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

atlc20190319_10q.htm
 

 

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

  

FORM 10-Q

 

For the quarterly period ended June 30, 2019

 

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 under the symbol “ATLC”.

 

Atlanticus (1) has filed all reports required to be filed by Section 13 of the Act during the preceding 12 months and (2) 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 August 8, 2019, 16,097,022 shares of common stock, no par value, of Atlanticus were outstanding, including 1,459,233 loaned shares to be returned.

 

 

 
 

 

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 Income

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

24

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41

 

Item 4.

Controls and Procedures

41

 

Part II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

42

 

Item 1A.

Risk Factors

42

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

50

 

Item 3.

Defaults Upon Senior Securities

51

 

Item 4.

Mine Safety Disclosure

51

 

Item 5.

Other Information

52

 

Item 6.

Exhibits

52

 

 

Signatures

53

 

i

Table of Contents

 

PART I--FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

 

 

Atlanticus Holdings Corporation and Subsidiaries

Consolidated Balance Sheets (Unaudited)

(Dollars in thousands)

 

   

June 30,

   

December 31,

 
   

2019

   

2018

 
                 

Assets

               

Unrestricted cash and cash equivalents (including $22.2 million and $16.8 million associated with variable interest entities at June 30, 2019 and December 31, 2018, respectively)

  $ 63,197     $ 60,968  

Restricted cash and cash equivalents (including $55.9 million and $61.0 million associated with variable interest entities at June 30, 2019 and December 31, 2018, respectively)

    81,897       80,786  

Loans, interest and fees receivable:

               

Loans, interest and fees receivable, at fair value (including $4.3 million and $5.7 million associated with variable interest entities at June 30, 2019 and December 31, 2018, respectively)

    4,904       6,306  

Loans, interest and fees receivable, gross (including $551.6 million and $403.4 million associated with variable interest entities at June 30, 2019 and December 31, 2018, respectively)

    691,816       541,344  

Allowances for uncollectible loans, interest and fees receivable (including $91.4 million and $57.4 million associated with variable interest entities at June 30, 2019 and December 31, 2018, respectively)

    (100,197 )     (79,211 )

Deferred revenue (including $28.1 million and $13.2 million associated with variable interest entities at June 30, 2019 and December 31, 2018, respectively)

    (65,662 )     (43,897 )

Net loans, interest and fees receivable

    530,861       424,542  

Property at cost, net of depreciation

    3,147       3,625  

Investments in equity-method investees

    2,053       2,476  

Deposits

    104       124  

Operating lease right-of-use assets

    16,275        

Prepaid expenses and other assets

    12,824       10,087  

Total assets

  $ 710,358     $ 582,608  

Liabilities

               

Accounts payable and accrued expenses

  $ 86,309     $ 105,765  

Operating lease liabilities

    26,171        

Notes payable, at face value (including $469.1 million and $366.7 million associated with variable interest entities at June 30, 2019 and December 31, 2018, respectively)

    497,126       390,927  

Notes payable to related parties

    40,000       40,000  

Notes payable associated with structured financings, at fair value (associated with variable interest entities)

    4,324       5,651  

Convertible senior notes

    62,487       62,142  

Income tax liability

    2,504       252  

Total liabilities

    718,921       604,737  
                 

Commitments and contingencies (Note 10)

               
                 

Equity

               

Common stock, no par value, 150,000,000 shares authorized: 16,123,285 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at June 30, 2019; and 15,563,574 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at December 31, 2018

           

Paid-in capital

    215,111       213,435  

Accumulated other comprehensive income

    4,056       3,558  

Retained deficit

    (227,272 )     (238,784 )

Total shareholders’ deficit

    (8,105 )     (21,791 )

Noncontrolling interests

    (458 )     (338 )

Total deficit

    (8,563 )     (22,129 )

Total liabilities and deficit

  $ 710,358     $ 582,608  


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 June 30,     For the Six Months Ended June 30,  
   

2019

   

2018

   

2019

   

2018

 

Interest income:

                               

Consumer loans, including past due fees

  $ 55,091     $ 37,743     $ 105,481     $ 73,424  

Other

    109       41       178       86  

Total interest income

    55,200       37,784       105,659       73,510  

Interest expense

    (12,014 )     (8,807 )     (23,160 )     (16,960 )

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

    43,186       28,977       82,499       56,550  

Fees and related income on earning assets

    15,137       7,094       26,401       13,308  

Net (losses upon) recovery of impairment of loans, interest and fees receivable recorded at fair value

    (271 )     1,352       (525 )     (439 )

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

    (48,414 )     (16,476 )     (83,012 )     (32,467 )

Net interest income, fees and related income on earning assets

    9,638       20,947       25,363       36,952  

Other operating income:

                               

Servicing income

    375       632       1,061       1,264  

Other income

    28,570       771       45,414       1,287  

Equity in income of equity-method investees

    225       531       452       540  

Total other operating income

    29,170       1,934       46,927       3,091  

Other operating expense:

                               

Salaries and benefits

    6,435       5,602       13,026       11,900  

Card and loan servicing

    11,527       8,928       21,971       18,092  

Marketing and solicitation

    9,110       2,093       15,497       4,439  

Depreciation

    283       235       572       464  

Other

    4,021       5,446       7,899       9,146  

Total other operating expense

    31,376       22,304       58,965       44,041  

Income (loss) before income taxes

    7,432       577       13,325       (3,998 )

Income tax (expense) benefit

    (2,250 )     4,998       (2,488 )     4,854  

Net income

    5,182       5,575       10,837       856  

Net loss attributable to noncontrolling interests

    62       55       120       104  

Net income attributable to controlling interests

  $ 5,244     $ 5,630     $ 10,957     $ 960  

Net income attributable to controlling interests per common share—basic

  $ 0.36     $ 0.41     $ 0.76     $ 0.07  

Net income attributable to controlling interests per common share—diluted

  $ 0.35     $ 0.41     $ 0.74     $ 0.07  


See accompanying notes.

 

2

Table of Contents

 

 

Atlanticus Holdings Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)

 

    For the Three Months Ended June 30,     For the Six Months Ended June 30,  
   

2019

   

2018

   

2019

   

2018

 

Net income

  $ 5,182     $ 5,575     $ 10,837     $ 856  

Other comprehensive income:

                               

Foreign currency translation adjustment

    2,011       4,871       498       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 loss

                       

Comprehensive income attributable to noncontrolling interests

    7,193       10,446       11,335       3,382  

Comprehensive loss attributable to noncontrolling interests

    62       55       120       104  

Comprehensive income attributable to controlling interests

  $ 7,255     $ 10,501     $ 11,455     $ 3,486  


See accompanying notes.

 

3

Table of Contents

 

 

Atlanticus Holdings Corporation and Subsidiaries

Consolidated Statement of Shareholders’ Deficit (Unaudited)

(Dollars in thousands)

 

   

Common Stock

                                         
   

Shares Issued

   

Amount

   

Paid-In Capital

   

Accumulated Other Comprehensive Income

   

Retained Deficit

   

Noncontrolling Interests

    Total Deficit  
                                                         

Balance at December 31, 2018

    15,563,574     $     $ 213,435     $ 3,558     $ (238,784 )   $ (338 )   $ (22,129 )

Cumulative effects from adoption of new lease standard (Note 2)

                            555             555  

Stock option exercises and proceeds related thereto

    419,500             1,065                         1,065  

Deferred stock-based compensation costs

                412                         412  

Redemption and retirement of shares

    (5,944 )           (21 )                       (21 )

Comprehensive income

                      (1,513 )     5,713       (58 )     4,142  
Balance at March 31, 2019     15,977,130     $     $ 214,891     $ 2,045     $ (232,516 )   $ (396 )   $ (15,976 )
Stock option exercises and proceeds related thereto     6,000             18                         18  
Compensatory stock issuances, net of forfeitures     205,000                                      
Deferred stock-based compensation costs                 440                         440  
Redemption and retirement of shares     (64,845 )           (238 )                       (238 )
Comprehensive income                       2,011       5,244       (62 )     7,193  

Balance at June 30, 2019

    16,123,285     $     $ 215,111     $ 4,056     $ (227,272 )   $ (458 )   $ (8,563 )


 

   

Common Stock

                                         
   

Shares Issued

   

Amount

   

Paid-In Capital

   

Accumulated Other Comprehensive Income (Loss)

   

Retained Deficit

   

Noncontrolling Interests

   

Total Deficit

 
                                                         

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                                      

Deferred stock-based compensation costs

                254                         254  

Redemption and retirement of shares

    (7,006 )           (14 )                       (14 )

Comprehensive income

                      (2,345 )     (4,670 )     (49 )     (7,064 )

Balance at March 31, 2018

    15,353,878     $     $ 213,025     $ (4,523 )   $ (251,310 )   $ (143 )   $ (42,951 )

Deferred stock-based compensation costs

                203                         203  

Redemption and retirement of shares

    (12,453 )           (27 )                       (27 )

Comprehensive income

                      4,871       5,630       (55 )     10,446  

Balance at June 30, 2018

    15,341,425     $     $ 213,201     $ 348     $ (245,680 )   $ (198 )   $ (32,329 )

 

See accompanying notes.

 

 

4

Table of Contents

 

 

Atlanticus Holdings Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

    For the Six Months Ended June 30,  
   

2019

   

2018

 

Operating activities

               

Net income

  $ 10,837     $ 856  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation, amortization and accretion, net

    3,775       464  

Losses upon impairment of loans, interest and fees receivable recorded at fair value

    525       439  

Provision for losses on loans, interest and fees receivable

    83,012       32,467  

Interest expense from accretion of discount on notes

    470       437  

Income from accretion of discount associated with receivables purchases

    (48,316 )     (36,681 )

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

    (1,697 )     (2,938 )

Amortization of deferred loan costs

    1,417       709  

Income from equity-method investments

    (452 )     (540 )

Deferred stock-based compensation costs

    440       457  

Lease liability payments

    (4,999 )     (4,966 )

Changes in assets and liabilities:

               

Decrease (increase) in uncollected fees on earning assets

    1,171       (2,965 )

Increase (decrease) in income tax liability

    2,252       (4,678 )

Decrease (increase) in deposits

    20       (32 )

(Decrease) increase in accounts payable and accrued expenses

    (6,462 )     597  

Other

    (2,264 )     27,027  

Net cash provided by operating activities

    39,729       10,653  

Investing activities

               

Proceeds from equity-method investees

    875       1,337  

Investments in earning assets

    (433,277 )     (279,391 )

Proceeds from earning assets

    290,936       233,681  

Purchases and development of property, net of disposals

    (94 )     (143 )

Net cash used in investing activities

    (141,560 )     (44,516 )

Financing activities

               

Proceeds from exercise of stock options

    1,083        

Purchase and retirement of outstanding stock

    (259 )     (41 )

Proceeds from borrowings

    349,701       243,316  

Repayment of borrowings

    (245,043 )     (201,939 )

Net cash provided by financing activities

    105,482       41,336  

Effect of exchange rate changes on cash

    (311 )     342  

Net increase in cash and cash equivalents

    3,340       7,815  

Cash and cash equivalents and restricted cash at beginning of period

    141,754       70,658  

Cash and cash equivalents and restricted cash at end of period

  $ 145,094     $ 78,473  

Supplemental cash flow information

               

Cash paid for interest

  $ 20,890     $ 15,706  

Net cash income tax payments (refunds)

  $ 236     $ (176 )

 

See accompanying notes.
 
5

Table of Contents

 

 

Atlanticus Holdings Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2019 and 2018

 

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. From time to time, we also purchase receivables portfolios from third parties.  References to "receivables" include receivables purchased from our lending partners and from third parties. 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, digital marketing 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 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, digital marketing 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 legacy credit card receivables. One of our portfolios of legacy 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.

 

6

 

 

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, interest and fees receivable, net, as shown on our consolidated balance sheets, as well as on the provision for losses on loans, interest and fees receivable within our consolidated statements of operations.

 

We have eliminated all significant intercompany balances and transactions for financial reporting purposes.

 

Loans, Interest and Fees Receivable

 

Our loans, interest and fees receivable include loans, interest and fees receivable, at fair value and loans, interest and fees receivable, gross.  Some of these receivables are held by entities which qualify as variable interest entities ("VIE"), that are consolidated onto our consolidated balance sheet.

 

As of June 30, 2019 and December 31, 2018, the weighted average remaining accretion period for the $65.7 million and $43.9 million of deferred revenue reflected in the consolidated balance sheets was 11 months. Included within deferred revenue, are discounts on purchased loans of $36.6 million and $30.0 million as of June 30, 2019 and December 31, 2018, respectively.

 

A roll-forward (in millions) of our allowance for uncollectible loans, interest and fees receivable by class of receivable is as follows: 

 

For the three months ended June 30, 2019

 

Credit Cards

   

Auto Finance

   

Other Unsecured

Lending Products

   

Total

 

Allowance for uncollectible loans, interest and fees receivable:

                               

Balance at beginning of period

  $ (43.1 )   $ (1.6 )   $ (40.6 )   $ (85.3 )

Provision for loan losses

    (28.9 )     (1.1 )     (18.4 )     (48.4 )

Charge offs

    17.1       1.5       17.1       35.7  

Recoveries

    (0.4 )     (0.4 )     (1.4 )     (2.2 )

Balance at end of period

  $ (55.3 )   $ (1.6 )   $ (43.3 )   $ (100.2 )

 

For the six months ended June 30, 2019

 

Credit Cards

   

Auto Finance

   

Other Unsecured Lending Products

   

Total

 

Allowance for uncollectible loans, interest and fees receivable:

                               

Balance at beginning of period

  $ (35.4 )   $ (1.3 )   $ (42.5 )   $ (79.2 )

Provision for loan losses

    (48.6 )     (2.0 )     (32.4 )     (83.0 )

Charge offs

    29.4       2.4       34.2       66.0  

Recoveries

    (0.7 )     (0.7 )     (2.6 )     (4.0 )

Balance at end of period

  $ (55.3 )   $ (1.6 )   $ (43.3 )   $ (100.2 )

 

As of June 30, 2019

 

Credit Cards

   

Auto Finance

   

Other Unsecured Lending Products

   

Total

 

Allowance for uncollectible loans, interest and fees receivable:

                               

Balance at end of period individually evaluated for impairment

  $     $ (0.3 )   $ (0.1 )   $ (0.4 )

Balance at end of period collectively evaluated for impairment

  $ (55.3 )   $ (1.3 )   $ (43.2 )   $ (99.8 )

Loans, interest and fees receivable:

                               

Loans, interest and fees receivable, gross

  $ 290.5     $ 89.5     $ 311.8     $ 691.8  

Loans, interest and fees receivable individually evaluated for impairment

  $     $ 0.6     $ 0.1     $ 0.7  

Loans, interest and fees receivable collectively evaluated for impairment

  $ 290.5     $ 88.9     $ 311.7     $ 691.1  

 

For the three months ended June 30, 2018

 

Credit Cards

   

Auto Finance

   

Other Unsecured Lending Products

   

Total

 

Allowance for uncollectible loans, interest 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 )

 

7

 

 

For the six months ended June 30, 2018

 

Credit Cards

   

Auto Finance

   

Other Unsecured Lending Products

   

Total

 

Allowance for uncollectible loans, interest 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 )

As of December 31, 2018

 

Credit Cards

   

Auto Finance

   

Other Unsecured Lending Products

   

Total

 

Allowance for uncollectible loans, interest and fees receivable:

                               

Balance at end of period individually evaluated for impairment

  $     $ (0.2 )   $ (0.1 )   $ (0.3 )

Balance at end of period collectively evaluated for impairment

  $ (35.4 )   $ (1.1 )   $ (42.4 )   $ (78.9 )

Loans, interest and fees receivable:

                               

Loans, interest and fees receivable, gross

  $ 188.6     $ 88.1     $ 264.6     $ 541.3  

Loans, interest and fees receivable individually evaluated for impairment

  $     $ 0.4     $ 0.1     $ 0.5  

Loans, interest and fees receivable collectively evaluated for impairment

  $ 188.6     $ 87.7     $ 264.5     $ 540.8  

 

An aging of our delinquent loans, interest and fees receivable, gross (in millions) by class of receivable as of June 30, 2019 and December 31, 2018 is as follows:

 

As of June 30, 2019

 

Credit Cards

   

Auto Finance

   

Other Unsecured Lending Products

   

Total

 

30-59 days past due

  $ 10.3     $ 7.1     $ 9.8     $ 27.2  

60-89 days past due

    7.4       2.5       7.1       17.0  

90 or more days past due

    19.6       2.3       15.5       37.4  

Delinquent loans, interest and fees receivable, gross

    37.3       11.9       32.4       81.6  

Current loans, interest and fees receivable, gross

    253.2       77.6       279.4       610.2  

Total loans, interest and fees receivable, gross

  $ 290.5     $ 89.5     $ 311.8     $ 691.8  
Balance of loans greater than 90-days delinquent still accruing interest and fees   $     $ 1.6     $     $ 1.6  

 

As of December 31, 2018

 

Credit Cards

   

Auto Finance

   

Other Unsecured Lending Products

   

Total

 

30-59 days past due

  $ 7.1     $ 7.9     $ 9.7     $ 24.7  

60-89 days past due

    5.3       2.8       7.6       15.7  

90 or more days past due

    12.3       2.2       18.5       33.0  

Delinquent loans, interest and fees receivable, gross

    24.7       12.9       35.8       73.4  

Current loans, interest and fees receivable, gross

    163.9       75.2       228.8       467.9  

Total loans, interest and fees receivable, gross

  $ 188.6     $ 88.1     $ 264.6     $ 541.3  

Balance of loans greater than 90-days delinquent still accruing interest and fees

  $     $ 1.5     $     $ 1.5  

 

8

 

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 use of programs under which the contractual interest associated with a receivable may be reduced or eliminated, or a certain amount of accrued fees is waived, provided a minimum number or amount of payments have been made. 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”).

 

The following table details by class of receivable, the number and amount of loans that qualify as TDRs, as of June 30, 2019 and December 31, 2018:

 

   

As of

 
   

June 30, 2019

   

December 31, 2018

 
   

Point-of-sale

   

Direct-to-consumer

   

Point-of-sale

   

Direct-to-consumer

 

Number of TDRs

    9,334       8,188       8,722       3,003  

Number of TDRs that have been re-aged

    2,795       1,878       2,414       236  

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

  $ 12,662     $ 7,719     $ 12,178     $ 3,193  

Amount of TDRs on non-accrual status above that have been re-aged (in thousands)

  $ 5,026     $ 2,046     $ 3,876     $ 262  

Carrying value of TDRs (in thousands)

  $ 8,606     $ 4,836     $ 7,535     $ 1,524  

TDRs - Performing (carrying value, in thousands)*

  $ 6,571     $ 4,047     $ 5,788     $ 1,208  

TDRs - Nonperforming (carrying value, in thousands)*

  $ 2,035     $ 789     $ 1,747     $ 316  


*“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 Company modified 22,408 and 17,704 accounts in the amount of $33.5 million and $28.3 million during the twelve month periods ended June 30, 2019 and June 30, 2018, respectively, that qualified as TDRs. The following table details by class of receivable, the number of accounts and balance of TDRs that completed a modification within the prior twelve months and subsequently defaulted.

 

   

Twelve Months Ended

 
   

June 30, 2019

   

June 30, 2018

 
   

Point-of-sale

   

Direct-to-consumer

   

Point-of-sale

   

Direct-to-consumer

 

Number of accounts

    2,539       2,347       2,987       1,606  

Loan balance at time of charge off (in thousands)

  $ 3,964     $ 2,561     $ 4,711     $ 2,326  


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) ongoing deferred costs associated with service contracts and (3) 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 payable in respect of one of our portfolios.

 

9

 

Income Taxes

 

We experienced an effective income tax expense rate of 30.3% and 18.7% for the three and six months ended June 30, 2019; this is compared to 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. Our effective income tax expense rate for the three months ended June 30, 2019, is above the statutory rate principally due to (1) interest accruals on unpaid federal tax liabilities and uncertain tax positions and (2) state and foreign income tax accruals.  Our effective income tax expense rate for the six months ended June 30, 2019, is  below the statutory rate principally due to reductions in our valuation allowances against net federal deferred tax assets during such period—the effect of such reductions being partially offset by interest accruals on unpaid federal tax liabilities and uncertain tax positions and state and foreign income tax accruals during such period.

 

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, differed significantly from the statutory rate principally due to 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.

 

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 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, 2019, we included $0.2 million and $0.3 million, respectively, of net income tax-related interest and penalties within those periods’ respective income tax expense line items.

 

In December 2014, we reached a settlement with the IRS concerning the tax treatment of net operating losses we incurred in 2007 and 2008 and carried back to obtain refunds of federal income taxes paid in earlier years dating back to 2003. In 2015, we filed an amended return claim 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; during the three months ended September 30, 2018, the IRS refunded $0.5 million of the $5.4 million payment. 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 paid another $0.2 million against accrued interest liabilities in March 2019, and we are continuing to pursue complete abatement of failure-to-pay penalties of $0.9 million. Once this matter is resolved and we pay any residual interest liability, we expect the IRS to remove the aforementioned lien in due course

 

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, which are recognized in accordance with the terms of the related customer agreements. Premiums and discounts paid or received associated with an installment or auto 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, interest and fees receivable and revenue when the fees are earned based upon the contractual terms of the loans.

 

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 legacy credit card receivables; (2) changes in the fair value of loans, interest and fees receivable recorded at fair value; (3) changes in fair value of notes payable associated with structured financings recorded at fair value; and (4) 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 which is generally 12 months. 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, interest and fees receivable and revenue when the fees are earned based upon the contractual terms of the loans.

 

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

 

   

For the three months ended June 30,

   

For the six months ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Fees on credit products

  $ 14,308     $ 5,498     $ 24,604     $ 10,403  

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

    371       513       370       495  

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

    452       1,112       1,327       2,443  

Other

    6       (29 )     100       (33 )

Total fees and related income on earning assets

  $ 15,137     $ 7,094     $ 26,401     $ 13,308  

 

The above changes in the fair value of loans, interest 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, interest 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.

 

Other Income

 

Included in Other income for the three and six months ended June 30, 2019, is $26.0 million and $41.4 million, respectively, associated with reductions in accruals related to one of our portfolios.  The accrual is based upon our estimate of the amount that may be claimed by customers and is based upon several factors including customer claims volume, average claim amount and a determination of the amount, if any, which may be offered to resolve such claims.  The assumptions used in the accrual estimate are subjective, mainly due to uncertainty associated with future claims volumes and the resolution costs, if any, per claim.  As of June 30, 2019, we had approximately $64 million accrued related to this liability within accounts payable and accrued expenses on the consolidated balance sheets, including the reclassification in the first quarter of 2019 of approximately $26 million from unrestricted cash and cash equivalents on our consolidated balance sheets. Also included in other income, are revenues associated with ancillary product offerings and interchange revenues. We recognize these fees as income in the period earned. 

 

10

 

Revenue from Contracts with Customers

 

The majority of our revenue is earned from financial instruments and is not included within the scope of ASU No. 2014-09, "Revenue from Contracts with Customers". 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. Servicing revenue is generated by meeting contractual performance obligations related to the collection of amounts due on receivables, and is settled with the customer net of our fee. Revenue from these contracts with customers is included as a component of Other income on our consolidated statements of operations. Service charges and other customer related fees are earned from customers based on the occurrence of specific services that do not result in an ongoing obligation beyond what has already been rendered.  Components (in thousands) of our revenue from contracts with customers is as follows:

 

 

   

Credit and

                 

For the three months ended June 30, 2019

 

Other Investments

   

Auto Finance

   

Total

 

Interchange revenues, net (1)

  $ 1,912     $     $ 1,912  

Servicing income

    135       240       375  

Service charges and other customer related fees

    679       16       695  

Total revenue from contracts with customers

  $ 2,726     $ 256     $ 2,982  


(1) Interchange revenue is presented net of customer reward expense.

   

Credit and

                 

For the six months ended June 30, 2019

 

Other Investments

   

Auto Finance

   

Total

 

Interchange revenues, net (1)

  $ 2,840     $     $ 2,840  

Servicing income

    554       507       1,061  

Service charges and other customer related fees

    1,108       33       1,141  

Total revenue from contracts with customers

  $ 4,502     $ 540     $ 5,042  


(1) Interchange revenue is presented net of customer reward expense.

   

Credit and

                 

For the three months ended June 30, 2018

 

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 revenue from contracts with customers

  $ 1,122     $ 281     $ 1,403  


(1) Interchange revenue is presented net of customer reward expense.

   

Credit and

                 

For the six months ended June 30, 2018

 

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 revenue from contracts with customers

  $ 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. In May 2019 the FASB issued ASU 2019-05 which allows entities to measure assets in the scope of ASC 326-20, except held to maturity securities, using the fair value option when they adopt the new credit impairment standard. The election can be made on an instrument by instrument basis.  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 (and ASU 2019-05) is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The FASB recently proposed an extension to the effective date for smaller reporting companies (among others) that would make the new standard effective for annual and interim periods beginning after December 15, 2022, with early adoption permitted. We are currently in the process of reviewing accounting interpretations, including the recently added fair value option, 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 (unless the fair value option is elected) given the change to expected losses for the estimated life of the financial asset. If the fair value option is elected for some or all of our eligible receivables, we would expect an increase in the recorded value of the assets but more potential volatility as these receivables are remeasured each period.  The extent of the financial statement impact 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, along with subsequent guidance, which requires lessees to recognize assets and liabilities for most leases and changes certain aspects of current lessor accounting, among other things. We adopted these standards using a modified retrospective transition approach for leases existing at, or entered into after, January 1, 2019 and did not restate the comparative periods presented in the Consolidated Financial Statements upon adoption.

 

ASU 2016-02 provides a number of optional practical expedients and policy elections in transition. We elected the ‘package of practical expedients’ under which we did not reassess prior conclusions about lease identification, lease classification and initial direct costs. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements, the latter not being applicable to us. We also elected the short-term lease recognition exemption for all leases that qualify, meaning we did not recognize right-of-use assets or lease liabilities for these short term leases. 

 

Upon adoption, we recognized additional lease liabilities of $30.2 million and a corresponding right-of-use asset of $18.6 million with a $0.6 million cumulative effect on our opening retained deficit. The impact of our status as a lessor in the sublease arrangements we maintain did not result in a material change upon adoption.  See Note 7, "Leases" for additional disclosure.

        

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. This includes most of the revenue of the Company.  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, 2019, 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.

 

11

 

 

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, 2019 and December 31, 2018, 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, 2019 and 2018 were generated outside of the U.S.

 

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

 

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

 

Three months ended June 30, 2019

 

Credit and Other Investments

   

Auto Finance

   

Total

 

Interest income:

                       

Consumer loans, including past due fees

  $ 47,168     $ 7,923     $ 55,091  

Other

    109             109  

Total interest income

    47,277       7,923       55,200  

Interest expense

    (11,583 )     (431 )     (12,014 )

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

  $ 35,694     $ 7,492     $ 43,186  

Fees and related income on earning assets

  $ 15,053     $ 84     $ 15,137  

Servicing income

  $ 135     $ 240     $ 375  

Equity in loss of equity-method investees

  $ 225     $     $ 225  

Income before income taxes

  $ 5,958     $ 1,474     $ 7,432  

Income tax benefit (expense)

  $ (1,914 )   $ (336 )   $ (2,250 )

 

Six months ended June 30, 2019

  Credit and Other Investments    

Auto Finance

   

Total

 

Interest income:

                       

Consumer loans, including past due fees

  $ 89,840     $ 15,641     $ 105,481  

Other

    178             178  

Total interest income

    90,018       15,641       105,659  

Interest expense

    (22,352 )     (808 )     (23,160 )

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

  $ 67,666     $ 14,833     $ 82,499  

Fees and related income on earning assets

  $ 26,289     $ 112     $ 26,401  

Servicing income

  $ 554     $ 507     $ 1,061  

Equity in income of equity-method investees

  $ 452     $     $ 452  

Income before income taxes

  $ 10,165     $ 3,160     $ 13,325  

Income tax benefit (expense)

  $ (1,675 )   $ (813 )   $ (2,488 )

Total assets

  $ 630,985     $ 79,373     $ 710,358  

 

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, interest 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 investees

  $ 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, interest 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 investees

  $ 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  

 

12

 

 

4.

Shareholders’ Equity

 

During the three and six months ended June 30, 2019, we repurchased and contemporaneously retired 64,845 and 70,789 shares of our common stock at an aggregate cost of $238,000 and $259,000, respectively, pursuant to both open market purchases and the return of stock by holders of equity incentive awards to pay tax withholding obligations. 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 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 June 30, 2019 and December 31, 2018, 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, 2019 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

 
   

June 30, 2019

   

December 31, 2018

 

Loans, interest and fees receivables, at fair value

  $ 2,962     $ 3,546  

Total assets

  $ 3,095     $ 3,732  

Total liabilities

  $ 15     $ 18  

Members’ capital

  $ 3,080     $ 3,714  

 

   

Three months ended June 30,

   

Six months ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Net interest income, fees and related income on earning assets

  $ 338     $ 798     $ 680     $ 812  

Net income

  $ 290     $ 730     $ 579     $ 669  

Net income attributable to our equity investment investee

  $ 225     $ 531     $ 452     $ 540  

13

 

 

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, 2019 and December 31, 2018 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, 2019 (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, interest and fees receivable, net for which it is practicable to estimate fair value

  $     $     $ 581,899     $ 525,957  

Loans, interest and fees receivable, at fair value

  $     $     $ 4,904     $ 4,904  

 

Assets – As of December 31, 2018 (1)

 

Quoted Prices in Active Markets for Identical Assets (Level 1)

   

Significant Other Observable Inputs (Level 2)

   

Significant Unobservable Inputs (Level 3)

   

Carrying Amount of Assets

 

Loans, interest and fees receivable, net for which it is practicable to estimate fair value

  $     $     $ 470,496     $ 418,236  

Loans, interest and fees receivable, at fair value

  $     $     $ 6,306     $ 6,306  

 

 

(1)

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

 

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

 

For Level 3 assets carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) a reconciliation of the beginning and ending balances for the six months ended June 30, 2019 and 2018:

 

   

Loans, Interest and Fees Receivables, at Fair Value

 
   

2019

   

2018

 

Balance at January 1,

  $ 6,306     $ 11,109  

Total gains—realized/unrealized:

               

Net revaluations of loans, interest and fees receivable, at fair value

    370       495  

Settlements

    (1,772 )     (3,309 )

Impact of foreign currency translation

          (9 )

Balance at June 30,

  $ 4,904     $ 8,286  

 

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. 

 

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Net Revaluation of Loans, Interest and Fees Receivable. We record the net revaluation of loans, interest 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, interest and fees receivable recorded at fair value. The net revaluation of loans, interest 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, 2019 and December 31, 2018:

 

Quantitative Information about Level 3 Fair Value Measurements

 

Fair Value Measurements

 

Fair Value at

June 30, 2019

(in thousands)

 

Valuation Technique

 

Unobservable Input

 

Range (Weighted Average)

 

Loans, interest and fees receivable, at fair value

  $ 4,904  

Discounted cash flows

 

Gross yield

  26.5% to 37.6% (27.9%)  
             

Principal payment rate

  2.2% to 3.6% (2.4%)  
             

Expected credit loss rate

  13.1% to 13.7% (13.2%)  
             

Servicing rate

  16.2% to 22.2% (16.9%)  
             

Discount rate

  14.8% to 14.8% (14.8%)  

 

Quantitative Information about Level 3 Fair Value Measurements

 

Fair Value Measurements

 

Fair Value at

December 31, 2018

(in thousands)

 

Valuation Technique

 

Unobservable Input

 

Range (Weighted Average)

 

Loans, interest and fees receivable, at fair value

  $ 6,306  

Discounted cash flows

 

Gross yield

  25.8% to 30.8% (26.4%)  
             

Principal payment rate

  2.2% to 3.0% (2.3%)  
             

Expected credit loss rate

  8.7% to 11.3% (9.0%)  
             

Servicing rate

  14.9% to 19.5% (15.5%)  
             

Discount rate

  14.9% to 14.9% (14.9%)  

 

15

 

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, 2019 and December 31, 2018 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, 2019

 

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

  $     $     $ 495,906     $ 495,906  

Amortizing debt facilities

  $     $     $ 1,220     $ 1,220  

Notes payable to related parties

  $     $     $ 40,000     $ 40,000  

Convertible senior notes

  $     $ 47,230     $     $ 62,487  

Liabilities carried at fair value

                               

Notes payable associated with structured financings, at fair value

  $     $     $ 4,324     $ 4,324  

 

Liabilities – As of December 31, 2018

 

Quoted Prices in Active Markets for Identical Assets (Level 1)

   

Significant Other Observable Inputs (Level 2)

   

Significant Unobservable Inputs (Level 3)

   

Carrying Amount of Liabilities

 

Liabilities not carried at fair value

                               

Revolving credit facilities

  $     $     $ 389,707     $ 389,707  

Amortizing debt facilities

  $     $     $ 1,220     $ 1,220  

Notes payable to related parties

  $     $     $ 40,000     $ 40,000  

Convertible senior notes

  $     $ 47,230     $     $ 62,142  

Liabilities carried at fair value

                               

Notes payable associated with structured financings, at fair value

  $     $     $ 5,651     $ 5,651  

 

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, 2019 and 2018.

 

   

Notes Payable Associated with

Structured Financings, at Fair Value

 
   

2019

   

2018

 

Balance at January 1,

  $ 5,651     $ 9,240  

Total (gains) losses—realized/unrealized:

               

Net revaluations of notes payable associated with structured financings, at fair value

    (1,327 )     (2,443 )

Repayments on outstanding notes payable, net

           

Balance at June 30,

  $ 4,324     $ 6,797  

 

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.

 

16

 

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 legal entity associated with the securitization transaction is consolidated as a VIE as the Company is deemed the primary beneficiary of the entity.  The Company is not liable for the full face value of the liability in the VIE so it is carried at fair value based upon amounts the borrower will receive from the legal entity. 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, 2019 and December 31, 2018:

 

Quantitative information about Level 3 Fair Value Measurements

 

Fair Value Measurements

 

Fair Value at

June 30, 2019

(in thousands)

   

Valuation Technique

 

Unobservable Input

 

Weighted Average

 

Notes payable associated with structured financings, at fair value

  $ 4,324    

Discounted cash flows

 

Gross yield

    26.5 %
               

Principal payment rate

    2.2 %
               

Expected credit loss rate

    13.1 %
               

Discount rate

    14.8 %

 

Quantitative Information about Level 3 Fair Value Measurements

 

Fair Value Measurements

 

Fair Value at

December 31, 2018

(in thousands)

   

Valuation Technique

 

Unobservable Input

 

Weighted Average

 

Notes payable associated with structured financings, at fair value

  $ 5,651    

Discounted cash flows

 

Gross yield

    25.8 %
               

Principal payment rate

    2.2 %
               

Expected credit loss rate

    8.7 %
               

Discount rate

    14.9 %

 

17

 

Other Relevant Data

 

Other relevant data (in thousands) as of June 30, 2019 and December 31, 2018 concerning certain assets and liabilities we carry at fair value are as follows:

 

As of June 30, 2019

 

Loans, Interest and Fees Receivable at Fair Value

   

Loans, Interest and Fees Receivable Pledged as Collateral under Structured Financings at Fair Value

 

Aggregate unpaid principal balance within loans, interest and fees receivable that are reported at fair value

  $ 877     $ 6,353  

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

  $ 580     $ 4,324  

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  

Unpaid principal balance of receivables within loans, interest 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, interest and fees receivable

  $ 24     $ 150  

 

As of December 31, 2018

 

Loans, Interest and Fees Receivable at Fair Value

   

Loans, Interest and Fees Receivable Pledged as Collateral under Structured Financings at Fair Value

 

Aggregate unpaid principal balance within loans, interest and fees receivable that are reported at fair value

  $ 1,160     $ 7,708  

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

  $ 655     $ 5,651  

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     $ 7  

Unpaid principal balance of receivables within loans, interest 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, interest and fees receivable

  $ 35     $ 224  

 

Notes Payable

 

Notes Payable Associated with Structured Financings, at Fair Value as of June 30, 2019

   

Notes Payable Associated with Structured Financings, at Fair Value as of December 31, 2018

 

Aggregate unpaid principal balance of notes payable

  $ 101,314     $ 101,314  

Aggregate fair value of notes payable

  $ 4,324     $ 5,651  

 

18

 

 

7.

Leases

 

We have operating leases primarily associated with our corporate offices and regional service centers as well as for certain equipment.  Our leases have remaining lease terms of 1 to 5 years, some of which include options, at our discretion, to extend the leases for additional periods generally on one-year revolving periods.  Other leases allow for us to terminate the lease based on appropriate notification periods. For certain of our leased offices, we sublease a portion of the unoccupied space.  The terms of the sublease arrangement generally coincide with the underlying lease. The components of lease expense associated with our lease liabilities and supplemental cash flow information related to those leases were as follows:

 

   

For the three months ended June 30,

   

For the six months ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Operating lease cost, gross

  $ 1,727     $ 1,688     $ 3,436     $ 3,3