 277     $ 1,280  

 

   

Credit and

                 

Nine months ended September 30, 2018

 

Other Investments

   

Auto Finance

   

Total

 
Interchange revenues, net (1)   $ 1,846     $     $ 1,846  

Servicing income

    862       784       1,646  

Service charges and other customer related fees

    288       51       339  

Total Other income

  $ 2,996     $ 835     $ 3,831  

(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.

 

13

 

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 September 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 other than the disclosure related to the sale of asset backed securities as described in Note 7, "Notes Payable".

 

 

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 September 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 nine months ended September 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.

 

14

 

Summary operating segment information (in thousands) is as follows:

 

Three months ended September 30, 2018

 

Credit and Other Investments

   

Auto Finance

   

Total

 

Interest income:

                       

Consumer loans, including past due fees

  $ 34,164     $ 7,737     $ 41,901  

Other

    51             51  

Total interest income

    34,215       7,737       41,952  

Interest expense

    (8,920 )     (361 )     (9,281 )

Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable

  $ 25,295     $ 7,376     $ 32,671  

Fees and related income on earning assets

  $ 9,509     $ 27     $ 9,536  

Servicing income

  $ 122     $ 260     $ 382  

Equity in loss of equity-method investees

  $ (49 )   $     $ (49 )

(Loss) income before income taxes

  $ (19,079 )   $ 3,030     $ (16,049 )

Income tax benefit (expense)

  $ 1,055     $ (1,176 )   $ (121 )

 

Nine months ended September 30, 2018

 

Credit and Other Investments

   

Auto Finance

   

Total

 

Interest income:

                       

Consumer loans, including past due fees

  $ 93,028     $ 22,297     $ 115,325  

Other

    137             137  

Total interest income

    93,165       22,297       115,462  

Interest expense

    (25,274 )     (967 )     (26,241 )

Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable

  $ 67,891     $ 21,330     $ 89,221  

Fees and related income on earning assets

  $ 22,781     $ 63     $ 22,844  

Servicing income

  $ 862     $ 784     $ 1,646  

Equity in income of equity-method investees

  $ 491     $     $ 491  

(Loss) income before income taxes

  $ (28,329 )   $ 8,282     $ (20,047 )

Income tax benefit (expense)

  $ 6,694     $ (1,961 )   $ 4,733  

Total assets

  $ 387,430     $ 73,579     $ 461,009  

 

15

 

Three months ended September 30, 2017

 

Credit and Other Investments

   

Auto Finance

   

Total

 

Interest income:

                       

Consumer loans, including past due fees

  $ 21,901     $ 7,084     $ 28,985  

Other

    34             34  

Total interest income

    21,935       7,084       29,019  

Interest expense

    (6,998 )     (270 )     (7,268 )

Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable

  $ 14,937     $ 6,814     $ 21,751  

Fees and related income on earning assets

  $ 4,137     $ 29     $ 4,166  

Servicing income

  $ 831     $ 203     $ 1,034  

Equity in income of equity-method investees

  $ 164     $     $ 164  

(Loss) income before income taxes

  $ (16,547 )   $ 2,057     $ (14,490 )

Income tax benefit (expense)

  $ 655     $ (633 )   $ 22  

 

Nine months ended September 30, 2017

 

Credit and Other Investments

   

Auto Finance

   

Total

 

Interest income:

                       

Consumer loans, including past due fees

  $ 60,320     $ 21,137     $ 81,457  

Other

    178             178  

Total interest income

    60,498       21,137       81,635  

Interest expense

    (18,758 )     (746 )     (19,504 )

Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable

  $ 41,740     $ 20,391     $ 62,131  

Fees and related income on earning assets

  $ 10,859     $ 79     $ 10,938  

Servicing income

  $ 2,332     $ 652     $ 2,984  

Depreciation of rental merchandise

  $ (27 )   $     $ (27 )

Equity in income of equity-method investees

  $ 902     $     $ 902  

(Loss) income before income taxes

  $ (32,071 )   $ 5,702     $ (26,369 )

Income tax benefit (expense)

  $ 5,677     $ (1,830 )   $ 3,847  

Total assets

  $ 363,526     $ 65,541     $ 429,067  

 

 

4.

Shareholders’ Equity

 

During the three and nine months ended September 30, 2018, we repurchased and contemporaneously retired 260,060 and 279,519 shares of our common stock at an aggregate cost of $676,000 and $717,000, 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 three and nine months ended September 30, 2017, we repurchased and contemporaneously retired 107,916 and 114,618 shares of our common stock at an aggregate cost of $268,000 and $286,000, 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 September 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.

 

16

 

 

5.

Investment in Equity-Method Investee

 

Our equity-method investment outstanding at September 30, 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

 
   

September 30, 2018

   

December 31, 2017

 

Loans and fees receivables, at fair value

  $ 4,151     $ 6,123  

Total assets

  $ 4,298     $ 6,392  

Total liabilities

  $ 20     $ 26  

Members’ capital

  $ 4,278     $ 6,366  

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2018

   

2017

   

2018

   

2017

 

Net interest income, fees and related income (loss) on earning assets

  $ (73 )   $ 607     $ 739     $ 1,111  

Net income (loss)

  $ (135 )   $ 511     $ 534     $ 908  

Net income (loss) attributable to our equity investment investee

  $ (49 )   $ 164     $ 491     $ 902  

         

 

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 September 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 September 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   $     $     $ 395,920     $ 372,018  

Loans and fees receivable, at fair value

  $     $     $ 7,125     $ 7,125  

 

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.”

 

17

 

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 nine months ended September 30, 2018 and 2017:

 

   

Loans and Fees Receivables, 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

    2,597       2,718  

Settlements

    (6,567 )     (6,398 )

Impact of foreign currency translation

    (14 )     51  

Balance at September 30,

  $ 7,125     $ 12,019  

  

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 September 30, 2018 and December 31, 2017:

 

Quantitative Information about Level 3 Fair Value Measurements

 

Fair Value Measurements

 

Fair Value at September 30, 2018 (in thousands)

 

Valuation Technique

 

Unobservable Input

 

Range (Weighted Average)

 
                       

Loans and fees receivable, at fair value

  $ 7,125  

Discounted cash flows

 

Gross yield

    25.8% to 30.0% (26.3%)  
             

Principal payment rate

    2.3% to 3.3% (2.4%)  
             

Expected credit loss rate

    9.3% to 11.0% (9.5%)  
             

Servicing rate

    12.8% to 16.4% (13.3%)  
             

Discount rate

    14.6% to 14.6% (14.6%)  

 

18

 

Quantitative Information about Level 3 Fair Value Measurements

 

Fair Value Measurements

 

Fair Value at December 31, 2017 (in thousands)

 

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 September 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 September 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

  $     $     $ 223,593     $ 223,593  

Amortizing debt facilities

  $     $     $ 69,705     $ 69,705  

Senior secured term loan

  $     $     $ 40,000     $ 40,000  

5.875% convertible senior notes

  $     $ 46,788     $     $ 61,975  

Liabilities carried at fair value

                               

Notes payable associated with structured financings, at fair value

  $     $     $ 6,220     $ 6,220  

 

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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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 nine months ended September 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

    (3,020 )     (1,786 )

Repayments on outstanding notes payable, net

          (721 )

Ending balance, September 30,

  $ 6,220     $ 9,769  

 

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 September 30, 2018 and December 31, 2017:

Quantitative Information about Level 3 Fair Value Measurements

 

Fair Value Measurements

 

Fair Value at September 30, 2018 (in thousands)

 

Valuation Technique

 

Unobservable Input

 

Weighted Average

 

Notes payable associated with structured financings, at fair value

  $ 6,220  

Discounted cash flows

 

Gross yield

    25.8 %
             

Principal payment rate

    2.3 %
             

Expected credit loss rate

    9.3 %
             

Discount rate

    14.6 %

 

Quantitative Information about Level 3 Fair Value Measurements

 

 

Fair Value Measurements

 

Fair Value at December 31, 2017 (in thousands)

 

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 %

 

20

 

Other Relevant Data

 

Other relevant data (in thousands) as of September 30, 2018 and December 31, 2017 concerning certain assets and liabilities we carry at fair value are as follows:

 

As of September 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

  $ 1,306     $ 8,437  

Aggregate fair value of loans and fees receivable that are reported at fair value

  $ 905     $ 6,220  

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     $ 7  

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

  $ 26     $ 218  

 

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 September 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

  $ 6,220     $ 9,240  

 

21

 

 

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 September 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 September 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 September 30, 2018 and December 31, 2017.

 

   

Carrying Amounts at Fair Value as of

 
   

September 30, 2018

   

December 31, 2017

 

Amortizing securitization facility (stated maturity of December 2021), outstanding face amount of $101.3 million as of September 30, 2018 ($101.3 million as of December 31, 2017) bearing interest at a weighted average 7.3% interest rate at September 30, 2018 (6.7% at December 31, 2017), which is secured by credit card receivables and restricted cash aggregating $6.2 million as of September 30, 2018 ($9.2 million as of December 31, 2017) in carrying amount

  $ 6.2     $ 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 $6.2 million in fair value of the structured financing facility included in the above table is $6.2 million, which means that we have no aggregate exposure to pre-tax equity loss associated with the above structured financing arrangement at September 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.

 

22

 

Notes Payable, at Face Value and Notes Payable to Related Parties

 

Other notes payable outstanding as of September 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

 
   

September 30, 2018

   

December 31, 2017

 
Revolving credit facilities at a weighted average interest rate equal to 9.8% at September 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 $315.1 million as of September 30, 2018 ($216.0 million at December 31, 2017)                
Revolving credit facility, not to exceed $40.0 million (expiring November 1, 2019) (1)     30.1       24.8