SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended
March 31, 2019of
September 30, 2017
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 (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)(2) has been subject to such filing requirements for the past 90 days.
Atlanticus has submitted electronically and posted on its corporate Web site every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.
Atlanticus is a smaller reporting company and is not a shell company or an emerging growth company.
As of
Page | |||||||
PART I. FINANCIAL INFORMATION | |||||||
Item 1. | |||||||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 24 | |||||
Item 3. | 41 | ||||||
Item 4. | 41 | ||||||
Part II. OTHER INFORMATION | |||||||
Item 1. | 42 | ||||||
Item 1A. | 42 | ||||||
Item 2. | 50 | ||||||
Item 3. | |||||||
Item 4. | |||||||
Item 5. | |||||||
Item 6. | |||||||
ITEM 1. | FINANCIAL STATEMENTS |
Atlanticus Holdings Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands)
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Assets | ||||||||
Unrestricted cash and cash equivalents (including $41.1 million and $16.8 million associated with variable interest entities at March 31, 2019 and December 31, 2018, respectively) | $ | 101,049 | $ | 60,968 | ||||
Restricted cash and cash equivalents (including $45.7 million and $61.0 million associated with variable interest entities at March 31, 2019 and December 31, 2018, respectively) | 65,184 | 80,786 | ||||||
Loans, interest and fees receivable: | ||||||||
Loans, interest and fees receivable, at fair value (including $4.8 million and $5.7 million associated with variable interest entities at March 31, 2019 and December 31, 2018, respectively | 5,394 | 6,306 | ||||||
Loans, interest and fees receivable, gross (including $453.1 million and $403.4 million associated with variable interest entities at March 31, 2019 and December 31, 2018, respectively) | 562,472 | 541,344 | ||||||
Allowances for uncollectible loans, interest and fees receivable (including $76.5 million and $57.4 million associated with variable interest entities at March 31, 2019 and December 31, 2018, respectively) | (85,319 | ) | (79,211 | ) | ||||
Deferred revenue (including $16.9 million and $13.2 million associated with variable interest entities at March 31, 2019 and December 31, 2018, respectively) | (47,251 | ) | (43,897 | ) | ||||
Net loans, interest and fees receivable | 435,296 | 424,542 | ||||||
Property at cost, net of depreciation | 3,385 | 3,625 | ||||||
Investments in equity-method investees | 2,260 | 2,476 | ||||||
Deposits | 125 | 124 | ||||||
Operating lease right-of-use assets | 17,013 | — | ||||||
Prepaid expenses and other assets | 11,922 | 10,087 | ||||||
Total assets | $ | 636,234 | $ | 582,608 | ||||
Liabilities | ||||||||
Accounts payable and accrued expenses | $ | 108,837 | $ | 105,765 | ||||
Operating lease liabilities | 27,742 | — | ||||||
Notes payable, at face value (including $382.4 million and $366.7 million associated with variable interest entities at March 31, 2019 and December 31, 2018, respectively) | 408,242 | 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) | 4,776 | 5,651 | ||||||
Convertible senior notes | 62,313 | 62,142 | ||||||
Income tax liability | 300 | 252 | ||||||
Total liabilities | 652,210 | 604,737 | ||||||
Commitments and contingencies (Note 10) | ||||||||
Equity | ||||||||
Common stock, no par value, 150,000,000 shares authorized: 15,977,130 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at March 31, 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 | 214,891 | 213,435 | ||||||
Accumulated other comprehensive income | 2,045 | 3,558 | ||||||
Retained deficit | (232,516 | ) | (238,784 | ) | ||||
Total shareholders’ deficit | (15,580 | ) | (21,791 | ) | ||||
Noncontrolling interests | (396 | ) | (338 | ) | ||||
Total deficit | (15,976 | ) | (22,129 | ) | ||||
Total liabilities and deficit | $ | 636,234 | $ | 582,608 |
September 30, 2017 | December 31, 2016 | ||||||
Assets | |||||||
Unrestricted cash and cash equivalents | $ | 68,582 | $ | 76,052 | |||
Restricted cash and cash equivalents | 28,659 | 16,589 | |||||
Loans and fees receivable: | |||||||
Loans and fees receivable, at fair value | 12,019 | 15,648 | |||||
Loans and fees receivable, gross | 359,823 | 290,697 | |||||
Allowances for uncollectible loans and fees receivable | (52,118 | ) | (43,275 | ) | |||
Deferred revenue | (35,881 | ) | (23,639 | ) | |||
Net loans and fees receivable | 283,843 | 239,431 | |||||
Rental merchandise, net of depreciation | — | 27 | |||||
Property at cost, net of depreciation | 3,296 | 3,829 | |||||
Investment in equity-method investee | 4,745 | 6,725 | |||||
Deposits | 306 | 505 | |||||
Prepaid expenses and other assets | 39,636 | 19,389 | |||||
Total assets | $ | 429,067 | $ | 362,547 | |||
Liabilities | |||||||
Accounts payable and accrued expenses | $ | 114,883 | $ | 86,768 | |||
Notes payable, at face value, net | 208,980 | 141,166 | |||||
Notes payable to related parties | 40,000 | 40,000 | |||||
Notes payable associated with structured financings, at fair value | 9,769 | 12,276 | |||||
Convertible senior notes | 61,238 | 60,791 | |||||
Income tax liability | 11,059 | 15,769 | |||||
Total liabilities | 445,929 | 356,770 | |||||
Commitments and contingencies (Note 9) | |||||||
Equity | |||||||
Common stock, no par value, 150,000,000 shares authorized: 15,335,468 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at September 30, 2017; and 15,348,086 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at December 31, 2016 | — | — | |||||
Additional paid-in capital | 212,618 | 211,646 | |||||
Accumulated other comprehensive loss | (1,096 | ) | — | ||||
Retained deficit | (228,382 | ) | (205,859 | ) | |||
Total shareholders’ equity | (16,860 | ) | 5,787 | ||||
Noncontrolling interests | (2 | ) | (10 | ) | |||
Total equity | (16,862 | ) | 5,777 | ||||
Total liabilities and equity | $ | 429,067 | $ | 362,547 |
Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share data)
For the Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Interest income: | ||||||||
Consumer loans, including past due fees | $ | 50,390 | $ | 35,681 | ||||
Other | 69 | 45 | ||||||
Total interest income | 50,459 | 35,726 | ||||||
Interest expense | (11,146 | ) | (8,153 | ) | ||||
Net interest income before fees and related income on earning assets and provision for losses on loans, interest and fees receivable | 39,313 | 27,573 | ||||||
Fees and related income on earning assets | 11,264 | 6,214 | ||||||
Net losses upon impairment of loans, interest and fees receivable recorded at fair value | (254 | ) | (1,791 | ) | ||||
Provision for losses on loans, interest and fees receivable recorded at net realizable value | (34,598 | ) | (15,991 | ) | ||||
Net interest income, fees and related income on earning assets | 15,725 | 16,005 | ||||||
Other operating income: | ||||||||
Servicing income | 686 | 632 | ||||||
Other income | 16,844 | 516 | ||||||
Equity in income of equity-method investees | 227 | 9 | ||||||
Total other operating income | 17,757 | 1,157 | ||||||
Other operating expense: | ||||||||
Salaries and benefits | 6,591 | 6,298 | ||||||
Card and loan servicing | 10,444 | 9,164 | ||||||
Marketing and solicitation | 6,387 | 2,346 | ||||||
Depreciation | 289 | 229 | ||||||
Other | 3,878 | 3,700 | ||||||
Total other operating expense | 27,589 | 21,737 | ||||||
Income (loss) before income taxes | 5,893 | (4,575 | ) | |||||
Income tax expense | (238 | ) | (144 | ) | ||||
Net income (loss) | 5,655 | (4,719 | ) | |||||
Net loss attributable to noncontrolling interests | 58 | 49 | ||||||
Net income (loss) attributable to controlling interests | $ | 5,713 | $ | (4,670 | ) | |||
Net income (loss) attributable to controlling interests per common share—basic | $ | 0.40 | $ | (0.34 | ) | |||
Net income (loss) attributable to controlling interests per common share—diluted | $ | 0.39 | $ | (0.34 | ) |
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Interest income: | |||||||||||||||
Consumer loans, including past due fees | $ | 28,985 | $ | 24,053 | $ | 81,457 | $ | 63,663 | |||||||
Other | 34 | 36 | 178 | 188 | |||||||||||
Total interest income | 29,019 | 24,089 | 81,635 | 63,851 | |||||||||||
Interest expense | (7,268 | ) | (5,257 | ) | (19,504 | ) | (14,693 | ) | |||||||
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable | 21,751 | 18,832 | 62,131 | 49,158 | |||||||||||
Fees and related income on earning assets | 4,166 | 75 | 10,938 | 13,840 | |||||||||||
Net recovery of charge off of loans and fees receivable recorded at fair value | 2,393 | 1,556 | 10,763 | 12,607 | |||||||||||
Provision for losses on loans and fees receivable recorded at net realizable value | (24,087 | ) | (17,470 | ) | (50,484 | ) | (33,012 | ) | |||||||
Net interest income, fees and related income on earning assets | 4,223 | 2,993 | 33,348 | 42,593 | |||||||||||
Other operating income: | |||||||||||||||
Servicing income | 1,034 | 885 | 2,984 | 3,313 | |||||||||||
Other income | 590 | 69 | 939 | 214 | |||||||||||
Gain on repurchase of convertible senior notes | — | — | — | 1,037 | |||||||||||
Equity in income of equity-method investee | 164 | 629 | 902 | 1,956 | |||||||||||
Total other operating income | 1,788 | 1,583 | 4,825 | 6,520 | |||||||||||
Other operating expense: | |||||||||||||||
Salaries and benefits | 5,296 | 6,329 | 16,314 | 18,242 | |||||||||||
Card and loan servicing | 8,687 | 7,027 | 23,866 | 23,300 | |||||||||||
Marketing and solicitation | 2,072 | 587 | 6,731 | 2,374 | |||||||||||
Depreciation | 236 | 794 | 789 | 7,049 | |||||||||||
Other | 4,210 | 3,570 | 16,842 | 6,199 | |||||||||||
Total other operating expense | 20,501 | 18,307 | 64,542 | 57,164 | |||||||||||
Loss before income taxes | (14,490 | ) | (13,731 | ) | (26,369 | ) | (8,051 | ) | |||||||
Income tax benefit | 22 | 4,666 | 3,847 | 3,811 | |||||||||||
Net loss | (14,468 | ) | (9,065 | ) | (22,522 | ) | (4,240 | ) | |||||||
Net (income) loss attributable to noncontrolling interests | 1 | — | (1 | ) | 5 | ||||||||||
Net loss attributable to controlling interests | $ | (14,467 | ) | $ | (9,065 | ) | $ | (22,523 | ) | $ | (4,235 | ) | |||
Net loss attributable to controlling interests per common share—basic | $ | (1.04 | ) | $ | (0.65 | ) | $ | (1.61 | ) | $ | (0.31 | ) | |||
Net loss attributable to controlling interests per common share—diluted | $ | (1.04 | ) | $ | (0.65 | ) | $ | (1.61 | ) | $ | (0.31 | ) |
Consolidated Statements of Comprehensive LossIncome (Loss) (Unaudited)
(Dollars in thousands)
For the Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Net income (loss) | $ | 5,655 | $ | (4,719 | ) | |||
Other comprehensive loss: | ||||||||
Foreign currency translation adjustment | (1,513 | ) | (2,345 | ) | ||||
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 (loss) attributable to noncontrolling interests | 4,142 | (7,064 | ) | |||||
Comprehensive loss attributable to noncontrolling interests | 58 | 49 | ||||||
Comprehensive income (loss) attributable to controlling interests | $ | 4,200 | $ | (7,015 | ) |
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Net loss | $ | (14,468 | ) | $ | (9,065 | ) | $ | (22,522 | ) | $ | (4,240 | ) | |||
Other comprehensive income: | |||||||||||||||
Foreign currency translation adjustment | (1,721 | ) | — | (1,721 | ) | — | |||||||||
Reclassifications of foreign currency translation adjustment to consolidated statements of operations | — | — | — | 600 | |||||||||||
Income tax expense related to other comprehensive income | 625 | — | 625 | — | |||||||||||
Comprehensive loss | (15,564 | ) | (9,065 | ) | (23,618 | ) | (3,640 | ) | |||||||
Comprehensive (income) loss attributable to noncontrolling interests | 1 | — | (1 | ) | 5 | ||||||||||
Comprehensive loss attributable to controlling interests | $ | (15,563 | ) | $ | (9,065 | ) | $ | (23,619 | ) | $ | (3,635 | ) |
Consolidated Statement of Equity
For the NineThree Months Ended September 30, 2017March 31, 2019 (Unaudited)
(Dollars in thousands)
Common Stock | ||||||||||||||||||||||||||||
Shares Issued | Amount | Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | 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 | ) |
Common Stock | ||||||||||||||||||||||||||
Shares Issued | Amount | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Retained Deficit | Noncontrolling Interests | Total Equity | ||||||||||||||||||||
Balance at December 31, 2016 | 15,348,086 | $ | — | $ | 211,646 | $ | — | $ | (205,859 | ) | $ | (10 | ) | $ | 5,777 | |||||||||||
Compensatory stock issuances, net of forfeitures | 102,000 | — | — | — | — | — | — | |||||||||||||||||||
Contributions from owners of noncontrolling interests | — | — | — | — | — | 7 | 7 | |||||||||||||||||||
Amortization of deferred stock-based compensation costs | — | — | 1,258 | — | — | — | 1,258 | |||||||||||||||||||
Redemption and retirement of shares | (114,618 | ) | — | (286 | ) | — | — | — | (286 | ) | ||||||||||||||||
Other comprehensive (loss) income | — | — | — | (1,096 | ) | (22,523 | ) | 1 | (23,618 | ) | ||||||||||||||||
Balance at September 30, 2017 | 15,335,468 | $ | — | $ | 212,618 | $ | (1,096 | ) | $ | (228,382 | ) | $ | (2 | ) | $ | (16,862 | ) |
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
For the Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Operating activities | ||||||||
Net income (loss) | $ | 5,655 | $ | (4,719 | ) | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
Depreciation, amortization and accretion, net | 1,769 | 229 | ||||||
Losses upon impairment of loans, interest and fees receivable recorded at fair value | 254 | 1,791 | ||||||
Provision for losses on loans, interest and fees receivable | 34,598 | 15,991 | ||||||
Interest expense from accretion of discount on notes | 233 | 216 | ||||||
Income from accretion of discount associated with receivables purchases | (21,862 | ) | (18,020 | ) | ||||
Unrealized gain on loans, interest and fees receivable and underlying notes payable held at fair value | (874 | ) | (1,313 | ) | ||||
Amortization of deferred loan costs | 696 | 390 | ||||||
Income from equity-method investments | (227 | ) | (9 | ) | ||||
Deferred stock-based compensation costs | 412 | 254 | ||||||
Lease liability payments | (2,492 | ) | (2,523 | ) | ||||
Changes in assets and liabilities: | ||||||||
Increase in uncollected fees on earning assets | (165 | ) | (802 | ) | ||||
Increase in income tax liability | 48 | 333 | ||||||
Increase in deposits | (1 | ) | (20 | ) | ||||
Increase (decrease) in accounts payable and accrued expenses | 13,710 | (1,800 | ) | |||||
Other | (1,769 | ) | (235 | ) | ||||
Net cash provided by (used in) operating activities | 29,985 | (10,237 | ) | |||||
Investing activities | ||||||||
Proceeds from equity-method investees | 443 | 692 | ||||||
Investments in earning assets | (164,935 | ) | (125,768 | ) | ||||
Proceeds from earning assets | 141,354 | 116,164 | ||||||
Purchases and development of property, net of disposals | (48 | ) | (21 | ) | ||||
Net cash used in investing activities | (23,186 | ) | (8,933 | ) | ||||
Financing activities | ||||||||
Proceeds from exercise of stock options | 1,065 | — | ||||||
Purchase and retirement of outstanding stock | (21 | ) | (14 | ) | ||||
Proceeds from borrowings | 89,661 | 89,538 | ||||||
Repayment of borrowings | (73,105 | ) | (73,996 | ) | ||||
Net cash provided by financing activities | 17,600 | 15,528 | ||||||
Effect of exchange rate changes on cash | 80 | (362 | ) | |||||
Net increase (decrease) in cash and cash equivalents | 24,479 | (4,004 | ) | |||||
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 | $ | 166,233 | $ | 66,654 | ||||
Supplemental cash flow information | ||||||||
Cash paid for interest | $ | 3,894 | $ | 8,718 | ||||
Net cash income tax payments (refunds) | $ | 190 | $ | (189 | ) |
For the Nine Months Ended September 30, | |||||||
2017 | 2016 | ||||||
Operating activities | |||||||
Net loss | $ | (22,522 | ) | $ | (4,240 | ) | |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | |||||||
Depreciation of rental merchandise | 27 | 5,172 | |||||
Depreciation, amortization and accretion, net | 762 | 1,877 | |||||
Losses upon charge off of loans and fees receivable recorded at fair value | 2,973 | 4,647 | |||||
Provision for losses on loans and fees receivable | 50,484 | 33,012 | |||||
Interest expense from accretion of discount on convertible senior notes | 406 | 385 | |||||
Income from accretion of discount associated with receivables purchases | (41,961 | ) | (30,662 | ) | |||
Unrealized gain on loans and fees receivable and underlying notes payable held at fair value | (4,504 | ) | (2,931 | ) | |||
Income from equity-method investments | (902 | ) | (1,956 | ) | |||
Gain on repurchase of convertible senior notes | — | (1,037 | ) | ||||
Changes in assets and liabilities: | |||||||
Increase in uncollected fees on earning assets | (1,530 | ) | (2,782 | ) | |||
Decrease in income tax liability | (4,084 | ) | (4,521 | ) | |||
Decrease in deposits | 199 | 295 | |||||
Increase in accounts payable and accrued expenses | 22,032 | 28,555 | |||||
Additions to rental merchandise | — | (634 | ) | ||||
Other | (13,395 | ) | (475 | ) | |||
Net cash (used in) provided by operating activities | (12,015 | ) | 24,705 | ||||
Investing activities | |||||||
(Increase) decrease in restricted cash | (12,049 | ) | 3,252 | ||||
Proceeds from equity-method investee | 2,882 | 4,396 | |||||
Investments in earning assets | (335,664 | ) | (286,654 | ) | |||
Proceeds from earning assets | 282,064 | 222,606 | |||||
Purchases and development of property, net of disposals | (229 | ) | (244 | ) | |||
Net cash used in investing activities | (62,996 | ) | (56,644 | ) | |||
Financing activities | |||||||
Noncontrolling interests contributions, net | 7 | 4 | |||||
Purchase and retirement of outstanding stock | (286 | ) | (869 | ) | |||
Proceeds from borrowings | 243,945 | 156,869 | |||||
Repayment of borrowings | (176,417 | ) | (115,245 | ) | |||
Net cash provided by financing activities | 67,249 | 40,759 | |||||
Effect of exchange rate changes on cash | 292 | (1,133 | ) | ||||
Net (decrease) increase in unrestricted cash | (7,470 | ) | 7,687 | ||||
Unrestricted cash and cash equivalents at beginning of period | 76,052 | 51,033 | |||||
Unrestricted cash and cash equivalents at end of period | $ | 68,582 | $ | 58,720 | |||
Supplemental cash flow information | |||||||
Cash paid for interest | $ | 19,214 | $ | 15,390 | |||
Net cash income tax payments | $ | 238 | $ | 710 | |||
Supplemental non-cash information | |||||||
Issuance of stock options and restricted stock | $ | 1,364 | $ | 2,310 |
Notes to Consolidated Financial Statements
March 31, 2019 and
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 OtherWithin 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-linedigital marketing and partnerships.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 whichthat includes retail point-of-sale, direct mail Internet-basedsolicitation, digital marketing and through partnerships.partnerships with third parties. Using our infrastructure and technology platform, we also provide loan servicing, activities, 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 segmentsegment: 1) the income earned from an investment in an equity-method investee that holds credit card receivables for which we are the servicer.
Within our Auto Finance segment, our CAR subsidiary operations principally purchase andand/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
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.
As of September 30, 2017March 31, 2019 and December 31, 2016,2018, the weighted average remaining accretion period for the $35.9$47.3 million and $23.6$43.9 million of deferred revenue reflected in the consolidated balance sheets was 11 months.
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 March 31, 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 | (19.7 | ) | (0.9 | ) | (14.0 | ) | (34.6 | ) | ||||||||
Charge offs | 12.3 | 0.9 | 17.1 | 30.3 | ||||||||||||
Recoveries | (0.3 | ) | (0.3 | ) | (1.2 | ) | (1.8 | ) | ||||||||
Balance at end of period | $ | (43.1 | ) | $ | (1.6 | ) | $ | (40.6 | ) | $ | (85.3 | ) |
As of March 31, 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 | ) | $ | — | $ | (0.3 | ) | ||||||
Balance at end of period collectively evaluated for impairment | $ | (43.1 | ) | $ | (1.3 | ) | $ | (40.6 | ) | $ | (85.0 | ) | ||||
Loans, interest and fees receivable: | ||||||||||||||||
Loans, interest and fees receivable, gross | $ | 211.4 | $ | 90.2 | $ | 260.9 | $ | 562.5 | ||||||||
Loans, interest and fees receivable individually evaluated for impairment | $ | — | $ | 0.6 | $ | 0.1 | $ | 0.7 | ||||||||
Loans, interest and fees receivable collectively evaluated for impairment | $ | 211.4 | $ | 89.6 | $ | 260.8 | $ | 561.8 |
For the Three Months Ended September 30, 2017 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||||||||||||||||||
Allowance for uncollectible loans and fees receivable: | ||||||||||||||||||||||||||||||||
For the three months ended March 31, 2018 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||||||||||||||||||
Allowance for uncollectible loans, interest and fees receivable: | ||||||||||||||||||||||||||||||||
Balance at beginning of period | $ | (3.2 | ) | $ | (2.0 | ) | $ | (36.0 | ) | $ | (41.2 | ) | $ | (18.2 | ) | $ | (2.3 | ) | $ | (42.5 | ) | $ | (63.0 | ) | ||||||||
Provision for loan losses | (6.2 | ) | (0.2 | ) | (17.7 | ) | (24.1 | ) | (9.0 | ) | — | (7.0 | ) | (16.0 | ) | |||||||||||||||||
Charge offs | 0.7 | 0.5 | 13.2 | 14.4 | 6.5 | 0.7 | 15.1 | 22.3 | ||||||||||||||||||||||||
Recoveries | (0.1 | ) | (0.3 | ) | (0.8 | ) | (1.2 | ) | (0.1 | ) | (0.3 | ) | (1.2 | ) | (1.6 | ) | ||||||||||||||||
Balance at end of period | $ | (8.8 | ) | $ | (2.0 | ) | $ | (41.3 | ) | $ | (52.1 | ) | $ | (20.8 | ) | $ | (1.9 | ) | $ | (35.6 | ) | $ | (58.3 | ) | ||||||||
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 | ) |
As of September 30, 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 | ) | ||||||
Balance at end of period collectively evaluated for impairment | $ | (8.8 | ) | $ | (2.0 | ) | $ | (41.1 | ) | $ | (51.9 | ) | ||||
Loans and fees receivable: | ||||||||||||||||
Loans and fees receivable, gross | $ | 61.8 | $ | 75.5 | $ | 222.5 | $ | 359.8 | ||||||||
Loans and fees receivable individually evaluated for impairment | $ | — | $ | 0.2 | $ | 0.2 | $ | 0.4 | ||||||||
Loans and fees receivable collectively evaluated for impairment | $ | 61.8 | $ | 75.3 | $ | 222.3 | $ | 359.4 |
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 |
For the Three Months Ended September 30, 2016 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||
Allowance for uncollectible loans and fees receivable: | ||||||||||||||||
Balance at beginning of period | $ | (1.1 | ) | $ | (2.0 | ) | $ | (21.1 | ) | $ | (24.2 | ) | ||||
Provision for loan losses | 0.1 | (0.7 | ) | (16.9 | ) | (17.5 | ) | |||||||||
Charge offs | 0.5 | 0.8 | 6.9 | 8.2 | ||||||||||||
Recoveries | (0.5 | ) | (0.2 | ) | (0.4 | ) | (1.1 | ) | ||||||||
Balance at end of period | $ | (1.0 | ) | $ | (2.1 | ) | $ | (31.5 | ) | $ | (34.6 | ) | ||||
For the Nine Months Ended September 30, 2016 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||
Allowance for uncollectible loans and fees receivable: | ||||||||||||||||
Balance at beginning of period | $ | (1.2 | ) | $ | (1.7 | ) | $ | (18.6 | ) | $ | (21.5 | ) | ||||
Provision for loan losses | 0.7 | (2.1 | ) | (31.6 | ) | (33.0 | ) | |||||||||
Charge offs | 1.5 | 2.5 | 20.1 | 24.1 | ||||||||||||
Recoveries | (2.0 | ) | (0.8 | ) | (1.4 | ) | (4.2 | ) | ||||||||
Balance at end of period | $ | (1.0 | ) | $ | (2.1 | ) | $ | (31.5 | ) | $ | (34.6 | ) |
As of December 31, 2016 | 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 | $ | — | $ | (0.3 | ) | $ | (0.3 | ) | $ | (0.6 | ) | |||||
Balance at end of period collectively evaluated for impairment | $ | (1.4 | ) | $ | (1.8 | ) | $ | (39.5 | ) | $ | (42.7 | ) | ||||
Loans and fees receivable: | ||||||||||||||||
Loans and fees receivable, gross | $ | 11.0 | $ | 77.1 | $ | 202.6 | $ | 290.7 | ||||||||
Loans and fees receivable individually evaluated for impairment | $ | — | $ | 0.7 | $ | 0.3 | $ | 1.0 | ||||||||
Loans and fees receivable collectively evaluated for impairment | $ | 11.0 | $ | 76.4 | $ | 202.3 | $ | 289.7 |
An aging of our delinquent loans, interest and fees receivable, gross (in millions) by class of receivable as of
As of March 31, 2019 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||
30-59 days past due | $ | 8.3 | $ | 5.5 | $ | 7.8 | $ | 21.6 | ||||||||
60-89 days past due | 6.7 | 2.1 | 6.9 | 15.7 | ||||||||||||
90 or more days past due | 17.0 | 2.7 | 18.5 | 38.2 | ||||||||||||
Delinquent loans, interest and fees receivable, gross | 32.0 | 10.3 | 33.2 | 75.5 | ||||||||||||
Current loans, interest and fees receivable, gross | 179.4 | 79.9 | 227.7 | 487.0 | ||||||||||||
Total loans, interest and fees receivable, gross | $ | 211.4 | $ | 90.2 | $ | 260.9 | $ | 562.5 | ||||||||
Balance of loans greater than 90-days delinquent still accruing interest and fees | $ | — | $ | 2.0 | $ | — | $ | 2.0 |
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 |
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 March 31, 2019 and December 31, 2018:
Balance at September 30, 2017 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||
30-59 days past due | $ | 1.7 | $ | 6.3 | $ | 9.3 | $ | 17.3 | ||||||||
60-89 days past due | 0.8 | 2.2 | 7.1 | 10.1 | ||||||||||||
90 or more days past due | 1.4 | 1.7 | 14.2 | 17.3 | ||||||||||||
Delinquent loans and fees receivable, gross | 3.9 | 10.2 | 30.6 | 44.7 | ||||||||||||
Current loans and fees receivable, gross | 57.9 | 65.3 | 191.9 | 315.1 | ||||||||||||
Total loans and fees receivable, gross | $ | 61.8 | $ | 75.5 | $ | 222.5 | $ | 359.8 | ||||||||
Balance of loans 90 or more days past due and still accruing interest and fees | $ | — | $ | 1.3 | $ | — | $ | 1.3 |
As of | ||||||||||||||||
March 31, 2019 | December 31, 2018 | |||||||||||||||
Point-of-sale | Direct-to-consumer | Point-of-sale | Direct-to-consumer | |||||||||||||
Number of TDRs | 8,604 | 6,515 | 8,722 | 3,003 | ||||||||||||
Number of TDRs that have been re-aged | 2,737 | 1,503 | 2,414 | 236 | ||||||||||||
Amount of TDRs on non-accrual status (in thousands) | $ | 11,712 | $ | 6,160 | $ | 12,178 | $ | 3,193 | ||||||||
Amount of TDRs on non-accrual status above that have been re-aged (in thousands) | $ | 4,779 | $ | 1,608 | $ | 3,876 | $ | 262 | ||||||||
Carrying value of TDRs (in thousands) | $ | 8,015 | $ | 4,033 | $ | 7,535 | $ | 1,524 | ||||||||
TDRs - Performing (carrying value, in thousands)* | $ | 6,426 | $ | 3,449 | $ | 5,788 | $ | 1,208 | ||||||||
TDRs - Nonperforming (carrying value, in thousands)* | $ | 1,589 | $ | 584 | $ | 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 19,383 and 15,723 accounts in the amount of $29.2 million and $26.4 million during the twelve month periods ended March 31, 2019 and March 31, 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 | ||||||||||||||||
March 31, 2019 | March 31, 2018 | |||||||||||||||
Point-of-sale | Direct-to-consumer | Point-of-sale | Direct-to-consumer | |||||||||||||
Number of accounts | 2,279 | 1,985 | 2,753 | 1,245 | ||||||||||||
Loan balance at time of charge off (in thousands) | $ | 3,607 | $ | 2,168 | $ | 4,322 | $ | 2,415 |
Balance at December 31, 2016 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | |||||||||||
30-59 days past due | $ | 0.2 | $ | 7.0 | $ | 8.2 | $ | 15.4 | |||||||
60-89 days past due | 0.2 | 2.4 | 6.7 | 9.3 | |||||||||||
90 or more days past due | 0.4 | 1.9 | 11.4 | 13.7 | |||||||||||
Delinquent loans and fees receivable, gross | 0.8 | 11.3 | 26.3 | 38.4 | |||||||||||
Current loans and fees receivable, gross | 10.2 | 65.8 | 176.3 | 252.3 | |||||||||||
Total loans and fees receivable, gross | $ | 11.0 | $ | 77.1 | $ | 202.6 | $ | 290.7 | |||||||
Balance of loans 90 or more days past due and still accruing interest and fees | $ | — | $ | 1.5 | $ | — | $ | 1.5 |
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 associated with reimbursements in respect of one of our portfolios and (3) ongoing deferred costs associated with service contracts.
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 owedpayable in respect of one of our portfolios.
We experienced an effective income tax benefit ratesexpense rate of 0.2% and 14.6%4.0% for the three and nine months ended September 30, 2017, respectively,March 31, 2019, compared to a negative effective income tax benefit ratesexpense rate of 34.0% and 47.3%3.1% for the three and nine months ended September 30, 2016, respectively.March 31, 2018. Our effective income tax benefit ratesexpense rate for the three and nine months ended September 30, 2017 areMarch 31, 2019, is below the statutory rate principally due to (1)reductions in our valuation allowances against net federal deferred tax assets during such period—the effect of such reductions being partially offset by accruals of interest and penalties that we accrued on unpaid federal tax liabilities and (2) our establishment of,uncertain tax positions and increases in, our valuation allowancesstate and foreign income taxes during such periodsperiod. Conversely, our negative effective income tax expense rate for the three months ended March 31, 2018, was greater than the statutory rate principally due to accruals of interest on unpaid federal tax liabilities and uncertain tax positions and state and foreign income taxes during such period—the effect of such accruals being partially offset by additions to valuation allowances against our net federal deferred tax assets that arose during such periods associated with our net loss incurred during such periods. Our effective income tax benefit rate for the three months ended September 30, 2016 was below the statutory rate principally due to our accruals of interest and penalties on unpaid tax liabilities relative to our $13.7 million of pre-tax loss during that period. Our effective income tax benefit rate for the nine months ended September 30, 2016 was above the statutory rate principally due to income during that period of our U.K. subsidiary that was not subject to tax in the U.S. and the U.K. tax on which was fully offset by the release of U.K. valuation allowances in that period.
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 suchincome tax-related interest and penalties within the income tax benefit or expensesuch 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, 2017, our income tax benefits were offset byMarch 31, 2019, and 2018, we included $0.1 million and $0.2 million, and $0.5 million of net income tax-related interest and penalties charges. During the three and nine months ended September 30, 2016, we included $0.2 million and $0.6 millionrespectively, 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 that we incurred in 2007 and 2008 and carried back to obtain refunds of federal income taxes paid in earlier years dating back to 2003. Our net unpaid income tax assessment associated with that settlement was $7.4 million at September 30, 2017; this amount excludes unpaid interest and penalties on the tax assessment, the accruals for which aggregated $3.9 million at September 30, 2017. Prior to our filingIn 2015, we filed an amended return claimsclaim 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, thesettlement. 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. In October 2017, we attended anFollowing correspondence and conferences held with IRS Appeals, conferencewe 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 subject matter underlying our amended return claims,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 in the processcontinuing to pursue complete abatement of preparing a supplemental submission to address matters on whichfailure-to-pay penalties of $0.9 million. Once this matter is resolved and we pay any residual interest liability, we expect the IRS Appeals Officer needed additional support.
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 March 31, | ||||||||
2019 | 2018 | |||||||
Fees on credit products | $ | 10,296 | $ | 4,905 | ||||
Changes in fair value of loans, interest and fees receivable recorded at fair value | (1 | ) | (18 | ) | ||||
Changes in fair value of notes payable associated with structured financings recorded at fair value | 875 | 1,331 | ||||||
Other | 94 | (4 | ) | |||||
Total fees and related income on earning assets | $ | 11,264 | $ | 6,214 |
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Fees on credit products | $ | 3,248 | $ | 944 | $ | 6,351 | $ | 2,599 | |||||||
Changes in fair value of loans and fees receivable recorded at fair value | 1,153 | (1,857 | ) | 2,718 | 568 | ||||||||||
Changes in fair value of notes payable associated with structured financings recorded at fair value | 259 | 259 | 1,786 | 2,363 | |||||||||||
Rental revenue | — | 758 | 148 | 8,091 | |||||||||||
Other | (494 | ) | (29 | ) | (65 | ) | 219 | ||||||||
Total fees and related income on earning assets | $ | 4,166 | $ | 75 | $ | 10,938 | $ | 13,840 |
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
Other Income
Included in Other income for the three months ended March 31, 2019, is $15.5 million associated with reductions in accruals related to one of our portfolios. The original accrual was based upon our estimate of the amount that could 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 March 31, 2019, we had approximately $92 million accrued related to this liability within accounts payable and accrued expenses on the consolidated balance sheets, including the reclassification 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.
Revenue from Contracts with Customers
The majority of our revenue is earned from financial instruments and is not included within the scope of this standard. 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 | ||||||||||||
Three months ended March 31, 2019 | Other Investments | Auto Finance | Total | |||||||||
Interchange revenues, net (1) | $ | 928 | $ | — | $ | 928 | ||||||
Servicing income | 419 | 267 | 686 | |||||||||
Service charges and other customer related fees | 429 | 17 | 446 | |||||||||
Total revenue from contracts with customers | $ | 1,776 | $ | 284 | $ | 2,060 |
(1) Interchange revenue is presented net of customer reward expense.
Credit and | ||||||||||||
Three months ended March 31, 2018 | Other Investments | Auto Finance | Total | |||||||||
Interchange revenues, net (1) | $ | 444 | $ | — | $ | 444 | ||||||
Servicing income | 402 | 230 | 632 | |||||||||
Service charges and other customer related fees | 25 | 47 | 72 | |||||||||
Total revenue from contracts with customers | $ | 871 | $ | 277 | $ | 1,148 |
(1) Interchange revenue is presented net of customer reward expense.
Recent Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update (“ASU”)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.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. While weWe are continuingcurrently in the process of reviewing accounting interpretations, expected data requirements and necessary changes to evaluate the effect that ASU 2016-13 will have on our consolidated financial statementsloss estimation methods, processes and related disclosures, thissystems. This standard is expected to result in an increase to our allowance for loan losses given the change to expected losses for the estimated life of the financial asset. The extent of the increase will depend on the asset quality of the portfolio, and economic conditions and forecasts at adoption.
In February 2016, the FASB issued ASU No. 2016-02, Leases, along with subsequent guidance, which requires lessees to recognize assets and liabilities for most leases changingand 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 is effectiveprovides 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 annualall 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 interim periods beginning after December 15, 2018,a corresponding right-of-use asset of $18.6 million with early adoption permitted.a $0.6 million cumulative effect on our opening retained deficit. The adoptionimpact of ASU 2016-02 willour status as a lessor in the sublease arrangements we maintain did not 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. 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 will now bewas effective for annual and interim periods beginning January 1, 20182018. Most revenue associated with financial instruments, including interest income, loan origination fees and early adoptioncredit card fees, is permitted. We do not plan to early adoptoutside the scope of the guidance. The scopeThis includes most of ASU 2014-09 excludes interest and fee income on loans andthe revenue of the Company. We adopted this standard as a result,of January 1, 2018 using the majoritymodified retrospective method of our revenue will not be affected. As such theadoption. Our adoption of this standard outside of the additional disclosures required under the standard, willdid 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, 2017,March 31, 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.
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
We measure the profitability of our reportable segments based on their income after allocation of specific costs and corporate overhead; however, our segment results do not reflect any charges for internal capital allocations among our segments. Overhead costs are allocated based on headcounts and other applicable measures to better align costs with the associated revenues.
Summary operating segment information (in thousands) is as follows:
Three months ended March 31, 2019 | Credit and Other Investments | Auto Finance | Total | |||||||||
Interest income: | ||||||||||||
Consumer loans, including past due fees | $ | 42,672 | $ | 7,718 | $ | 50,390 | ||||||
Other | 69 | — | 69 | |||||||||
Total interest income | 42,741 | 7,718 | 50,459 | |||||||||
Interest expense | (10,769 | ) | (377 | ) | (11,146 | ) | ||||||
Net interest income before fees and related income on earning assets and provision for losses on loans, interest and fees receivable | $ | 31,972 | $ | 7,341 | $ | 39,313 | ||||||
Fees and related income on earning assets | $ | 11,236 | $ | 28 | $ | 11,264 | ||||||
Servicing income | $ | 419 | $ | 267 | $ | 686 | ||||||
Equity in income of equity-method investees | $ | 227 | $ | — | $ | 227 | ||||||
Income before income taxes | $ | 4,207 | $ | 1,686 | $ | 5,893 | ||||||
Income tax benefit (expense) | $ | 239 | $ | (477 | ) | $ | (238 | ) | ||||
Total assets | $ | 557,281 | $ | 78,953 | $ | 636,234 |
Three months ended March 31, 2018 | Credit and Other Investments | Auto Finance | Total | |||||||||
Interest income: | ||||||||||||
Consumer loans, including past due fees | $ | 28,562 | $ | 7,119 | $ | 35,681 | ||||||
Other | 45 | — | 45 | |||||||||
Total interest income | 28,607 | 7,119 | 35,726 | |||||||||
Interest expense | (7,892 | ) | (261 | ) | (8,153 | ) | ||||||
Net interest income before fees and related income on earning assets and provision for losses on loans, interest and fees receivable | $ | 20,715 | $ | 6,858 | $ | 27,573 | ||||||
Fees and related income on earning assets | $ | 6,197 | $ | 17 | $ | 6,214 | ||||||
Servicing income | $ | 402 | $ | 230 | $ | 632 | ||||||
Equity in income of equity-method investees | $ | 9 | $ | — | $ | 9 | ||||||
(Loss) income before income taxes | $ | (6,914 | ) | $ | 2,339 | $ | (4,575 | ) | ||||
Income tax benefit (expense) | $ | 399 | $ | (543 | ) | $ | (144 | ) | ||||
Total assets | $ | 365,882 | $ | 67,030 | $ | 432,912 |
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 | ||||||
Depreciation of rental merchandise | $ | — | $ | — | $ | — | ||||||
Equity in income of equity-method investee | $ | 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 investee | $ | 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 |
Three months ended September 30, 2016 | Credit and Other Investments | Auto Finance | Total | |||||||||
Interest income: | ||||||||||||
Consumer loans, including past due fees | $ | 16,701 | $ | 7,352 | $ | 24,053 | ||||||
Other | 36 | — | 36 | |||||||||
Total interest income | 16,737 | 7,352 | 24,089 | |||||||||
Interest expense | (4,944 | ) | (313 | ) | (5,257 | ) | ||||||
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable | $ | 11,793 | $ | 7,039 | $ | 18,832 | ||||||
Fees and related income on earning assets | $ | 92 | $ | (17 | ) | $ | 75 | |||||
Servicing income | $ | 645 | $ | 240 | $ | 885 | ||||||
Gain on repurchase of convertible senior notes | $ | — | $ | — | $ | — | ||||||
Depreciation of rental merchandise | $ | (458 | ) | $ | — | $ | (458 | ) | ||||
Equity in income of equity-method investee | $ | 629 | $ | — | $ | 629 | ||||||
(Loss) income before income taxes | $ | (15,709 | ) | $ | 1,978 | $ | (13,731 | ) | ||||
Income tax benefit (expense) | $ | 5,296 | $ | (630 | ) | $ | 4,666 | |||||
Nine months ended September 30, 2016 | Credit and Other Investments | Auto Finance | Total | |||||||||
Interest income: | ||||||||||||
Consumer loans, including past due fees | $ | 42,018 | $ | 21,645 | $ | 63,663 | ||||||
Other | 188 | — | 188 | |||||||||
Total interest income | 42,206 | 21,645 | 63,851 | |||||||||
Interest expense | (13,735 | ) | (958 | ) | (14,693 | ) | ||||||
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable | $ | 28,471 | $ | 20,687 | $ | 49,158 | ||||||
Fees and related income on earning assets | $ | 13,761 | $ | 79 | $ | 13,840 | ||||||
Servicing income | $ | 2,569 | $ | 744 | $ | 3,313 | ||||||
Gain on repurchase of convertible senior notes | $ | 1,037 | $ | — | $ | 1,037 | ||||||
Depreciation of rental merchandise | $ | (5,172 | ) | $ | — | $ | (5,172 | ) | ||||
Equity in income of equity-method investee | $ | 1,956 | $ | — | $ | 1,956 | ||||||
(Loss) income before income taxes | $ | (13,047 | ) | $ | 4,996 | $ | (8,051 | ) | ||||
Income tax benefit (expense) | $ | 5,500 | $ | (1,689 | ) | $ | 3,811 | |||||
Total assets | $ | 267,390 | $ | 68,440 | $ | 335,830 |
4. | |
Shareholders’ Equity |
During the three and nine months ended September 30, 2017,March 31, 2019 and 2018, we repurchased and contemporaneously retired 107,9165,944 and 114,6187,006 shares of our common stock at an aggregate cost of $268,000$21,000 and $286,000,$14,000, 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, 2016, we repurchased and contemporaneously retired 39,580 and 286,223 shares of our common stock at an aggregate cost of $124,000 and $869,000, 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
5. | |
Investment in Equity-Method Investee |
Our equity-method investment outstanding at September 30, 2017March 31, 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 | ||||||||
March 31, 2019 | December 31, 2018 | |||||||
Loans, interest and fees receivables, at fair value | $ | 3,232 | $ | 3,546 | ||||
Total assets | $ | 3,407 | $ | 3,732 | ||||
Total liabilities | $ | 17 | $ | 18 | ||||
Members’ capital | $ | 3,390 | $ | 3,714 |
Three months ended March 31, | ||||||||
2019 | 2018 | |||||||
Net interest income, fees and related income on earning assets | $ | 342 | $ | 14 | ||||
Net income (loss) | $ | 289 | $ | (61 | ) | |||
Net income attributable to our equity investment investee | $ | 227 | $ | 9 |
As of | |||||||
September 30, 2017 | December 31, 2016 | ||||||
Loans and fees receivable, at fair value | $ | 6,833 | $ | 9,650 | |||
Total assets | $ | 7,145 | $ | 10,291 | |||
Total liabilities | $ | 28 | $ | 204 | |||
Members’ capital | $ | 7,117 | $ | 10,087 |
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Net interest income, fees and related income on earning assets | $ | 247 | $ | 949 | $ | 1,358 | $ | 2,957 | |||||||
Net income | $ | 159 | $ | 822 | $ | 1,067 | $ | 2,537 | |||||||
Net income attributable to our equity investment in investee | $ | 164 | $ | 629 | $ | 902 | $ | 1,956 |
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
Assets – As of March 31, 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 | $ | — | $ | — | $ | 476,959 | $ | 429,902 | ||||||||
Loans, interest and fees receivable, at fair value | $ | — | $ | — | $ | 5,394 | $ | 5,394 |
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 |
Assets – As of September 30, 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 | $ | — | $ | — | $ | 310,557 | $ | 271,824 | ||||||||
Loans and fees receivable, at fair value | $ | — | $ | — | $ | 12,019 | $ | 12,019 |
Assets – As of December 31, 2016 (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 | $ | — | $ | — | $ | 248,171 | $ | 223,783 | ||||||||
Loans and fees receivable, at fair value | $ | — | $ | — | $ | 15,648 | $ | 15,648 |
(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 ninethree months ended September 30, 2017March 31, 2019 and 2016:2018:
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 | (1 | ) | (18 | ) | ||||
Settlements | (911 | ) | (1,691 | ) | ||||
Impact of foreign currency translation | — | 13 | ||||||
Balance at March 31, | $ | 5,394 | $ | 9,413 |
Loans and Fees Receivable, at Fair Value | |||||||
2017 | 2016 | ||||||
Balance at January 1, | $ | 15,648 | $ | 26,706 | |||
Total gains—realized/unrealized: | |||||||
Net revaluations of loans and fees receivable, at fair value | 2,718 | 568 | |||||
Settlements | (6,398 | ) | (8,590 | ) | |||
Impact of foreign currency translation | 51 | (239 | ) | ||||
Balance at September 30, | $ | 12,019 | $ | 18,445 |
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.
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
Quantitative Information about Level 3 Fair Value Measurements | |||||||||||
Fair Value Measurements | Fair Value at March 31, 2019 (in thousands) | Valuation Technique | Unobservable Input | Range (Weighted Average) | |||||||
Loans, interest and fees receivable, at fair value | $ | 5,394 | Discounted cash flows | Gross yield | 25.2% to 33.5% (26.3%) | ||||||
Principal payment rate | 2.1% to 3.1% (2.2%) | ||||||||||
Expected credit loss rate | 10.6% to 11.2% (10.7%) | ||||||||||
Servicing rate | 15.6% to 20.9% (16.3%) | ||||||||||
Discount rate | 14.9% to 14.9% (14.9%) |
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%) |
Quantitative Information about Level 3 Fair Value Measurements | ||||||||||
Fair Value Measurements | Fair Value at September 30, 2017 | Valuation Technique | Unobservable Input | Range (Weighted Average) | ||||||
Loans and fees receivable, at fair value | $ | 12,019 | Discounted cash flows | Gross yield | 16.3% to 26.7% (24.9%) | |||||
Principal payment rate | 1.7% to 2.8% (2.4%) | |||||||||
Expected credit loss rate | 11.2% to 13.4% (11.6%) | |||||||||
Servicing rate | 9.6% to 11.6% (9.8%) | |||||||||
Discount rate | 5.8% to 14.0% (12.7%) |
Quantitative Information about Level 3 Fair Value Measurements | ||||||||||
Fair Value Measurements | Fair Value at December 31, 2016 | Valuation Technique | Unobservable Input | Range (Weighted Average) | ||||||
Loans and fees receivable, at fair value | $ | 15,648 | Discounted cash flows | Gross yield | 24.2% to 35.8% (26.1%) | |||||
Principal payment rate | 2.2% to 3.5% (2.4%) | |||||||||
Expected credit loss rate | 11.8% to 18.0% (12.9%) | |||||||||
Servicing rate | 8.6% to 9.6% (8.8%) | |||||||||
Discount rate | 5.8% to 13.6% (12.5%) |
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
Liabilities – As of March 31, 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 | $ | — | $ | — | $ | 407,022 | $ | 407,022 | ||||||||
Amortizing debt facilities | $ | — | $ | — | $ | 1,220 | $ | 1,220 | ||||||||
Notes payable to related parties | $ | — | $ | — | $ | 40,000 | $ | 40,000 | ||||||||
Convertible senior notes | $ | — | $ | 47,230 | $ | — | $ | 62,313 | ||||||||
Liabilities carried at fair value | ||||||||||||||||
Notes payable associated with structured financings, at fair value | $ | — | $ | — | $ | 4,776 | $ | 4,776 |
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 |
Liabilities – As of September 30, 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 | $ | — | $ | — | $ | 143,834 | $ | 143,834 | ||||||||
Amortizing debt facilities | $ | — | $ | — | $ | 66,191 | $ | 66,191 | ||||||||
Senior secured term loan | $ | — | $ | — | $ | 40,000 | $ | 40,000 | ||||||||
5.875% convertible senior notes | $ | — | $ | 39,064 | $ | — | $ | 61,238 | ||||||||
Liabilities carried at fair value | ||||||||||||||||
Notes payable associated with structured financings, at fair value | $ | — | $ | — | $ | 9,769 | $ | 9,769 |
Liabilities - As of December 31, 2016 | 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 | $ | — | $ | — | $ | 83,399 | $ | 83,399 | ||||||||
Amortizing debt facilities | $ | — | $ | — | $ | 58,190 | $ | 58,190 | ||||||||
Senior secured term loan | $ | — | $ | — | $ | 40,000 | $ | 40,000 | ||||||||
5.875% convertible senior notes | $ | — | $ | 40,609 | $ | — | $ | 60,791 | ||||||||
Liabilities carried at fair value | ||||||||||||||||
Notes payable associated with structured financings, at fair value | $ | — | $ | — | $ | 12,276 | $ | 12,276 |
Notes Payable Associated with Structured Financings, at Fair Value | ||||||||
2019 | 2018 | |||||||
Beginning balance, January 1, | $ | 5,651 | $ | 9,240 | ||||
Total (gains) losses—realized/unrealized: | ||||||||
Net revaluations of notes payable associated with structured financings, at fair value | (875 | ) | (1,331 | ) | ||||
Repayments on outstanding notes payable, net | — | — | ||||||
Ending balance, March 31, | $ | 4,776 | $ | 7,909 |
Notes Payable Associated with Structured Financings, at Fair Value | |||||||
2017 | 2016 | ||||||
Beginning balance, January 1 | $ | 12,276 | $ | 20,970 | |||
Total (gains) losses—realized/unrealized: | |||||||
Net revaluations of notes payable associated with structured financings, at fair value | (1,786 | ) | (2,363 | ) | |||
Repayments on outstanding notes payable, net | (721 | ) | (4,240 | ) | |||
Ending balance, September 30, | $ | 9,769 | $ | 14,367 |
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.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
Quantitative information about Level 3 Fair Value Measurements | |||||||||||||
Fair Value Measurements | Fair Value at March 31, 2019 (in thousands) | Valuation Technique | Unobservable Input | Weighted Average | |||||||||
Notes payable associated with structured financings, at fair value | $ | 4,776 |
| Discounted cash flows | Gross yield | 25.2 | % | ||||||
Principal payment rate | 2.1 | % | |||||||||||
Expected credit loss rate | 10.6 | % | |||||||||||
Discount rate | 14.9 | % |
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 | % |
Quantitative Information about Level 3 Fair Value Measurements | |||||||||||
Fair Value Measurements | Fair Value at September 30, 2017 | Valuation Technique | Unobservable Input | Weighted Average | |||||||
Notes payable associated with structured financings, at fair value | $ | 9,769 | Discounted cash flows | Gross yield | 26.7 | % | |||||
Principal payment rate | 2.6 | % | |||||||||
Expected credit loss rate | 11.2 | % | |||||||||
Discount rate | 14.0 | % |
Quantitative Information about Level 3 Fair Value Measurements | |||||||||||
Fair Value Measurements | Fair Value at December 31, 2016 | Valuation Technique | Unobservable Input | Weighted Average | |||||||
Notes payable associated with structured financings, at fair value | $ | 12,276 | Discounted cash flows | Gross yield | 24.6 | % | |||||
Principal payment rate | 2.2 | % | |||||||||
Expected credit loss rate | 11.8 | % | |||||||||
Discount rate | 13.6 | % |
Other Relevant Data
Other relevant data (in thousands) as of
As of March 31, 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 | $ | 1,016 | $ | 7,009 | ||||
Aggregate fair value of loans, interest and fees receivable that are reported at fair value | $ | 618 | $ | 4,776 | ||||
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) | $ | 4 | $ | 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 | $ | 28 | $ | 252 |
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 March 31, 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 | $ | 4,776 | $ | 5,651 |
As of September 30, 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 | $ | 4,810 | $ | 12,473 | ||||
Aggregate fair value of loans and fees receivable that are reported at fair value | $ | 2,250 | $ | 9,769 | ||||
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 | $ | 24 | ||||
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 | $ | 110 | $ | 347 |
As of December 31, 2016 | 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 | $ | 6,251 | $ | 16,614 | ||||
Aggregate fair value of loans and fees receivable that are reported at fair value | $ | 3,484 | $ | 12,164 | ||||
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) | $ | 6 | $ | 22 | ||||
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 | $ | 204 | $ | 562 |
Notes Payable | Notes Payable Associated with Structured Financings, at Fair Value as of September 30, 2017 | Notes Payable Associated with Structured Financings, at Fair Value as of December 31, 2016 | ||||||
Aggregate unpaid principal balance of notes payable | $ | 101,314 | $ | 102,035 | ||||
Aggregate fair value of notes payable | $ | 9,769 | $ | 12,276 |
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 March 31, | ||||||||
2019 | 2018 | |||||||
Operating lease cost, gross | $ | 1,709 | $ | 1,696 | ||||
Sublease income | (1,283 | ) | (1,270 | ) | ||||
Net Operating lease cost | $ | 426 | $ | 426 | ||||
Cash paid under operating leases, gross | $ | 2,492 | $ | 2,523 | ||||
Weighted average remaining lease term - months | 38 | |||||||
Weighted average discount rate | 6.9 | % |
Maturities of lease liabilities were as follows:
Gross Lease Payment | Payments received from Sublease | Net Lease Payment | ||||||||||
2019 (excluding the three months ended March 31, 2019 | $ | 7,460 | $ | (5,201 | ) | $ | 2,259 | |||||
2020 | 9,999 | (7,115 | ) | 2,884 | ||||||||
2021 | 10,011 | (7,315 | ) | 2,696 | ||||||||
2022 | 4,254 | (3,112 | ) | 1,142 | ||||||||
2023 | 73 | — | 73 | |||||||||
Thereafter | 13 | — | 13 | |||||||||
Total lease payments | 31,810 | $ | (22,743 | ) | $ | 9,067 | ||||||
Less imputed interest | (4,068 | ) | ||||||||||
Total | $ | 27,742 |
8. | Notes Payable |
The Company contributes certain receivables to VIEs. These entities are established to facilitate a more efficient means of obtaining third party financing. When assets are contributed to the VIE, they serve as collateral for the debt securities issued by the VIE. The evaluation of whether the entity qualifies as a VIE is based upon the sufficiency of the equity at risk in the legal entity. This evaluation is generally a function of the level of excess collateral in the legal entity. We consolidate VIEs when we hold a variable interest and are the primary beneficiary. We are the primary beneficiary when we have the power to direct activities that most significantly affect the economic performance and have the obligation to absorb the majority of the losses or benefits. In certain circumstances we guarantee the performance of the underlying debt or agree to contribute additional collateral when necessary. When collateral is pledged it is not available for the general use of the Company and can only be used to satisfy the related debt obligation. The results of operations and financial position of consolidated VIEs are included in our consolidated financial statements.
As of | ||||||||
March 31, 2019 | December 31, 2018 | |||||||
Unrestricted cash and cash equivalents | $ | 41.1 | $ | 16.8 | ||||
Restricted cash and cash equivalents | $ | 45.7 | $ | 61.0 | ||||
Loans, interest and fees receivable, at fair value | $ | 4.8 | $ | 5.7 | ||||
Loans, interest and fees receivable, gross | $ | 453.1 | $ | 403.4 | ||||
Allowances for uncollectible loans, interest and fees receivable | $ | (76.5 | ) | $ | (57.4 | ) | ||
Deferred revenue | $ | (16.9 | ) | $ | (13.2 | ) | ||
Total Assets held by VIEs | $ | 451.3 | $ | 416.3 | ||||
Notes Payable, at face value held by VIEs | $ | 382.4 | $ | 366.7 | ||||
Notes Payable, at fair value held by VIEs | $ | 4.8 | $ | 5.7 | ||||
Maximum exposure to loss due to involvement with VIEs | $ | 454.5 | $ | 438.5 |
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
Carrying Amounts at Fair Value as of | ||||||||
March 31, 2019 | December 31, 2018 | |||||||
Securitization facility (stated maturity of December 2021), outstanding face amount of $101.3 million as of March 31, 2019 ($101.3 million as of December 31, 2018) bearing interest at a weighted average 7.5% interest rate, based upon LIBOR, at March 31, 2019 (7.5% at December 31, 2018), which is secured by credit card receivables and restricted cash aggregating $4.8 million as of March 31, 2019 ($5.7 million as of December 31, 2018) in carrying amount | $ | 4.8 | $ | 5.7 |
Carrying Amounts at Fair Value as of | |||||||
September 30, 2017 | December 31, 2016 | ||||||
Amortizing securitization facility (stated maturity of December 2021), outstanding face amount of $101.3 million as of September 30, 2017 ($102.0 million as of December 31, 2016) bearing interest at a weighted average 6.5% interest rate at September 30, 2017 (6.1% at December 31, 2016), which is secured by credit card receivables and restricted cash aggregating $9.8 million as of September 30, 2017 ($12.3 million as of December 31, 2016) in carrying amount | $ | 9.8 | $ | 12.3 |
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 $9.8$4.8 million in fair value of the structured financing notefacility included in the above table is
As discussed elsewhere, the legal entity holding the securitization facility discussed in the table above, is a VIE. 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.
Other notes payable outstanding as of
As of | ||||||||
March 31, 2019 | December 31, 2018 | |||||||
Revolving credit facilities at a weighted average interest rate equal to 7.7% at March 31, 2019 (7.6% at December 31, 2018) secured by the financial and operating assets of CAR and/or certain receivables and restricted cash with a combined aggregate carrying amount of $484.0 million as of March 31, 2019 ($468.8 million at December 31, 2018) | ||||||||
Revolving credit facility, not to exceed $40.0 million (expiring November 1, 2020) (1) (2) | 31.2 | 30.0 | ||||||
Revolving credit facility, not to exceed $50.0 million (expiring October 30, 2019) (2) (3) (4) | 49.6 | 49.9 | ||||||
Revolving credit facility, not to exceed $90.0 million (expiring February 8, 2022) (3) (4) (5) (6) | 69.0 | 61.0 | ||||||
Revolving credit facility, not to exceed $100.0 million (expiring June 11, 2020) (3) (4) (5) (6) | 80.5 | 80.5 | ||||||
Revolving credit facility, not to exceed $100.0 million (expiring November 16, 2020) (3) (4) (5) (6) | 16.0 | 8.0 | ||||||
Revolving credit facility, not to exceed $167.3 million (expiring November 15, 2023) (3) (4) (5) (6) | 167.3 | 167.3 | ||||||
Other facilities | ||||||||
Other secured debt (expiring September 8, 2023) that is secured by certain assets of the Company with an annual rate equal to 5.5% | 1.2 | 1.2 | ||||||
Senior secured term loan to related parties (expiring November 21, 2019) that is secured by certain assets of the Company with an annual rate equal to 9.0% (4) | 40.0 | 40.0 | ||||||
Total notes payable before unamortized debt issuance costs and discounts | 454.8 | 437.9 | ||||||
Unamortized debt issuance costs and discounts | (6.6 | ) | (7.0 | ) | ||||
Total notes payable outstanding | $ | 448.2 | $ | 430.9 |
As of | |||||||
September 30, 2017 | December 31, 2016 | ||||||
Revolving credit facilities at a weighted average interest rate equal to 7.1% at September 30, 2017 (4.8% at December 31, 2016) secured by the financial and operating assets of CAR and/or certain receivables and restricted cash with a combined aggregate carrying amount of $194.2 million as of September 30, 2017 ($127.9 million at December 31, 2016) | |||||||
Revolving credit facility, not to exceed $40.0 million (expiring November 1, 2018) (3) | 26.2 | 29.2 | |||||
Revolving credit facility, not to exceed $50.0 million (expiring October 30, 2019) (1) (2) | 49.2 | 34.7 | |||||
Revolving credit facility, not to exceed $20.0 million (expiring December 31, 2019) (1) (2) | 19.7 | 19.5 | |||||
Revolving credit facility, not to exceed $90.0 million (expiring February 8, 2022) (1) (4) | 50.0 | — | |||||
Amortizing facilities at a weighted average interest rate equal to 5.8% at September 30, 2017 (5.4% at December 31, 2016) secured by certain receivables and restricted cash with a combined aggregate carrying amount of $76.6 million as of September 30, 2017 ($69.9 million as of December 31, 2016) | |||||||
Amortizing debt facility (repaid in June 2017) (1) (2) (5) | — | 20.4 | |||||
Amortizing debt facility (repaid in September 2017) (1) (2) | — | 9.7 | |||||
Amortizing debt facility (expiring March 31, 2018) (1) (2) (5) | 7.3 | 14.6 | |||||
Amortizing debt facility (expiring June 30, 2018) (1) (2) (5) | 27.5 | — | |||||
Amortizing debt facility (expiring August 15, 2018) (1) (2) | 5.4 | 6.0 | |||||
Amortizing debt facility (expiring September 14, 2018) (1) (2) | 10.0 | 7.5 | |||||
Amortizing debt facility (expiring November 30, 2018) (1) (2) (5) | 16.0 | — | |||||
Other facilities | |||||||
Senior secured term loan from related parties (expiring November 22, 2017) that is secured by certain assets of the Company with an annual interest rate equal to 9.0% (4) | 40.0 | 40.0 | |||||
Total notes payable before unamortized debt issuance costs and discounts | 251.3 | 181.6 | |||||
Unamortized debt issuance costs and discounts | 2.3 | 0.4 | |||||
Total notes payable outstanding, net | $ | 249.0 | $ | 181.2 |
(1) | |
Loan is subject to certain affirmative covenants, including a coverage ratio, a leverage ratio and a collateral performance test, the failure of which could result in required early repayment of all or a portion of the outstanding balance by our CAR Auto Finance operations. |
(2) | These notes reflect modifications to either extend the maturity date, increase the loan amount or both, and are treated as accounting modifications. |
(3) | Loans are subject to certain affirmative covenants tied to default rates and other performance metrics the failure of which could result in required early repayment of the remaining unamortized balances of the notes. |
(4) | Loans are associated with variable interest entities. |
(5) | See below for additional information. |
(6) | Creditors do not have recourse against the general assets of |
Not included in the table above are certain bank commitments to lend additional capital upon assignment of available collateral. The remaining terms on these agreements range from 9-30 months at interest rates based on LIBOR plus a spread of 4.5%-6.5%. The total committed but undrawn capacity of these additional bank commitments as of March 31, 2019 was $97.0 million.
On November 26, 2014, we and certain of our subsidiaries entered into a Loan and Security Agreement with Dove Ventures, LLC, a Nevada limited liability company (“Dove”). The agreement provides for a senior secured term loan facility in an amount of up to $40.0 million at any time outstanding. The Loan and Security Agreement iswas fully drawn with $40.0 million outstanding as of September 30, 2017.March 31, 2019. In November 2016,2018, the agreement was amended to extend the maturity date of the term loan to November 22, 2017.21, 2019. All other terms remain unchanged.
Our obligations under the agreement are guaranteed by certain subsidiary guarantors and secured by a pledge of certain assets of ours and the subsidiary guarantors. The loans bear interest at the rate of 9.0% per annum, payable monthly in arrears. The principal amount of these loans is payable in a single installment on November 22, 201721, 2019 (as amended). The agreement includes customary affirmative and negative covenants, as well as customary representations, warranties and events of default. Subject to certain conditions, we can prepay the principal amounts of these loans without premium or penalty.
Dove is a limited liability company owned by three trusts. David G. Hanna is the sole shareholder and the President of the corporation that serves as the sole trustee of one of the trusts, and David G. Hanna and members of his immediate family are the beneficiaries of this trust. Frank J. Hanna, III is the sole shareholder and the President of the corporation that serves as the sole trustee of the other two trusts, and Frank J. Hanna, III and members of his immediate family are the beneficiaries of these other two trusts.
In October 2015, we (through a wholly owned subsidiary) entered a revolving credit facility with a (as subsequently amended) $50.0 million revolving borrowing limit that can be drawn to the extent of outstanding eligible principal receivables (of which $49.6 million was drawn as of March 31, 2019). This facility is secured by the loans, interest and fees receivable and related restricted cash and accrues interest at an annual rate equal to LIBOR plus 5.0%. The loan is subject to certain affirmative covenants, including a liquidity test and an eligibility test, the failure of which could result in required early repayment of all or a portion of the outstanding balance. The note is guaranteed by Atlanticus who is required to maintain certain minimum liquidity levels.
In October 2016, we (through a wholly owned subsidiary) entered a revolving credit facility with a $40.0 million borrowing limit that can be drawn to the extent of outstanding eligible principal receivables of our CAR subsidiary (of which $31.2 million was drawn as of March 31, 2019). This facility is secured by the financial and operating assets of CAR and accrues interest at an annual rate equal to LIBOR plus a range between 2.4% and 3.0% based on certain ratios. The loan is subject to certain affirmative covenants, including a coverage ratio, a leverage ratio and a collateral performance test, the failure of which could result in required early repayment of all or a portion of the outstanding balance. In February 2019, we extended the maturity date of this revolving credit facility to November 1, 2020. There were no other material changes to the existing terms or conditions and the new maturity date is reflected in the table above.
In February 2017, we (through a wholly owned subsidiary) established a program under which we sell certain receivables to a consolidated trust in exchange for notes issued by the trust. The notes are secured by the receivables and other assets of the trust. Simultaneously with the establishment of the program, the trust issued a series of variable funding notes and sold an aggregate amount of up to $90.0 million (of which $50.0$69.0 million was outstanding as of September 30, 2017)March 31, 2019) to an unaffiliated third party pursuant to a facility that can be drawn upon to the extent of outstanding eligible receivables.
In 2018, we (through a wholly owned subsidiary) entered into two separate facilities associated with the above mentioned program to sell up to an aggregate $200.0 million of notes which are secured by the receivables and other assets of the trust (of which $96.5 million was outstanding as of March 31, 2019) to separate unaffiliated third parties pursuant to facilities that can be drawn upon to the extent of outstanding eligible receivables. Interest rates on the notes are based on commercial paper rates plus 4.25% and LIBOR plus 4.5%, respectively. The facilities mature on June 11, 2020 and November 16, 2020, respectively, and are subject to certain affirmative covenants and collateral performance tests, the failure of which could result in required early repayment of all or a portion of the outstanding balance of notes. The facilities also may be prepaid subject to payment of a prepayment or other fee.
In November 2018, we sold $167.3 million of asset backed securities (“ABS”) secured by certain retail point-of-sale receivables. A portion of the proceeds from the sale were used to pay-down our existing term and revolving facilities associated with our point-of-sale receivables, noted in the table above, and the remaining proceeds are available to fund the acquisition of future receivables. The terms of the ABS allow for a two-year revolving structure with a subsequent 18-month amortization period. The weighted average interest rate on the securities is fixed at 5.76%.
We are in compliance with the covenants underlying our various notes payable.
9. | |
Convertible Senior Notes |
In November 2005, we issued $300.0 million aggregate principal amount of 5.875% convertible senior notes due November 30, 2035 (“5.875% convertible senior notes”).2035. The 5.875% convertible senior notes are unsecured, subordinate to existing and future secured obligations and structurally subordinate to existing and future claims of our subsidiaries’ creditors. These notes (net of repurchases since the issuance dates) are reflected within convertible senior notes on our consolidated balance sheets. No put rights exist under our 5.875% convertible senior notes.
The following summarizes (in thousands) components of our consolidated balance sheets associated with our convertible senior notes:
As of | ||||||||
March 31, 2019 | December 31, 2018 | |||||||
Face amount of convertible senior notes | $ | 88,280 | $ | 88,280 | ||||
Discount | (25,967 | ) | (26,138 | ) | ||||
Net carrying value | $ | 62,313 | $ | 62,142 | ||||
Carrying amount of equity component included in paid-in capital | $ | 108,714 | $ | 108,714 | ||||
Excess of instruments’ if-converted values over face principal amounts | $ | — | $ | — |
As of | |||||||
September 30, 2017 | December 31, 2016 | ||||||
Face amount of 5.875% convertible senior notes | $ | 88,280 | $ | 88,280 | |||
Discount | (27,042 | ) | (27,489 | ) | |||
Net carrying value | $ | 61,238 | $ | 60,791 | |||
Carrying amount of equity component included in additional paid-in capital | $ | 108,714 | $ | 108,714 | |||
Excess of instruments’ if-converted values over face principal amounts | $ | — | $ | — |
10. | |
Commitments and Contingencies |
General
Under finance products available in the point-of-sale and direct-to-consumer channels, consumers have the ability to borrow up to the maximum credit limit assigned to each individual’s account. Unfunded commitments under these products aggregated
Additionally our CAR operations provide floor-plan financing for a pre-qualified network of independent automotive dealers and automotive finance companies in the buy-here, pay-here used car business. The financings allow dealers and finance companies to borrow up to the maximum pre-approved credit limit allowed in order to finance ongoing inventory needs. These loans are secured by the underlying auto inventory and, in certain cases where we have other lending products outstanding with the dealer, are secured by the collateral under those lending arrangements as well, including any outstanding dealer reserves. As of
Under agreements with third-party originating and other financial institutions, we have pledged security (collateral) related to their issuance of consumer credit and purchases thereunder, of which $10.7$11.4 million remains pledged as of September 30, 2017March 31, 2019 to support various ongoing contractual obligations.
Under agreements with third-party originating and other financial institutions, we have agreed to indemnify the financial institutions for certain liabilities associated with the services we provide on behalf of the financial institutions—such indemnification obligations generally being limited to instances in which we either (a) have been afforded the opportunity to defend against any potentially indemnifiable claims or (b) have reached agreement with the financial institutions regarding settlement of potentially indemnifiable claims. As of
We also are subject to certain minimum payments under cancelable and non-cancelable lease arrangements. For further information regarding these commitments, see Note 8,7, “Leases” to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.
Litigation
We are involved in various legal proceedings that are incidental to the conduct of our business, none of which are expected to be material to us.
11. | |
Net |
The following table sets forth the computations of net lossincome (loss) per common share (in thousands, except per share data):
For the Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Numerator: | ||||||||
Net income (loss) attributable to controlling interests | $ | 5,713 | $ | (4,670 | ) | |||
Denominator: | ||||||||
Basic (including unvested share-based payment awards) (1) | 14,355 | 13,899 | ||||||
Effect of dilutive stock compensation arrangements (2) | 362 | — | ||||||
Diluted (including unvested share-based payment awards) (1) | 14,717 | 13,899 | ||||||
Net income (loss) attributable to controlling interests per common share—basic | $ | 0.40 | $ | (0.34 | ) | |||
Net income (loss) attributable to controlling interests per common share—diluted | $ | 0.39 | $ | (0.34 | ) |
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Numerator: | |||||||||||||||
Net loss attributable to controlling interests | $ | (14,467 | ) | $ | (9,065 | ) | $ | (22,523 | ) | $ | (4,235 | ) | |||
Denominator: | |||||||||||||||
Basic (including unvested share-based payment awards) (1) | 13,921 | 13,867 | 13,949 | 13,857 | |||||||||||
Effect of dilutive stock compensation arrangements (2) | 10 | 63 | 19 | 68 | |||||||||||
Diluted (including unvested share-based payment awards) (1) | 13,931 | 13,930 | 13,968 | 13,925 | |||||||||||
Net loss attributable to controlling interests per common share—basic | $ | (1.04 | ) | $ | (0.65 | ) | $ | (1.61 | ) | $ | (0.31 | ) | |||
Net loss attributable to controlling interests per common share—diluted | $ | (1.04 | ) | $ | (0.65 | ) | $ | (1.61 | ) | $ | (0.31 | ) |
(1) | Shares related to unvested share-based payment awards included in our basic and diluted share counts were |
(2) | The effect of dilutive stock compensation arrangements is shown only for informational purposes where we are in a net loss position. In such situations, the effect of including outstanding options and restricted stock would be anti-dilutive, and they are thus excluded from all loss period calculations. |
For the three and nine months ended
12. | Stock-Based Compensation |
As of March 31, 2019, we had two
stock-based compensation plans, the Second Amended and Restated Employee Stock Purchase Plan (the “ESPP”) and the Second Amended and Restated 2014 Equity Incentive Plan (the “2014 Plan”). On May 9, 2019, our shareholders approved the Fourth Amended and Restated 2014 Equity Incentive Plan (the "Fourth Amended 2014 Plan"). Among other things, the Fourth Amended 2014 Plan (i) increased the number of shares of Common Stock available for issuance under the Fourth Amended 2014 Plan by 2,000,000 shares and (ii) extended the term of the Fourth Amended 2014 Plan by approximately two years. As ofExercises and vestings under our stock-based compensation plans resulted in $0 inno income tax-related charges to additional paid-in capital during both the three and nine months ended
Restricted Stock and Restricted Stock Unit Awards
During the ninethree months ended September 30, 2017March 31, 2019 and 2016,2018, we granted 102,000205,000 and
Stock Options
Our 2014 Plan provides that we may grant options on or shares of our common stock (and other types of equity awards) to members of our Board of Directors, employees, consultants and advisors. The exercise price per share of the options must be equal to or greater than the market price on the date the option is granted. The option period may not exceed 10 years from the date of grant. The vesting requirements for options are determined by the Compensation Committee of the Board of Directors. We had expense of $0.7$0.2 million and $0.6$0.2 million related to stock option-related compensation costs during the ninethree months ended September 30, 2017March 31, 2019 and 2016,2018, respectively. When applicable, we recognize stock option-related compensation expense for any awards with graded vesting on a straight-line basis over the vesting period for the entire award. Information related to optionsThe table below includes additional information about outstanding is as follows:options:
Number of Shares | Weighted-Average Exercise Price | Weighted-Average of Remaining Contractual Life (in years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding at December 31, 2018 | 3,121,200 | $ | 3.50 | |||||||||||||
Issued | 50,000 | $ | 3.13 | |||||||||||||
Exercised | (419,500 | ) | $ | 2.54 | ||||||||||||
Cancelled/Forfeited | — | $ | — | |||||||||||||
Outstanding at March 31, 2019 | 2,751,700 | $ | 3.64 | 2.9 | $ | 934,117 | ||||||||||
Exercisable at March 31, 2019 | 959,868 | $ | 3.34 | 2.1 | $ | 239,953 |
September 30, 2017 | ||||||||||||
Number of Shares | Weighted- Average Exercise Price | Weighted- Average of Remaining Contractual Life (in years) | Aggregate Intrinsic Value | |||||||||
Outstanding at December 31, 2016 | 1,411,667 | $ | 3.09 | |||||||||
Issued | 1,215,000 | $ | 2.98 | |||||||||
Exercised | — | $ | — | |||||||||
Cancelled/Forfeited | (4,000 | ) | $ | 3.04 | ||||||||
Outstanding at September 30, 2017 | 2,622,667 | $ | 3.04 | 3.6 | $ | 10,653 | ||||||
Exercisable at September 30, 2017 | 792,205 | $ | 2.92 | 2.3 | $ | 10,653 |
The following discussion should be read in conjunction with our consolidated financial statements and the related notes included therein and our Annual Report on Form 10-K for the year ended December 31, 2016,2018, where certain terms (including trust, subsidiary and other entity names and financial, operating and statistical measures) have been defined.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements. We base these forward-looking statements on our current plans, expectations and beliefs about future events. There are risks, including the factors discussed in “Risk Factors” in Part II, Item 1A and elsewhere in this Report,report, that our actual experience will differ materially from these expectations. For more information, see “Forward Looking“Forward-Looking Information” below.
In this Report,report, except as the context suggests otherwise, the words “Company,” “Atlanticus Holdings Corporation,” “Atlanticus,” “we,” “our,” “ours,” and “us” refer to Atlanticus Holdings Corporation and its subsidiaries and predecessors.
This report contains information that we obtained from industry and general publications and research, surveys and studies conducted by third parties. This information involves many assumptions and limitations, and you are cautioned not to give undue weight to any of this data. We have obtained this information from sources that we believe are reliable. However, we have not independently verified market or industry data from third party sources.
OVERVIEW
We utilize proprietary analytics and a flexible technology platform to enable financial institutions to provide various credit and related financial services and products to or associated with the financially underserved consumer credit market. According to data published by FICO (NYSE: FICO), 41.7% of consumers had FICO® scores of 700 or less as of April 2018 which represents a population in excess of 90 million consumers. The “Report on Economic Well-Being of U.S. Households in 2017” published by the Board of Governors of the Federal Reserve System further states that 40% of adults do not have ready access to $400 to cover an unexpected expense or would cover the expense by selling something or borrowing money, with CareerBuilder noting that 75% of Americans live “paycheck to paycheck”. These consumers often have short-term, immediate credit needs that are often not effectively met by traditional financial institutions. By facilitating fairly priced consumer credit alternatives with value added features and benefits specifically curated for the unique needs of this financially underserved consumer, we endeavor to empower consumers on a path to improved financial well-being.
Currently, within our Credit and Other Investments segment, we are applying the experiences gained and infrastructure built from servicing over $25 billion in consumer loans over our 21-year22-year operating history to support lenders who originate a range of consumer loan products. These products include retail credit personal loans, and credit cards marketed through multiple channels, including retail point-of-sale, direct mail solicitation, Internet-based marketing and partnerships with third parties. In the point-of-sale channel, we partner with retailers and service providers in various industries across the U.S. to allow them to provide credit to their customers for the purchase of a variety of goods and services including consumer electronics, furniture, elective medical procedures, healthcare, educational services and home-improvements. These services of our lending partners are often extended to consumers who may not have access to traditional financing options. We specialize in supporting this “second-look” credit service. Our flexible technology platform allows our lending partners to integrate our paperless process and instant decision-making platform with the technology infrastructure of participating retailers and service providers. These services of our lending partners are often extended to consumers who may have been declined under traditional financing options. We specialize in supporting this “second-look” credit service. Additionally, we support lenders who market general purpose personal loans and credit cards directly to consumers through additional channels, which enables them to reach consumers through a diverse origination platform that includes retail point-of-sale, direct mail Internet-basedand digital marketing solicitation and our retail partnerships.partnerships with third parties. Our technology platform and proprietary analytics enable lenders to make instant credit decisions utilizing hundreds of inputs from multiple sources and thereby offer credit to consumers overlooked by traditional providers of credit.financing. By offering a range of products through a multitude of channels, we enable lenders to provide the right type of credit, whenever and wherever the consumer has a need.
In most cases, we invest in the receivables originated by lenders who utilize our technology platform and other related services.
Using our infrastructure and technology platform, we also provide loan servicing, including risk management and customer service outsourcing, for third parties. Also through our Credit and Other Investments segment, we engage in testing and limited investment in consumer finance technology platforms as we seek to capitalize on our expertise and infrastructure.
Additionally, we report within our Credit and Other Investments segmentsegment: (1) the income earned from an investment in an equity-method investee that holds credit card receivables for which we are the servicer.
The recurring cash flows we receive within our Credit and Other Investments segment principally include those associated with (1) point-of-sale and direct-to-consumer receivables, (2) servicing compensation and (3) credit card receivables portfolios that are unencumbered or where we own a portion of the underlying structured financing facility.
We historically financed most ofbelieve that our investments in the credit card receivables originated through our platform through the asset-backed securitization markets. These markets deteriorated significantly in 2008, and the level of “advance rates,” or leverage against credit card receivable assets, in the current asset-backed securitization markets is below pre-2008 levels. We do believe, however, that point-of-sale and direct-to-consumer receivables are generating, and will continue to generate, attractive returns on assets, thereby facilitating debt financing under terms and conditions (including advance rates and pricing) that will support attractive returns on equity, and we continue to pursue growth in this area.
Within our Auto Finance segment, our CAR subsidiary operations principally purchase and/or service loans secured by automobiles from or for, and also provide floor plan financing for, a pre-qualified network of independent automotive dealers and automotive finance companies in the buy-here, pay-here, used car business. We purchase auto loans at a discount and with dealer retentions or holdbacks that provide risk protection. Also within our Auto Finance segment, we are providing certain installment lending products in addition to our traditional loans secured by automobiles.
We closely monitor and manage our expenses based on current product offerings (and in recent years have significantly reduced our overhead infrastructure which was built to accommodate higher managed receivables levels and a much greater number of accounts serviced). As such,offerings. At this time, we are maintaining our infrastructure and incurring increased overhead and other costs in order to expand point-of-sale and direct-to-consumer finance and credit solutions and new product offerings that we believe have the potential to grow into our existing infrastructure and allow for long-term shareholder returns.
Beyond these activities within our Credit and Other Investments segment, we invest in and service portfolios of credit card receivables. One of our portfolios of credit card receivables is encumbered by non-recourse structured financing, and for this portfolio our principal remaining economic interest is the servicing compensation we receive as an offset against our servicing costs given that the likely future collections on the portfolio are insufficient to allow for full repayment of the financing.
Subject to the availability of capital at attractive terms and pricing, we plan to continue to evaluate and pursue a variety of activities, including: (1) investments in additional financial assets associated with point-of-sale and direct-to-consumer finance and credit activities as well as the acquisition of interests in receivables portfolios;portfolios and (2) investments in other assets or businesses that are not necessarily financial services assets or businesses; and (3) the repurchase of our convertible senior notes and other debt orand our outstanding common stock.
CONSOLIDATED RESULTS OF OPERATIONS
Income | ||||||||||||
For the Three Months Ended March 31, | Increases (Decreases) | |||||||||||
(In Thousands) | 2019 | 2018 | from 2018 to 2019 | |||||||||
Total interest income | $ | 50,459 | $ | 35,726 | $ | 14,733 | ||||||
Interest expense | (11,146 | ) | (8,153 | ) | (2,993 | ) | ||||||
Fees and related income on earning assets: | ||||||||||||
Fees on credit products | 10,296 | 4,905 | 5,391 | |||||||||
Changes in fair value of loans, interest and fees receivable recorded at fair value | (1 | ) | (18 | ) | 17 | |||||||
Changes in fair value of notes payable associated with structured financings recorded at fair value | 875 | 1,331 | (456 | ) | ||||||||
Other | 94 | (4 | ) | 98 | ||||||||
Other operating income: | ||||||||||||
Servicing income | 686 | 632 | 54 | |||||||||
Other income | 16,844 | 516 | 16,328 | |||||||||
Equity in income of equity-method investee | 227 | 9 | 218 | |||||||||
Total | $ | 68,334 | $ | 34,944 | $ | 33,390 | ||||||
Net losses upon impairment of loans, interest and fees receivable recorded at fair value | 254 | 1,791 | 1,537 | |||||||||
Provision for losses on loans, interest and fees receivable recorded at net realizable value | 34,598 | 15,991 | (18,607 | ) | ||||||||
Other operating expenses: | ||||||||||||
Salaries and benefits | 6,591 | 6,298 | (293 | ) | ||||||||
Card and loan servicing | 10,444 | 9,164 | (1,280 | ) | ||||||||
Marketing and solicitation | 6,387 | 2,346 | (4,041 | ) | ||||||||
Depreciation | 289 | 229 | (60 | ) | ||||||||
Other | 3,878 | 3,700 | (178 | ) | ||||||||
Net income (loss) | 5,655 | (4,719 | ) | 10,374 | ||||||||
Net loss attributable to noncontrolling interests | 58 | 49 | 9 | |||||||||
Net income (loss) attributable to controlling interests | 5,713 | (4,670 | ) | 10,383 |
Income | |||||||||||
For the Three Months Ended September 30, | Increases (Decreases) | ||||||||||
(In Thousands) | 2017 | 2016 | from 2016 to 2017 | ||||||||
Total interest income | $ | 29,019 | $ | 24,089 | $ | 4,930 | |||||
Interest expense | (7,268 | ) | (5,257 | ) | (2,011 | ) | |||||
Fees and related income on earning assets: | |||||||||||
Fees on credit products | 3,248 | 944 | 2,304 | ||||||||
Changes in fair value of loans and fees receivable recorded at fair value | 1,153 | (1,857 | ) | 3,010 | |||||||
Changes in fair value of notes payable associated with structured financings recorded at fair value | 259 | 259 | — | ||||||||
Rental revenue | — | 758 | (758 | ) | |||||||
Other | (494 | ) | (29 | ) | (465 | ) | |||||
Other operating income: | |||||||||||
Servicing income | 1,034 | 885 | 149 | ||||||||
Other income | 590 | 69 | 521 | ||||||||
Gain on repurchase of convertible senior notes | — | — | — | ||||||||
Equity in income equity-method investee | 164 | 629 | (465 | ) | |||||||
Total | $ | 27,705 | $ | 20,490 | $ | 7,215 | |||||
Net recovery of losses upon charge off of loans and fees receivable recorded at fair value | (2,393 | ) | (1,556 | ) | 837 | ||||||
Provision for losses on loans and fees receivable recorded at net realizable value | 24,087 | 17,470 | (6,617 | ) | |||||||
Other operating expenses: | |||||||||||
Salaries and benefits | 5,296 | 6,329 | 1,033 | ||||||||
Card and loan servicing | 8,687 | 7,027 | (1,660 | ) | |||||||
Marketing and solicitation | 2,072 | 587 | (1,485 | ) | |||||||
Depreciation, primarily related to rental merchandise | 236 | 794 | 558 | ||||||||
Other | 4,210 | 3,570 | (640 | ) | |||||||
Net loss | (14,468 | ) | (9,065 | ) | (5,403 | ) | |||||
Net loss attributable to noncontrolling interests | 1 | — | 1 | ||||||||
Net loss attributable to controlling interests | (14,467 | ) | (9,065 | ) | (5,402 | ) |
Income | |||||||||||
For the Nine Months Ended September 30, | Increases (Decreases) | ||||||||||
(In Thousands) | 2017 | 2016 | from 2016 to 2017 | ||||||||
Total interest income | $ | 81,635 | $ | 63,851 | $ | 17,784 | |||||
Interest expense | (19,504 | ) | (14,693 | ) | (4,811 | ) | |||||
Fees and related income on earning assets: | |||||||||||
Fees on credit products | 6,351 | 2,599 | 3,752 | ||||||||
Changes in fair value of loans and fees receivable recorded at fair value | 2,718 | 568 | 2,150 | ||||||||
Changes in fair value of notes payable associated with structured financings recorded at fair value | 1,786 | 2,363 | (577 | ) | |||||||
Rental revenue | 148 | 8,091 | (7,943 | ) | |||||||
Other | (65 | ) | 219 | (284 | ) | ||||||
Other operating income: | |||||||||||
Servicing income | 2,984 | 3,313 | (329 | ) | |||||||
Other income | 939 | 214 | 725 | ||||||||
Gain on repurchase of convertible senior notes | — | 1,037 | (1,037 | ) | |||||||
Equity in income equity-method investee | 902 | 1,956 | (1,054 | ) | |||||||
Total | $ | 77,894 | $ | 69,518 | $ | 8,376 | |||||
Net recovery of losses upon charge off of loans and fees receivable recorded at fair value | (10,763 | ) | (12,607 | ) | (1,844 | ) | |||||
Provision for losses on loans and fees receivable recorded at net realizable value | 50,484 | 33,012 | (17,472 | ) | |||||||
Other operating expenses: | |||||||||||
Salaries and benefits | 16,314 | 18,242 | 1,928 | ||||||||
Card and loan servicing | 23,866 | 23,300 | (566 | ) | |||||||
Marketing and solicitation | 6,731 | 2,374 | (4,357 | ) | |||||||
Depreciation, primarily related to rental merchandise | 789 | 7,049 | 6,260 | ||||||||
Other | 16,842 | 6,199 | (10,643 | ) | |||||||
Net loss | (22,522 | ) | (4,240 | ) | (18,282 | ) | |||||
Net (income) loss attributable to noncontrolling interests | (1 | ) | 5 | (6 | ) | ||||||
Net loss attributable to controlling interests | (22,523 | ) | (4,235 | ) | (18,288 | ) |
Total interest income.
Total interest income consists primarily of finance charges and late fees earned on point-of-sale and direct-to-consumer receivables, credit card and auto finance receivables. Period-over-period results primarily relate to growth in point-of-sale finance and direct-to-consumer products, the receivables of which increased fromInterest expense.
Variations in interest expense are due to new borrowings associated with growth in point-of-sale and direct-to-consumer receivables and CAR operations as evidenced within Note 8, “Notes Payable,” to our consolidated financial statements offset by our debt facilities being repaid commensurate with net liquidations of the underlying credit card, auto finance and installment loan receivables that serve as collateral for theFees and related income on earning assets.
The significant factors affecting our differing levels of fees and related income on earning assets include:increases in fees on credit products, primarily associated with growth in direct-to-consumer products and to a lesser degree by growth in point-of-sale finance and direct-to-consumer products, offset somewhat by general net declines in historical credit card receivables; and
the effects of changes in the fair values of credit card receivables recorded at fair value and notes payable associated with structured financings recorded at fair value as described below.
We expect increasing levels of credit carddirect-to-consumer fee income for the remainder of 2017 and into 2018throughout 2019 as we continue to invest in new credit card receivables as part of our direct-to-consumer operations, offset somewhat by diminishing fee income associated with our existing portfolios of liquidating credit card receivables.operations. Additionally, for credit card accounts for which we use fair value accounting, we expect our change in fair value of credit card receivables recorded at fair value and our change in fair value of notes payable associated with structured financings recorded at fair value amounts to gradually diminish (absent significant changes in the assumptions used to determine these fair values) in the future. These amounts, however, are subject to potentially high levels of volatility if we experience changes in the quality of our credit card receivables or if there are significant changes in market valuation factors (e.g., interest rates and spreads) in the future. Such volatility will be muted somewhat, however, by the offsetting nature of the receivables and underlying debt being recorded at fair value and with the expected reductions in the face amounts of such outstanding receivables and debt as we experience further legacy credit card receivables liquidations and associated debt amortizing repayments. Further, as discussed above, we do not expect meaningful levels of rental revenue as existing rent-to-own contracts have effectively concluded with no new acquisitions expected. This decline in rental revenues will serve to offset some of the aforementioned growth we expect in our credit card fee income.
Servicing income.
We earn servicing income by servicing loan portfolios for third parties (including our equity-method investee). Additionally, we will receive periodic compensation for processing reimbursements to consumers with respect to one of our portfolios. Unless and/or until we grow the number of contractual servicing relationships we have with third parties or our current relationships grow their loan portfolios, we will not experience significant growth and income within this category, and we currently expect to experienceOther income
.Equity in income of equity-method investee.
Because our equity-method investee uses the fair value option to account for its financial assets and liabilities, changes in fair value estimates can cause some volatility in the earnings of this investee. Because of continued liquidations in the credit card receivables portfolio of our equity-method investee, absent additional investments in our existing or in new equity-method investees in the future, we expect gradually declining effects from our equity-method investment on our operating results.Net recovery of losses upon charge offimpairment of loans, interest and fees receivable recorded at fair value.
Provision for losses on loans, interest and fees receivable recorded at net realizable value.
Our provision for losses on loans, interest and fees receivable recorded at net realizable value covers, with respect to such receivables, changes in estimates regarding our aggregate loss exposures on (1) principal receivable balances, (2) finance charges and late fees receivable underlying income amounts included within our total interest income category, and (3) other fees receivable. We have experienced a period-over-period increase in this category between both the three months endedTotal other operating expense.
Total other operating expense variances for the three• | increases in salaries reflecting marginal growth in both the number of employees and increases in related benefit costs. We expect some marginal increase in this cost for 2019 when compared to 2018 as we expect our receivables to continue to grow; | |
• | increases in card and loan servicing expenses in the three months ended March 31, 2019 when compared to the three months ended March 31, 2018 due to growth in receivables associated with our investments in point-of-sale and direct-to-consumer receivables which grew from $322.3 million outstanding to $472.3 million outstanding at March 31, 2018 and March 31, 2019, respectively, offset by the continued net liquidations in our historical credit card portfolios, the receivables of which declined from $15.6 million outstanding to $8.7 million outstanding at March 31, 2018 and March 31, 2019, respectively; |
increases in marketing and solicitation costs for the three and nine months ended September 30, 2017March 31, 2019 when compared to the three months ended March 31, 2018, primarily due to volume relatedvolume-related increases in costs attributable to the growth in our retail point-of-sale and direct-to-consumer portfolios. We expect that increased origination and brand marketing support will result in overall increases in year-over-year costs during the remainder of 2017 and into 20182019 although the frequency and timing of marketing efforts could result in reductions in quarter-over-quarter marketing costs; and
slight increases in other expenses primarily related to receivables acquisition, risk management costsrealized translation gains and third party costs associated with ongoing information technology upgrades.losses recognized during both periods.
Certain operating costs are variable based on the levels of accounts and receivables we service (both for our own account and for others) and the pace and breadth of our growth in receivables. However, a number of our operating costs are fixed and until recently have comprised a larger percentage of our total costs based on the ongoing contraction of our historicallegacy credit card receivables. This trend is gradually reversing however, as we continue to grow our earning assets (including loans, interest and fees receivable) based principally on growth of point-of-sale and direct-to-consumer receivables and to a lesser extent, growth within our CAR operations. This is evidenced by the growth we experienced in our managed receivables levels with minimal growth in the fixed portion of our card and loan servicing expenses as well as our salaries and benefits costs as we were able to better utilize our fixed costs to grow our asset base. We continue to perform extensive reviews of all areas of our businesses for cost savings opportunities to better alignmanage our costs with our portfolio of managed receivables.
Notwithstanding our cost-control efforts and focus, we expect increased levels of expenditures associated with anticipated growth in point-of-sale and direct-to-consumer personal loan and credit card-related operations. These expenses will primarily relate to the variable costs of marketing efforts and card and loan servicing expenses associated with new receivable acquisitions. While we have greater control over our variable expenses, it is difficult (as explained above) for us to appreciably reduce our fixed and other costs associated with an infrastructure (particularly within our Credit and Other Investments segment) that was built to support levels of managed receivables that are significantly higher than both our current levels and the levels that we expect to see in the near future. At this point, our Credit and Other Investments segment cash inflows are sufficient to cover its direct variable costs and a portion, but not all, of its share of overhead costs (including, for example, corporate-level executive and administrative costs and our convertible senior notes interest costs). As such, if we are
Noncontrolling interests.
We reflect the ownership interests of noncontrolling holders of equity in our majority-owned subsidiaries as noncontrolling interests in our consolidated statements of operations. Unless we enter into significant new majority-owned subsidiary ventures with noncontrolling interest holders in the future, we expect to have negligible noncontrolling interests in our majority-owned subsidiaries and negligible allocations of income or loss to noncontrolling interest holders in future quarters.Income Taxes. We experienced an effective income tax benefit ratesexpense rate of 0.2% and 14.6%4.0% for the three and nine months ended September 30, 2017, respectively,March 31, 2019, compared to a negative effective income tax benefit ratesexpense rate of 34.0% and 47.3%3.1% for the three and nine months ended September 30, 2016, respectively.March 31, 2018. Our effective income tax benefit ratesexpense rate for the three and nine months ended September 30, 2017 areMarch 31, 2019, is below the statutory rate principally due to (1)reductions in our valuation allowances against net federal deferred tax assets during such period—the effect of such reductions being partially offset by accruals of interest and penalties that we accrued on unpaid federal tax liabilities and (2) our establishment of,uncertain tax positions and increases in, our valuation allowancesstate and foreign income taxes during such periodsperiod. Conversely, our negative effective income tax expense rate for the three months ended March 31, 2018, was greater than the statutory rate principally due to accruals of interest on unpaid federal tax liabilities and uncertain tax positions and state and foreign income taxes during such period—the effect of such accruals being partially offset by additions to valuation allowances against our net federal deferred tax assets that arose during such periods associated with our net loss incurred during such periods. Our effective income tax benefit rate for the three months ended September 30, 2016 was below the statutory rate principally due to our accruals of interest and penalties on unpaid tax liabilities relative to our $13.7 million of pre-tax loss during that period. Our effective income tax benefit rate for the nine months ended September 30, 2016 was above the statutory rate principally due to income during that period of our U.K. subsidiary that was not subject to tax in the U.S. and the U.K. tax on which was fully offset by the release of U.K. valuation allowances in that period.
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 suchincome tax-related interest and penalties within the income tax benefit or expensesuch 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, 2017, our income tax benefits were offset byMarch 31, 2019, and 2018, we included $0.1 million and $0.2 million, and $0.5 million of net income tax-related interest and penalties charges. During the three and nine months ended September 30, 2016, we included $0.2 million and $0.6 millionrespectively, 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 that we incurred in 2007 and 2008 and carried back to obtain refunds of federal income taxes paid in earlier years dating back to 2003. Our net unpaid income tax assessment associated with that settlement was $7.4 million at September 30, 2017; this amount excludes unpaid interest and penalties on the tax assessment, the accruals for which aggregated $3.9 million at September 30, 2017. Prior to our filingIn 2015, we filed an amended return claimsclaim 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, thesettlement. 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. In October 2017, we attended anFollowing correspondence and conferences held with IRS Appeals, conferencewe 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 subject matter underlying our amended return claims,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 in the processcontinuing to pursue complete abatement of preparing a supplemental submission to address matters on whichfailure-to-pay penalties of $0.9 million. Once this matter is resolved and we pay any residual interest liability, we expect the IRS Appeals Officer needed additional support.
Credit and Other Investments Segment
Our Credit and Other Investments segment includes our activities relating to our servicing of and our investments in the point-of-sale, direct-to-consumer personal finance and credit card operations, our various credit card receivables portfolios, as well as other product testing and investments that generally utilize much of the same infrastructure. The types of revenues we earn from our investments in receivables portfolios and services primarily include finance charges, fees and the accretion of discounts associated with the point-of-sale receivables or annual fees on our direct-to-consumer receivables.
We record (i) the finance charges, discount accretion and late fees assessed on our Credit and Other Investments segment receivables in the interest income - consumer loans, including past due fees category on our consolidated statements of operations, (ii) the rental revenue, over-limit, annual, activation, monthly maintenance, returned-check, cash advance and other fees in the fees and related income on earning assets category on our consolidated statements of operations, and (iii) the charge offs (and recoveries thereof) within our provision for losses on loans, interest and fees receivable recorded at net realizable value on our consolidated statements of operations (for all credit product receivables other than those for which we have elected the fair value option) and within net losses upon charge offimpairment of loans, interest and fees receivable recorded at fair value on our consolidated statements of operations (for all of our other receivables for which we have elected the fair value option). Additionally, we show the effects of fair value changes for those credit card receivables for which we have elected the fair value option as a component of fees and related income on earning assets in our consolidated statements of operations.
We historically have invested in receivables portfolios through subsidiary entities. If we control through direct ownership or exert a controlling interest in the entity, we consolidate it and reflect its operations as noted above. If we exert significant influence but do not control the entity, we record our share of its net operating results in the equity in income of equity-method investee category on our consolidated statements of operations.
We make various references within our discussion of the Credit and Other Investments segment to our managed receivables. In calculatingOur managed receivables data we include within managed receivablesincludes only the performance of those receivables we manage for ourunderlying consolidated subsidiaries but we excludeand excludes from managed receivables any noncontrolling interest holders’ sharesdata the performance of receivables held by our equity method investee. As the receivables.receivables underlying our equity method investee reflect a diminishing portion of our overall receivables base, we do not believe their inclusion or exclusion in the overall results is material. Additionally, we include withincalculate average managed receivables only our economic share ofbased on the receivables that we manage for our equity-method investee.
Financial, operating and statistical data based on aggregate managed receivables are important to any evaluation of the performance of our credit portfolios, including our risk management, servicing and collection activities and our valuing of purchased receivables. In allocating our resources and managing our business, management relies heavily upon financial data and results prepared on this “managed basis.” Analysts, investors and others also consider it important that we provide selected financial, operating and statistical data on a managed basis because this allows a comparison of us to others within the specialty finance industry. Moreover, our management, analysts, investors and others believe it is critical that they understand the credit performance of the entire portfolio of our managed receivables because it revealsprovides information concerning the quality of loan originations and the related credit risks inherent within the portfolios.
Reconciliation of the managed receivables data to our GAAP financial statements requires: (1)requires an understanding thatthat: (1) our managed receivables data are based on billings and actual charge offscharge-offs as they occur, without regard to any changes in our allowance for uncollectible loans, interest and fees receivable or any changes inreceivable; (2) our managed receivables data exclude non-consolidated receivables (3) the period-end and average managed receivables data include the face value of receivables which are accounted for under the fair value of loansoption; and fees receivable and their associated structured financing notes; (2) inclusion of our economic share of (or equity interest in) the receivables(4) when applicable, we manage for our equity-method investee; (3) removal of any noncontrolling interest holders’ shares of the managed receivables underlying our GAAP consolidated results; (4) adjustment of principal charge offs for the difference between the deemed face amount and the deemed discounted repurchase price of the receivables which is treated as credit quality discount to be accreted into managed earnings as a reduction of adjusted net charge offs over the remaining life of the receivables; and (5) the exclusionexclude from our managed receivables data of certain reimbursements received in respect of one of our portfolios which resulted in pre-tax income benefits within our total interest income, fees and related income on earning assets, losses upon charge offnet recovery of impairment of loans, interest and fees receivable recorded at fair value net of recoveries, other income, servicing income, and equity in income of equity-method investee line itemsitem on our consolidated statements of operations totaling approximately $0.4 million for the three months ended September 30, 2018, $1.7 million for the three months ended June 30, 2018, $2.9 million for the three months ended September 30, 2017, and $1.1 million for the three months ended June 30, 2017, $8.6 million for the three months ended March 31, 2017, $10.3 million for the three months ended December 31, 2016, $2.4 million for the three months ended September 30, 2016, $7.1 million for the three months ended June 30, 2016, $5.9 million for the three months ended March 31, 2016, and $10.7 million for the three months ended December 31, 2015.2017. This last category of reconciling items above is excluded because it does not bear on our performance in managing our credit card portfolios, including our risk management, servicing and collection activities and our valuing of purchased receivables; moreover, it is difficultwe do not expect to determinereceive any further material reimbursements with respect to this portfolio.
A reconciliation of our Loans, interest and fees receivable, at fair value to the future effects of any such reimbursements that may be received.
At or for the Three Months Ended | ||||||||||||||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
Mar. 31 | Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | Dec. 31 | Sept. 30 | Jun. 30 | |||||||||||||||||||||||||
Loans, interest and fees receivable, gross | 8,664 | 9,575 | 10,504 | 13,790 | 15,557 | 16,601 | 18,180 | 20,102 | ||||||||||||||||||||||||
Fair value adjustment | (3,270 | ) | (3,269 | ) | (3,379 | ) | (5,504 | ) | (6,144 | ) | (5,492 | ) | (6,161 | ) | (7,332 | ) | ||||||||||||||||
Loans, interest and fees receivable, at fair value | 5,394 | 6,306 | 7,125 | 8,286 | 9,413 | 11,109 | 12,019 | 12,770 |
Asset quality.
Our delinquency and charge-off data at any point in time reflect the credit performance of our managed receivables. The average age of the accounts underlying our receivables, the timing of portfolio purchases, the success of our collection and recovery efforts and general economic conditions all affect our delinquency and charge-off rates. The average age of the accounts underlying our receivables portfolio also affects the stability of our delinquency and loss rates. We consider this delinquency and charge-off data in ourThe following table presents the delinquency trends of the receivables we manage within our Credit and Other Investments segment, as well as charge-off data and other managed receivables statistics (in thousands; percentages of total):
At or for the Three Months Ended | |||||||||||||||||||||||
2017 | 2016 | 2015 | |||||||||||||||||||||
Sept. 30 | Jun. 30 | Mar. 31 | Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | Dec. 31 | ||||||||||||||||
Period-end managed receivables | $307,886 | $272,727 | $253,308 | $245,007 | $221,683 | $201,406 | $155,425 | $152,528 | |||||||||||||||
Percent 30 or more days past due | 11.6 | % | 10.9 | % | 10.9 | % | 11.8 | % | 10.9 | % | 8.2 | % | 9.7 | % | 11.5 | % | |||||||
Percent 60 or more days past due | 7.9 | % | 7.4 | % | 7.8 | % | 8.1 | % | 7.3 | % | 5.3 | % | 7.1 | % | 7.9 | % | |||||||
Percent 90 or more days past due | 5.3 | % | 4.8 | % | 5.2 | % | 5.2 | % | 4.7 | % | 3.4 | % | 5.1 | % | 5.4 | % | |||||||
Average managed receivables | $298,128 | $265,175 | $250,862 | $236,103 | $216,951 | $188,128 | $152,831 | $152,983 | |||||||||||||||
Total yield ratio | 35.4 | % | 34.7 | % | 34.4 | % | 32.6 | % | 33.5 | % | 36.8 | % | 35.4 | % | 35.2 | % | |||||||
Combined gross charge-off ratio | 18.1 | % | 21.6 | % | 23.6 | % | 21.1 | % | 13.3 | % | 14.9 | % | 18.2 | % | 16.8 | % | |||||||
Adjusted charge-off ratio | 15.3 | % | 18.4 | % | 20.1 | % | 17.8 | % | 10.7 | % | 11.7 | % | 14.1 | % | 12.9 | % |
At or for the Three Months Ended | ||||||||||||||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
Mar. 31 | Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | Dec. 31 | Sept. 30 | Jun. 30 | |||||||||||||||||||||||||
Period-end managed receivables | $ | 480,928 | $ | 462,862 | $ | 406,057 | $ | 371,331 | $ | 337,848 | $ | 333,286 | $ | 303,080 | $ | 267,637 | ||||||||||||||||
Percent 30 or more days past due | 13.7 | % | 13.2 | % | 12.7 | % | 11.8 | % | 12.1 | % | 13.7 | % | 12.1 | % | 11.5 | % | ||||||||||||||||
Percent 60 or more days past due | 10.3 | % | 9.5 | % | 9.3 | % | 8.5 | % | 9.1 | % | 9.8 | % | 8.3 | % | 7.8 | % | ||||||||||||||||
Percent 90 or more days past due | 7.5 | % | 6.7 | % | 6.4 | % | 5.7 | % | 6.5 | % | 6.5 | % | 5.5 | % | 4.9 | % | ||||||||||||||||
Averaged managed receivables | $ | 471,895 | $ | 434,460 | $ | 388,694 | $ | 354,590 | $ | 335,567 | $ | 318,183 | $ | 285,359 | $ | 257,603 | ||||||||||||||||
Total yield ratio | 46.5 | % | 44.3 | % | 43.2 | % | 41.6 | % | 41.0 | % | 39.5 | % | 36.5 | % | 35.1 | % | ||||||||||||||||
Combined gross charge-off ratio | 23.6 | % | 21.6 | % | 19.7 | % | 22.4 | % | 24.2 | % | 20.1 | % | 18.2 | % | 21.1 | % |
The following table presents additional trends and data with respect to our current point-of-sale (“Retail”) and direct-to-consumer operations (“Direct”) (dollars in thousands). Results of our historical credit card receivables portfolios are excluded:
Retail - At or for the Three Months Ended | ||||||||||||||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
Mar. 31 | Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | Dec. 31 | Sept. 30 | Jun. 30 | |||||||||||||||||||||||||
Period-end managed receivables | $ | 255,922 | $ | 257,772 | $ | 238,851 | $ | 223,873 | $ | 207,231 | $ | 206,877 | $ | 193,403 | $ | 180,830 | ||||||||||||||||
Percent 30 or more days past due | 12.7 | % | 13.6 | % | 13.4 | % | 12.4 | % | 12.6 | % | 14.0 | % | 14.0 | % | 12.3 | % | ||||||||||||||||
Percent 60 or more days past due | 9.8 | % | 9.9 | % | 9.8 | % | 8.8 | % | 9.4 | % | 10.1 | % | 9.9 | % | 8.4 | % | ||||||||||||||||
Percent 90 or more days past due | 7.2 | % | 7.1 | % | 6.9 | % | 5.8 | % | 6.8 | % | 7.2 | % | 6.9 | % | 5.6 | % | ||||||||||||||||
Average APR | 24.8 | % | 25.0 | % | 24.7 | % | 24.8 | % | 24.2 | % | 24.2 | % | 26.7 | % | 26.7 | % | ||||||||||||||||
Receivables purchased during period | $ | 69,120 | $ | 80,096 | $ | 70,860 | $ | 74,391 | $ | 60,932 | $ | 64,036 | $ | 59,293 | $ | 65,786 |
Direct - At or for the Three Months Ended | ||||||||||||||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
Mar. 31 | Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | Dec. 31 | Sept. 30 | Jun. 30 | |||||||||||||||||||||||||
Period-end managed receivables | $ | 216,342 | $ | 195,515 | $ | 156,702 | $ | 133,668 | $ | 115,060 | $ | 109,808 | $ | 91,497 | $ | 66,705 | ||||||||||||||||
Percent 30 or more days past due | 15.1 | % | 13.0 | % | 12.1 | % | 11.5 | % | 12.2 | % | 12.9 | % | 8.3 | % | 9.3 | % | ||||||||||||||||
Percent 60 or more days past due | 11.2 | % | 9.3 | % | 8.9 | % | 8.5 | % | 9.2 | % | 9.1 | % | 5.0 | % | 6.2 | % | ||||||||||||||||
Percent 90 or more days past due | 8.0 | % | 6.4 | % | 6.0 | % | 5.9 | % | 6.4 | % | 5.3 | % | 2.7 | % | 3.4 | % | ||||||||||||||||
Average APR | 27.9 | % | 28.1 | % | 27.6 | % | 27.2 | % | 26.9 | % | 27.5 | % | 28.5 | % | 28.0 | % | ||||||||||||||||
Receivables purchased during period | $ | 60,733 | $ | 69,585 | $ | 48,729 | $ | 48,966 | $ | 33,747 | $ | 38,338 | $ | 38,005 | $ | 15,051 |
The following discussion relates to the tables above.
Managed receivables levels.
WeDelinquencies. Delinquencies have the potential to impact net income in the form of net credit losses. Delinquencies also are costly in terms of the personnel and resources dedicated to resolving them. We intend for the receivables management strategies we use on our portfolios to manage and, to the extent possible, reduce the higher delinquency rates that can be expected inwith the more mature portionyounger average age of the newer originations in our managed portfolio. These account management strategies include conservative credit line management, purging of inactive accounts and collection strategies intended to optimize the effective account-to-collector ratio across delinquency categories. We measure the success of these efforts by measuringreviewing delinquency rates. These rates exclude receivables that have been charged off.
As we continue to our historical credit card receivables have been closed and there has been no significant new activity for these accounts, we generally have noted declinesinvest in delinquency statistics of this portion of managed credit card receivables (when compared to the same quarters in the prior year).
Total yield ratio
. Currently, we are experiencing growth in our newer, higher yielding receivables, including point-of-sale receivables and direct-to-consumer loans. While this growth has contributed to increases in our total yield ratio, we expect this growth also will continue toWe anticipate continued growth in our higher yielding point-of-sale and direct-to-consumer receivables over the next few quarters which shouldexpect total yield ratios to continue to stabilize our yield (with some modest increases) consistent with what we experienced in the past several quarters. However, the timing of receivable acquisitions as well asfluctuate somewhat based on the relative mix of growth in point-of-sale receivables acquired within a given quarter may contribute to some continued minor variability inand our total yield ratio.
Combined gross charge-off ratio and Adjusted charge-off ratio.
Growth within point-of-sale finance and direct-to-consumer receivables that have higher charge-off rates than the liquidating credit card portfolios that have historically comprised a larger portion of our managed receivables has resulted in increases in our charge-off rates over time. Our recentfourth quarter 2017 and first quarter 2018 combined gross charge-off ratios reflect further significant investments during the second and adjusted charge-off ratios benefitedthird quarters in the first few quarters of 2016 from growth we experienced2017 in our point-of-sale operations and more directly from growth in our direct-to-consumer receivables, many of which reached their peak charge off periods induring the fourth quarter of 2016 but continued to negatively impact the2017 and first quarter of 2018. Second and second quarters of 2017. Additionally, we made substantial investments in our personal loan offeringsthird quarter 2018 declines in the second quartergross charge-off ratio are reflective of 2016 which did not reach their peak-charge off period untilthis as well and are also indicative of some of the seasonal delinquency benefits discussed above. Combined gross charge-off rates for the fourth quarter of 2016, thus positively impacting our second2018 and third quarter combined and adjusted gross charge-off ratios and negatively impacting the same ratios in the fourthfirst quarter of 20162019 reflect the expected higher charge-off rates associated with a mix shift to higher yielding products and the first and second quartersongoing testing of 2017.
The continued growth in the point-of-sale and direct-to-consumer receivables continues to result in higher charge-offs than those experienced historically. In the next few quarters, we expect increasingcontinued elevated charge off rates when compared to historical results. This expectation is based onresults, given the following: (1) higher expected charge off rates on the point-of-sale and direct-to-consumer receivables offset slightly by lower charge offs associatedcorresponding with historical credit card receivables due to the continued liquidation ofhigher yields on these receivables,product offerings, (2) continued testing of receivables with higher risk profiles, (3) the low charge-off ratios experiencedwhich could lead to periodic increases in the secondcombined gross charge-offs, and third quarters of 2016 as discussed above and (4)(3) recent vintages reaching peak charge-off periods. Offsetting these increases will be growth in the underlying receivables base which will serve to mute to a varying degree some of the aforementioned impacts as has been seen in recent quarters. Further impacting our charge-off rates are the timing of solicitations which serve to minimize charge off rates in periods of high receivable acquisitions but also exacerbate charge-off rates in periods of lower receivable acquisitions.
Average APR. Our average annual percentage rate (“APR”) charged to customers varies by receivable type, credit history and other factors. The average APR for receivables in our point-of-sale operations range from 9.99% to 36.0%. For our direct-to-consumer receivables, average APR ranges from 19.99% to 36.0%. We have experienced minor fluctuations in our average APR based on the relative product mix of receivables purchased during a period. We currently expect our average APRs in 2019 to remain consistent with the average APRs we have experienced over the past several quarters; however, the timing and relative mix of receivables acquired could cause some minor fluctuations.
Receivables purchased during period. Receivables purchased during the period reflect the gross amount of investments we have made in a given period, net of any credits issued to consumers during that same period. For most periods presented, our point-of-sale receivable purchases experienced overall growth throughout the periods presented largely based on the addition of new point-of-sale retail partners, as previously discussed. We may experience periodic declines in these acquisitions due to: the loss of one or more retail partners; seasonal purchase activity by consumers; or the timing of new customer originations by our lending partners. We currently expect to see increases in receivable acquisitions when compared to the same period in prior years. Our direct-to-consumer receivable acquisitions tend to have more volatility based on the issuance of new credit card accounts by our banking partner and the availability of capital to fund new purchases. Nonetheless, we expect continued growth in the acquisition of these receivables throughout 2019.
Auto Finance Segment
CAR, our auto sales and lending activities.
Collectively, as of September 30, 2017,March 31, 2019, we served more than
Managed Receivables Background
For reasons set forth above within our Credit and Other Investments segment discussion, we also provide managed receivables-based financial, operating and statistical data for our Auto Finance segment. Reconciliation of the auto finance managed receivables data to our GAAP financial statements requires an understanding that our managed receivables data are based on billings and actual charge offs as they occur, without regard to any changes in our allowance for uncollectible loans, interest and fees receivable. Similar to the managed receivables calculation above, the average managed receivables used in the ratios below is calculated based on the quarter ending balances of consolidated receivables.
Financial, operating and statistical metrics for our Auto Finance segment are detailed (in thousands; percentages of total) in the following table:
At or for the Three Months Ended | |||||||||||||||||||||||||||||||
2017 | 2016 | 2015 | |||||||||||||||||||||||||||||
Sept. 30 | Jun. 30 | Mar. 31 | Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | Dec. 31 | ||||||||||||||||||||||||
Period-end managed receivables | $ | 78,459 | $ | 80,014 | $ | 75,311 | $ | 79,683 | $ | 76,615 | $ | 80,903 | $ | 78,415 | $ | 77,833 | |||||||||||||||
Percent 30 or more days past due | 13.0 | % | 11.7 | % | 10.0 | % | 14.2 | % | 12.7 | % | 12.3 | % | 10.2 | % | 14.0 | % | |||||||||||||||
Percent 60 or more days past due | 5.0 | % | 4.0 | % | 4.2 | % | 5.4 | % | 4.5 | % | 3.9 | % | 4.2 | % | 5.5 | % | |||||||||||||||
Percent 90 or more days past due | 2.2 | % | 1.4 | % | 2.1 | % | 2.4 | % | 1.8 | % | 1.5 | % | 2.2 | % | 2.5 | % | |||||||||||||||
Average managed receivables | $ | 78,764 | $ | 78,258 | $ | 75,986 | $ | 78,209 | $ | 78,089 | $ | 80,213 | $ | 78,122 | $ | 76,413 | |||||||||||||||
Total yield ratio | 37.2 | % | 37.2 | % | 38.4 | % | 37.8 | % | 39.1 | % | 38.0 | % | 37.3 | % | 38.3 | % | |||||||||||||||
Combined gross charge-off ratio | 1.1 | % | 2.4 | % | 2.4 | % | 2.6 | % | 2.8 | % | 3.1 | % | 2.7 | % | 3.3 | % | |||||||||||||||
Recovery ratio | 1.6 | % | 1.9 | % | 1.6 | % | 1.6 | % | 1.0 | % | 1.5 | % | 1.3 | % | 1.6 | % |
At or for the Three Months Ended | ||||||||||||||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
Mar. 31 | Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | Dec. 31 | Sept. 30 | Jun. 30 | |||||||||||||||||||||||||
Period-end managed receivables | $ | 90,208 | $ | 88,057 | $ | 85,338 | $ | 83,872 | $ | 78,436 | $ | 77,213 | $ | 74,923 | $ | 76,387 | ||||||||||||||||
Percent 30 or more days past due | 11.4 | % | 14.7 | % | 13.3 | % | 10.8 | % | 8.8 | % | 12.8 | % | 13.0 | % | 11.7 | % | ||||||||||||||||
Percent 60 or more days past due | 5.3 | % | 5.7 | % | 4.3 | % | 3.6 | % | 3.3 | % | 5.0 | % | 5.0 | % | 4.0 | % | ||||||||||||||||
Percent 90 or more days past due | 2.9 | % | 2.5 | % | 1.7 | % | 1.4 | % | 1.6 | % | 2.4 | % | 2.2 | % | 1.4 | % | ||||||||||||||||
Average managed receivables | $ | 89,133 | $ | 86,698 | $ | 84,605 | $ | 81,154 | $ | 77,825 | $ | 76,068 | $ | 75,655 | $ | 74,254 | ||||||||||||||||
Total yield ratio | 36.0 | % | 36.1 | % | 37.9 | % | 38.2 | % | 37.9 | % | 37.9 | % | 38.8 | % | 39.2 | % | ||||||||||||||||
Combined gross charge-off ratio | 2.7 | % | 2.8 | % | 0.9 | % | 0.5 | % | 2.1 | % | 3.0 | % | 1.1 | % | 2.5 | % | ||||||||||||||||
Recovery ratio | 1.3 | % | 0.9 | % | 0.9 | % | 1.0 | % | 1.5 | % | 1.5 | % | 1.7 | % | 2.0 | % |
Managed receivables.
We expect modest growth in the level of our managed receivables for 2019 when compared to the same periods in priorDelinquencies.
Current delinquency levels are consistent with our expectations for levels in the near term with someTotal yield ratio.
We have experienced modest fluctuations in our total yield ratio largely impacted by the relative mix of receivables in various products offered by CAR as some shorter term product offerings tend to have higher yields.Combined gross charge-off ratio and recovery ratio.
We charge off auto finance receivables when they are between 120 and 180 days past due, unless the collateral is repossessed and sold before that point, in which case we will record a charge off when the proceeds are received. Combined gross charge-off ratios inDefinitions of Financial, Operating and Statistical Measures
Total yield ratio.
Represents an annualized fraction, the numerator of which includesCombined gross charge-off ratio.
Represents an annualized fraction, the numerator of which is the aggregate consolidated amounts of finance charge, fee and principal losses from consumers unwilling or unable to pay their receivables balances, as well as from bankrupt and deceased consumers, less current-period recoveries (including recoveries from dealer reserve offsets for our CAR operations) and the related portion of unamortized discounts, as reflected in Note 2 “Significant Accounting Policies and Consolidated Financial Statement Components-Loans, Interest and Fees Receivable”, and the denominator of which is average managed receivables. Recoveries on managed receivables represent all amounts received related to managed receivables that previously have been charged off, including payments received directly from consumers and proceeds received from the sale of those charged-off receivables. Recoveries typically have represented less than 2% of average managed receivables.LIQUIDITY, FUNDING AND CAPITAL RESOURCES
As discussed elsewhere in this Report,report, we incur a significant level of costs associated with a fixed infrastructure that had been designed to support our significant legacy credit card operations. Our infrastructure costs are still somewhat elevated, and while we had in the past focused on cost reduction, our primary focus now is growing the point-of-sale and direct-to-consumer personal loan and credit card receivables so that our revenues from these investments can cover our infrastructure costs and return us to consistent profitability. Increases in new and existing retail partnerships and the expansion of our investments in direct-to-consumer finance products have resulted in quarterly growth of total managed receivables levels, and we expect this growth to continue in the coming quarters.
Accordingly, we will continue to focus in the coming quarters on (i) containing costs (as opposed to our previous focus on reducing expenses) (ii) obtaining new retail partners to continue growth of the point-of-sale receivables (iii) continuing growth in direct-to-consumer credit card receivables and (iv) obtaining the funding necessary to meet capital needs required by the growth of our receivables and to cover our infrastructure costs until our receivables investments generate enough revenues and cash flows to cover such costs.
All of our Credit and Other Investments segment’s structured financing facilities are expected to amortize down with collections on the receivables within their underlying trusts and should not represent significant refunding or refinancing risks to our consolidated balance sheet. Additionally, we do not expect any imminent refunding or financing needs associated with our 5.875% convertible senior notes given their maturity in 2035. As such, the only facilities that could represent near-term significant refunding or refinancing needs as of September 30, 2017March 31, 2019 are those associated with the following notes payable in the amounts indicated (in millions):
Revolving credit facility (expiring October 30, 2019) that is secured by certain receivables and restricted cash | $ | 49.2 | |
Revolving credit facility (expiring November 1, 2018) that is secured by the financial and operating assets of our CAR operations | 26.2 | ||
Revolving credit facility (expiring December 31, 2019) that is secured by certain receivables and restricted cash | 19.7 | ||
Senior secured term loan from related parties (expiring November 22, 2017) that is secured by certain assets of the Company with an annual interest rate equal to 9.0% | 40.0 | ||
Total | $ | 135.1 |
Revolving credit facility (expiring October 30, 2019) that is secured by certain receivables and restricted cash | $ | 49.6 | ||
Revolving credit facility (expiring November 1, 2020) that is secured by the financial and operating assets of our CAR operations | 31.2 | |||
Revolving credit facility (expiring June 11, 2020) that is secured by certain receivables and restricted cash | 80.5 | |||
Revolving credit facility (expiring November 16, 2020) that is secured by certain receivables and restricted cash | 16.0 | |||
Senior secured term loan from related parties (expiring November 21, 2019) that is secured by certain assets of the Company | 40.0 | |||
Total | $ | 217.3 |
Further details concerning the above debt facilities are provided in Note 7,8, “Notes Payable,” and Note 8, “Convertible Senior Notes,” to our consolidated financial statements included herein. Based on the state of the debt capital markets, the performance of our assets that serve as security for the above facilities, and our relationships with lenders, we view imminent refunding or refinancing risks with respect to the above facilities as low in the current environment, and we believe that the quality of our new receivables should allow us to raise more capital through increasing the size of our facilities with our existing lenders and attracting new lending relationships. With respect to our senior secured term loan expiring November 22, 2017, we are in discussions with the lending party and anticipate that the loan will be extended on similar terms prior to expiration.
In February 2017, we (through a wholly owned subsidiary) established a program under which we sell certain receivables to a consolidated trust in exchange for notes issued by the trust. The notes are secured by the receivables and other assets of the trust. Simultaneously with the establishment of the program, the trust issued a series of variable funding notes and sold an aggregate amount of up to $90.0 million (of which $50.0$69.0 million was outstanding as of September 30, 2017
In December 2014,June 2018 and again in November 2018, we reached(through a settlement withwholly owned subsidiary) expanded the IRS concerningabove mentioned program to sell up to an additional $100.0 million of notes ($200.0 million in total notes through the tax treatmentJune and November 2018 expansions) which are secured by the receivables and other assets of net operating lossesthe trust (of which $96.5 million was outstanding as of March 31, 2019) to separate unaffiliated third parties pursuant to facilities that can be drawn upon to the extent of outstanding eligible receivables. Interest rates on the notes are based on commercial paper rates plus 4.25% and LIBOR plus 4.5%, respectively.
The facilities mature on June 11, 2020 and November 16, 2020, respectively, and are subject to certain affirmative covenants and collateral performance tests, the failure of which could result in required early repayment of all or a portion of the outstanding balance of notes. The facilities also may be prepaid subject to payment of a prepayment or other fee.
In November 2018, we incurred in 2007sold $167.3 million of asset backed securities (“ABS”) secured by certain retail point-of-sale receivables. A portion of the proceeds from the sale were used to pay-down our existing term and 2008 and carried back to obtain refunds of federal income taxes paid in earlier years dating back to 2003. Our net unpaid income tax assessmentrevolving facilities associated with that settlement was $7.4 million at September 30, 2017; this amount excludes unpaidour point-of-sale receivables. The weighted average interest and penaltiesrate on the tax assessment,securities is 5.76%.
In February 2019, we extended the accruals for which aggregated $3.9 million at September 30, 2017. Prior to our filing amended return claims that would have eliminated the $7.4 million assessment (and corresponding interest and penalties) under a negotiated provisionmaturity date of the IRS settlement,revolving credit facility secured by the IRS filed a lien (as is customarily the case) associated with the assessment. Subsequently, an IRS examination team denied our amended return claims,financial and we filed a protest with IRS Appeals. In October 2017, we attended an IRS Appeals conference relatedoperating assets of CAR to November 1, 2020. There were no other material changes to the subject matter underlying our amended return claims,existing terms or conditions and we arethe new maturity date is reflected in the processtable above.
At September 30, 2017,March 31, 2019, we had $68.6$101.0 million in unrestricted cash held by our various business subsidiaries. Because the characteristics of our assets and liabilities change, liquidity management has been a dynamic process for us, driven by the pricing and maturity of our assets and liabilities. We historically have financed our business through cash flows from operations, asset-backed structured financings and the issuance of debt and equity. Details concerning our cash flows for the ninethree months ended September 30, 2017March 31, 2019 and 2018 are as follows:
During the ninethree months ended September 30, 2017,March 31, 2019, we used $12.0generated $30.0 million of cash flows from operations compared to the generationuse of $24.7$10.2 million of cash flows from operations during the ninethree months ended September 30, 2016.March 31, 2018. The decreaseincrease in cash provided by operating activities was principally related to decreasesthe reclassification of approximately $26 million from unrestricted cash and cash equivalents on our consolidated balance sheets and increases in 1)finance collections associated with rental payments inour growing point-of-sale and direct-to-consumer receivables.
During the ninethree months ended September 30, 2017 relative to the same period in 2016, given the cessation of our rent-to-own program of approximately $8.0 million; and 2) increases in billed but
During the
Beyond our immediate financing efforts discussed throughout this report, we will continue to evaluate debt and equity issuances as a means to fund our investment opportunities. We expect to take advantage of any opportunities to raise additional capital if terms and pricing are attractive to us. Any proceeds raised under these efforts or additional liquidity available to us could be used to fund (1) the acquisition of additional financial assets associated with the point-of-sale and direct-to-consumer finance operations as well as the acquisition of credit card receivables portfolios and (2) further repurchases of our 5.875% convertible senior notes and common stock, and (3) investments in certain financial and non-financial assets or businesses.stock. Pursuant to a share repurchase plan authorized by our Board of Directors on May 12, 2016,10, 2018, we are authorized as of September 30, 2017 to repurchase an additional 4,871,185up to 5,000,000 shares of our common stock through June 30, 2018.
CONTRACTUAL OBLIGATIONS, COMMITMENTS AND OFF-BALANCE-SHEET ARRANGEMENTS
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2016.
Commitments and Contingencies
We do not currently have any off-balance-sheet arrangements; however, we do have certain contractual arrangements that would require us to make payments or provide funding if certain circumstances occur, which we refer to as contingent commitments. We do not currently expect that these contingent commitments will result in any material amounts being paid by us. See Note 9,10, “Commitments and Contingencies,” to our consolidated financial statements included herein for further discussion of these matters.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2, “Significant Accounting Policies and Consolidated Financial Statement Components,” to our consolidated financial statements included herein for a discussion of recent accounting pronouncements.
CRITICAL ACCOUNTING ESTIMATES
We have prepared our financial statements in accordance with GAAP. These principles are numerous and complex. We have summarized our significant accounting policies in the notes to our consolidated financial statements. In many instances, the application of GAAP requires management to make estimates or to apply subjective principles to particular facts and circumstances. A variance in the estimates used or a variance in the application or interpretation of GAAP could yield a materially different accounting result. It is impracticable for us to summarize every accounting principle that requires us to use judgment or estimates in our application. Nevertheless, we describe below the areas for which we believe that the estimations, judgments or interpretations that we have made, if different, would have yielded the most significant differences in our consolidated financial statements.
On a quarterly basis, we review our significant accounting policies and the related assumptions, in particular, those mentioned below, with the audit committee of the Board of Directors.
Revenue Recognition
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, interest 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 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; (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, interest and fees receivable and revenue when the fees are earned.
Measurements for Loans, Interest and Fees Receivable at Fair Value and Notes Payable Associated with Structured Financings at Fair Value
Our valuation of loans, interest and fees receivable, at fair value 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. Similarly, our valuation of notes payable associated with structured financings, at fair value 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.
The estimates for credit losses, payment rates, servicing costs, contractual servicing fees, costs of funds, discount rates and yields earned on credit card receivables significantly affect the reported amount of our loans, interest and fees receivable, at fair value and our notes payable associated with structured financings, at fair value on our consolidated balance sheet, and they likewise affect our changes in fair value of loans, interest and fees receivable recorded at fair value and changes in fair value of notes payable associated with structured financings recorded at fair value categories within our fees and related income on earning assets line item on our consolidated statementstatements of operations.
Allowance for Uncollectible Loans, Interest and Fees
Through our analysis of loan performance, delinquency data, charge-off data, economic trends and the potential effects of those economic trends on consumers, we establish an allowance for uncollectible loans, interest and fees receivable as an estimate of the probable losses inherent within those loans, interest and fees receivable that we do not report at fair value. Our loans, interest 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, interest and fees receivable by analyzing some or all of the following unique to 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 inputs are considered in conjunction with (and potentially reduced by) any unearned fees and discounts that may be applicable for an outstanding loan receivable. To the extent that actual results differ from our estimates of uncollectible loans, interest and fees receivable, our results of operations and liquidity could be materially affected.
Under a shareholders’ agreement into which we entered into with certain shareholders, including David G. Hanna, Frank J. Hanna, III Richard R. House, Jr., Richard W. Gilbert and certain trusts that were Hanna affiliates, following our initial public offering (1) if one or more of the shareholders accepts a bona fide offer from a third party to purchase more than 50% of the outstanding common stock, each of the other shareholders that is a party to the agreement may elect to sell his shares to the purchaser on the same terms and conditions, and (2) if shareholders that are a party to the agreement owning more than 50% of the common stock propose to transfer all of their shares to a third party, then such transferring shareholders may require the other shareholders that are a party to the agreement to sell all of the shares owned by them to the proposed transferee on the same terms and conditions.
In June 2007, we entered into a sublease for 1,000 square feet (as later amended to cover 600 square feet) of excess office space at our Atlanta headquarters with HBR Capital, Ltd. (“HBR”), a company co-owned by David G. Hanna and his brother Frank J. Hanna, III. The sublease rate per square foot is the same as the rate that we pay under the prime lease. Under the sublease, HBR paid us $26,103$18,089 and $25,588$26,629 for 20162018 and 2015,2017, respectively. The aggregate amount of payments required under the sublease from January 1, 20172019 to the expiration of the sublease in May 2022 is $150,717.
In January 2013, HBR began leasing four employees from us. HBR reimburses us for the full cost of the employees, based on the amount of time devoted to HBR. In the ninethree months ended September 30, 2017March 31, 2019 and 2016,2018, we received $197,563$69,257 and $194,155,$70,004, respectively, of reimbursed costs from HBR associated with these leased employees.
On November 26, 2014, we and certain of our subsidiaries entered into a Loan and Security Agreement with Dove Ventures, LLC, a Nevada limited liability company (“Dove”). The agreement provides for a senior secured term loan facility in
Our obligations under the agreement are guaranteed by certain subsidiary guarantors and secured by a pledge of certain assets of ours and the subsidiary guarantors. The loans bear interest at the rate of 9.0% per annum, payable monthly in arrears. The principal amount of these loans is payable in a single installment on November 22, 201721, 2019 (as amended). The agreement includes customary affirmative and negative covenants, as well as customary representations, warranties and events of default. Subject to certain conditions, we can prepay the principal amounts of these loans without premium or penalty.
Dove is a limited liability company owned by three trusts. David G. Hanna is the sole shareholder and the President of the corporation that serves as the sole trustee of one of the trusts, and David G. Hanna and members of his immediate family are the beneficiaries of this trust. Frank J. Hanna, III is the sole shareholder and the President of the corporation that serves as the sole trustee of the other two trusts, and Frank J. Hanna, III and members of his immediate family are the beneficiaries of these other two trusts.
FORWARD-LOOKING INFORMATION
We make forward-looking statements in this report and in other materials we file with the Securities and Exchange Commission (“SEC”) or otherwise make public. This Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements. In addition, our senior management might make forward-looking statements to analysts, investors, the media and others. Statements with respect to expected revenue; income; receivables; income ratios; net interest margins; long-term shareholder returns; acquisitions of financial assets and other growth opportunities; divestitures and discontinuations of businesses; loss exposure and loss provisions; delinquency and charge-off rates; the effects of account actions we may take or have taken; changes in collection programs and practices; changes in the credit quality and fair value of our credit card loans, interest and fees receivable and the fair value of their underlying structured financing facilities; the impact of actions by the Federal Deposit Insurance Corporation (“FDIC”), Federal Reserve Board, Federal Trade Commission (“FTC”), Consumer Financial Protection Bureau (“CFPB”) and other regulators on both us, banks that issue credit cards and other credit products on our behalf, and merchants that participate in our point-of-sale finance operations; account growth; the performance of investments that we have made; operating expenses; the impact of bankruptcy law changes; marketing plans and expenses; the performance of our Auto Finance segment; our plans in the U.K.; the impact of our credit card receivables on our financial performance; the sufficiency of available capital; the prospect for improvements in the capital and finance markets; future interest costs; sources of funding operations and acquisitions; growth and profitability of our point-of-sale finance operations; our entry into international markets; our ability to raise funds or renew financing facilities; share repurchases or issuances; debt retirement; the results associated with our equity-method investee; our servicing income levels; gains and losses from investments in securities; experimentation with new products and other statements of our plans, beliefs or expectations are forward-looking statements. These and other statements using words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and similar expressions also are forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement. The forward-looking statements we make are not guarantees of future performance, and we have based these statements on our assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or historical earnings levels.
Although it is not possible to identify all factors, we continue to face many risks and uncertainties. Among the factors that could cause actual future results to differ materially from our expectations are the risks and uncertainties described under “Risk Factors” set forth in Part II, Item 1A, and the risk factors and other cautionary statements in other documents we file with the SEC, including the following:
the availability of adequate financing to support growth;
the extent to which federal, state, local and foreign governmental regulation of our various business lines and the products we service for others limits or prohibits the operation of our businesses;
current and future litigation and regulatory proceedings against us;
the effect of adverse economic conditions on our revenues, loss rates and cash flows;
competition from various sources providing similar financial products, or other alternative sources of credit, to consumers;
the adequacy of our allowances for uncollectible loans, interest and fees receivable and estimates of loan losses used within our risk management and analyses;
the possible impairment of assets;
our ability to manage costs in line with the expansion or contraction of our various business lines;
our relationship with (i) the merchants that participate in point-of-sale finance operations and (ii) the banks that issue credit cards and provide certain other credit products utilizing our technology platform and related services; and
theft and employee errors.
Most of these factors are beyond our ability to predict or control. Any of these factors, or a combination of these factors, could materially affect our future financial condition or results of operations and the ultimate accuracy of our forward-looking statements. There also are other factors that we may not describe (because we currently do not perceive them to be material) that could cause actual results to differ materially from our expectations.
We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not required to provide this information.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Act)Securities Exchange Act of 1934, as amended (the “Act”)) was carried out on behalf of Atlanticus Holdings Corporation and our subsidiaries by our management and with the participation of our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer). Based upon the evaluation, our principal executive officer and principal financial officer concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
During the quarter ended September 30, 2017,March 31, 2019, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Act) occurred that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
An investment in our common stock or other securities involves a number of risks. You should carefully consider each of the risks described below before deciding to invest in our common stock or other securities. If any of the following risks develops into actual events, our business, financial condition or results of operations could be negatively affected, the market price of our common stock or other securities could decline and you may lose all or part of your investment.
Investors should be particularly cautious regarding investments in our common stock or other securities at the present time in light of uncertainties as to the profitability of our business model going forward and our inability to achieve consistent earnings from our operations in recent years.
Our Cash Flows and Net Income Are Dependent Upon Payments from Our Investments in Receivables
The collectibility of our investments in receivables is a function of many factors including the criteria used to select who is issued credit, the pricing of the credit products, the lengths of the relationships, general economic conditions, the rate at which consumers repay their accounts or become delinquent, and the rate at which consumers borrow funds. Deterioration in these factors would adversely impact our business. In addition, to the extent we have over-estimated collectibility, in all likelihood we have over-estimated our financial performance. Some of these concerns are discussed more fully below.
Our portfolio of receivables is not diversified and primarily originates from consumers whose creditworthiness is considered sub-prime.
Historically, we have invested in receivables in one of two ways—we have either (i) invested in receivables originated by lenders who utilize our services or (ii) invested in or purchased pools of receivables from other issuers. In either case, substantially all of our receivables are from financially underserved borrowers—borrowers represented by credit risks that regulators classify as “sub-prime.” Our reliance on sub-prime receivables has negatively impacted and may in the future negatively impact, our performance. Our various past and current losses might have been mitigated had our portfolios consisted of higher-grade receivables in addition to our sub-prime receivables.Economic slowdowns increase our credit losses.
During periods of economic slowdown or recession, we experience an increase in rates of delinquencies and frequency and severity of credit losses. Our actual rates of delinquencies and frequency and severity of credit losses may be comparatively higher during periods of economic slowdown or recession than those experienced by more traditional providers of consumer credit because of our focus on the financially underserved consumer market, which may be disproportionately impacted.We are subject to foreign economic and exchange risks.
Because of our operations in the U.K.,we have exposure to fluctuations in the U.K. economy. We also have exposure to fluctuations in the relative values of the U.S. dollar and the British pound. Because the British pound has experienced a net decline in value relative to the U.S. dollar since we commenced our most significant operations in the U.K., we have experienced significant transaction and translation losses within our financial statements.Because a significant portion of our reported income is based on management’s estimates of the future performance of receivables, differences between actual and expected performance of the receivables may cause fluctuations in net income.
Significant portions of our reported income (or losses) are based on management’s estimates of cash flows we expect to receive on receivables, particularly for such assets that we report based on fair value. The expected cash flows are based on management’s estimates of interest rates, default rates, payment rates, cardholder purchases, servicing costs, and discount rates. These estimates are based on a variety of factors, many of which are not within our control. Substantial differences between actual and expected performance of the receivables will occur and cause fluctuations in our net income. For instance, higher than expected rates of delinquencies and losses could cause our net income to be lower than expected. Similarly, levels of loss and delinquency can result in our being required to repay lenders earlier than expected, thereby reducing funds available to us for future growth. Because all of the credit card receivables structured financing facilities are now in amortization status—which for us generally means that the only meaningful cash flows that we are receiving with respect to the credit card receivables that are encumbered by such structured financing facilities are those associated with our contractually specified fee for servicing the receivables—recent payment and default trends have substantially reduced the cash flows that we receive from these receivables.Due to our relative lack of historical experience with Internet consumers, we may not be able to evaluate their creditworthiness.
We have less historical experience with respect to the credit risk and performance of receivables owed by consumers acquired over theWe Are Substantially Dependent Upon Borrowed Funds to Fund Receivables We Purchase
We finance receivables that we acquire in large part through financing facilities. All of our financing facilities are of finite duration (and ultimately will need to be extended or replaced) and contain financial covenants and other conditions that must be fulfilled in order for funding to be available. Moreover, some of our facilities currently are in amortization stages (and are not allowing for the funding of any new loans) based on their original terms. The cost and availability of equity and borrowed funds is dependent upon our financial performance, the performance of our industry generally and general economic and market conditions, and at times equity and borrowed funds have been both expensive and difficult to obtain.
If additional financing facilities are not available in the future on terms we consider acceptable—an issue that has been made even more acute in the U.S. given regulatory changes that reduced asset-level returns on credit card lending—we will not be able to purchase additional receivables and those receivables may contract in size.
Our Financial Performance Is, in Part, a Function of the Aggregate Amount of Receivables That Are Outstanding
The aggregate amount of outstanding receivables is a function of many factors including purchase rates, payment rates, interest rates, seasonality, general economic conditions, competition from credit card issuers and other sources of consumer financing, access to funding, and the timing and extent of our receivable purchases.
Despite our recent purchases of credit card receivables, our aggregate credit card receivables contracted over the last several years.
the availability of funding on favorable terms;
our relationships with the banks that issue credit cards;
the degree to which we lose business to competitors;
the level of usage of our credit card products by consumers;
the availability of portfolios for purchase on attractive terms;
levels of delinquencies and charge offs;
the level of costs of acquiring new receivables;
our ability to employ and train new personnel;
our ability to maintain adequate management systems, collection procedures, internal controls and automated systems; and
general economic and other factors beyond our control.
Reliance upon relationships with a few large retailers in the point-of-sale finance operations may adversely affect our revenues and operating results from these operations.
Our five largest retail partners accounted for over 50% of our outstanding point-of-sale receivables as of December 31,Changes in bankruptcy, privacy or other consumer protection laws, or to the prevailing interpretation thereof, may expose us to litigation, adversely affect our ability to collect receivables, or otherwise adversely affect our operations. Similarly, regulatory changes could adversely affect the ability or willingness of lenders who utilize our technology platform and related services to market credit products and services to consumers. While the new Presidential Administration and the congressional majorities in the U.S. Senate and House of Representatives supportsupports reducing regulatory burdens, the prospects for significant modifications are uncertain. Also, the accounting rules that apply to our business are exceedingly complex, difficult to apply
Reviews and enforcement actions by regulatory authorities under banking and consumer protection laws and regulations may result in changes to our business practices, may make collection of receivables more difficult or may expose us to the risk of fines, restitution and litigation.
Our operations and the operations of the issuing banks through which the credit products we service are originated are subject to the jurisdiction of federal, state and local government authorities, including the CFPB, the SEC, the FDIC, the Office of the Comptroller of the Currency, the FTC, U.K. banking and licensing authorities, state regulators having jurisdiction over financial institutions and debt origination and collection and state attorneys general. Our business practices and the practices of issuing banks, including the terms of products, servicing and collection practices, are subject to both periodic and special reviews by these regulatory and enforcement authorities. These reviews can range from investigations of specific consumer complaints or concerns to broader inquiries. If as part of these reviews the regulatory authorities conclude that we or issuing banks are not complying with applicable law, they could request or impose a wide range of remedies including requiring changes in advertising and collection practices, changes in the terms of products (such as decreases in interest rates or fees), the imposition of fines or penalties, or the paying of restitution or the taking of other remedial action with respect to affected consumers. They also could require us or issuing banks to stop offering some credit products or obtain licenses to do so, either nationally or in selected states. To the extent that these remedies are imposed on the issuing banks that originate credit products using our platform, under certain circumstances we are responsible for the remedies as a result of our indemnification obligations with those banks. We or our issuing banks also may elect to change practices that we believe are compliant with law in order to respond to regulatory concerns. Furthermore, negative publicity relating to any specific inquiry or investigation could hurt our ability to conduct business with various industry participants or to generate new receivables and could negatively affect our stock price, which would adversely affect our ability to raise additional capital and would raise our costs of doing business.If any deficiencies or violations of law or regulations are identified by us or asserted by any regulator, or if the CFPB, the FDIC, the FTC or any other regulator requires us or issuing banks to change any practices, the correction of such deficiencies or violations, or the making of such changes, could have a material adverse effect on our financial condition, results of operations or business. In addition, whether or not these practices are modified when a regulatory or enforcement authority requests or requires, there is a risk that we or other industry participants may be named as defendants in litigation involving alleged violations of federal and state laws and regulations, including consumer protection laws. Any failure to comply with legal requirements by us or the banks that originate credit products utilizing our platform in connection with the issuance of those products, or by us or our agents as the servicer of our accounts, could significantly impair our ability to collect the full amount of the account balances. The institution of any litigation of this nature, or any judgment against us or any other industry participant in any litigation of this nature, could adversely affect our business and financial condition in a variety of ways.
We are dependent upon banks to issue credit cards and provide certain other credit products utilizing our technology platform and related services.
WeChanges to consumer protection laws or changes in their interpretation may impede collection efforts or otherwise adversely impact our business practices. Federal and state consumer protection laws regulate the creation and enforcement of consumer credit card receivables and other loans. Many of these laws (and the related regulations) are focused on sub-prime lenders and are intended to prohibit or curtail industry-standard practices as well as non-standard practices. For instance, Congress enacted legislation that regulates loans to military personnel through imposing interest rate and other limitations and requiring new disclosures, all as regulated by the Department of Defense. Similarly, in 2009 Congress enacted legislation that required changes to a variety of marketing, billing and collection practices, and the Federal Reserve adopted significant changes to a number of practices through its issuance of regulations. While our practices are in compliance with these changes, some of the changes (e.g., limitations on the ability to assess up-front fees) have significantly affected the viability of certain credit products within the U.S. Changes in the consumer protection laws could result in the following:
receivables not originated in compliance with law (or revised interpretations) could become unenforceable and uncollectible under their terms against the obligors;
we may be required to credit or refund previously collected amounts;
certain fees and finance charges could be limited, prohibited or restricted, which would reduce the profitability of certain investments in receivables;
certain collection methods could be prohibited, forcing us to revise our practices or adopt more costly or less effective practices;
limitations on our ability to recover on charged-off receivables regardless of any act or omission on our part;
some credit products and services could be banned in certain states or at the federal level;
federal or state bankruptcy or debtor relief laws could offer additional protections to consumers seeking bankruptcy protection, providing a court greater leeway to reduce or discharge amounts owed to us; and
a reduction in our ability or willingness to invest in receivables arising under loans to certain consumers, such as military personnel.
Material regulatory developments may adversely impact our business and results from operations.
Our Automobile Lending Activities Involve Risks in Addition to Others Described Herein
Automobile lending exposes us not only to most of the risks described above but also to additional risks, including the regulatory scheme that governs installment loans and those attendant to relying upon automobiles and their repossession and liquidation value as collateral. In addition, our Auto Finance segment operation acquires loans on a wholesale basis from used car dealers, for which we rely upon the legal compliance and credit determinations by those dealers.
Funding for automobile lending may become difficult to obtain and expensive.
In the event we are unable to renew or replace any Auto Finance segment facilities that bear refunding or refinancing risks when they become due, our Auto Finance segment could experience significant constraints and diminution in reported asset values as lenders retain significant cash flows within underlying structured financings or otherwise under security arrangements for repayment of their loans. If we cannot renew or replace future facilities or otherwise are unduly constrained from a liquidity perspective, we may choose to sell part or all of our auto loan portfolios, possibly at less than favorable prices.Our automobile lending business is dependent upon referrals from dealers.
Currently we provide substantially all of our automobile loans only to or through used car dealers. Providers of automobile financing have traditionally competed based on the interest rate charged, the quality of credit accepted and the flexibility of loan terms offered. In order to be successful, we not only need to be competitive in these areas, but also need to establish and maintain good relations with dealers and provide them with a level of service greater than what they can obtain from our competitors.The financial performance of our automobile loan portfolio is in part dependent upon the liquidation of repossessed automobiles.
In the event of certain defaults, we may repossess automobiles and sell repossessed automobiles at wholesale auction markets located throughout the U.S. Auction proceeds from these types of sales and other recoveries rarely are sufficient to cover the outstanding balances of the contracts; where we experience these shortfalls, we will experience credit losses. Decreased auction proceeds resulting from depressed prices at which used automobiles may be sold would result in higher credit losses for us.Repossession of automobiles entails the risk of litigation and other claims.
Although we have contracted with reputable repossession firms to repossess automobiles on defaulted loans, it is not uncommon for consumers to assert that we were not entitled to repossess an automobile or that the repossession was not conducted in accordance with applicable law. These claims increase the cost of our collection efforts and, if correct, can result in awards against us.We Routinely Explore Various Opportunities to Grow Our Business, to Make Investments and to Purchase and Sell Assets
We routinely consider acquisitions of, or investments in, portfolios and other assets as well as the sale of portfolios and portions of our business. There are a number of risks attendant to any acquisition, including the possibility that we will overvalue the assets to be purchased and that we will not be able to produce the expected level of profitability from the acquired business or assets. Similarly, there are a number of risks attendant to sales, including the possibility that we will undervalue the assets to be sold. As a result, the impact of any acquisition or sale on our future performance may not be as favorable as expected and actually may be adverse.
Portfolio purchases may cause fluctuations in our reported Credit and Other Investments segment’s managed receivables data, which may reduce the usefulness of this data in evaluating our business. Our reported Credit and Other Investments segment managed receivables data may fluctuate substantially from quarter to quarter as a result of recent and future credit card portfolio acquisitions.
Receivables included in purchased portfolios are likely to have been originated using credit criteria different from the criteria of issuing bank partners that have originated accounts utilizing our technology platform. Receivables included in any particular purchased portfolio may have significantly different delinquency rates and charge-off rates than the receivables previously originated and purchased by us. These receivables also may earn different interest rates and fees as compared to other similar receivables in our receivables portfolio. These variables could cause our reported managed receivables data to fluctuate substantially in future periods making the evaluation of our business more difficult.
Any acquisition or investment that we make will involve risks different from and in addition to the risks to which our business is currently exposed. These include the risks that we will not be able to integrate and operate successfully new businesses, that we will have to incur substantial indebtedness and increase our leverage in order to pay for the acquisitions, that we will be exposed to, and have to comply with, different regulatory regimes and that we will not be able to apply our traditional analytical framework (which is what we expect to be able to do) in a successful and value-enhancing manner.
Other Risks of Our Business
We are a holding company with no operations of our own
. As a result, our cash flow and ability to service our debt is dependent upon distributions from our subsidiaries. The distribution of subsidiary earnings, or advances or other distributions of funds by subsidiaries to us, all of which are subject to statutory and could be subject to contractual restrictions, are contingent upon the subsidiaries’ cash flows and earnings and are subject to various business and debt covenant considerations.Unless we obtain a bank charter, we cannot issue credit cards. Issuers of general purpose credit cards other than through agreements with banks.
We are party to litigation.
We areWe face heightened levels of economic risk associated with new investment activities.
Because we outsource account-processing functions that are integral to our business, any disruption or termination of that outsourcing relationship could harm our business.
We generally outsource account and paymentIf we are unable to protect our information systems against service interruption, our operations could be disrupted and our reputation may be damaged. We rely heavily on networks and information systems and other technology, that are largely hosted by third-parties to support our business processes and activities, including processes integral to the origination and collection of loans and other financial products, and information systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting and legal and tax requirements.
Unauthorized or unintentional disclosure of sensitive or confidential customer data could expose us to protracted and costly litigation, and civil and criminal penalties.
To conduct our business, we are required to manage, use, and store large amounts of personally identifiable information, consisting primarily of confidential personal and financial data regarding consumers across all operations areas. We also depend on our IT networks and systems, and those of third parties, to process, store, and transmit this information. As a result, we are subject to numerous U.S. federal and state laws designed to protect this information. Security breaches involving our files and infrastructure could lead to unauthorized disclosure of confidential information.We take a number of measures to ensure the security of our hardware and software systems and customer information. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in the technology used by us to protect data being breached or compromised. In the past, banks and other financial service providers have been the subject of sophisticated and highly targeted attacks on their information technology. An increasing number of websites have reported breaches of their security.
If any person, including our employees or those of third-party vendors, negligently disregards or intentionally breaches our established controls with respect to such data or otherwise mismanages or misappropriates that data, we could be subject to costly litigation, monetary damages, fines, and/or criminal prosecution. Any unauthorized disclosure of personally identifiable information could subject us to liability under data privacy laws. Further, under credit card rules and our contracts with our card processors, if there is a breach of credit card information that we store, we could be liable to the credit card issuing banks for their cost of issuing new cards and related expenses. In addition, if we fail to follow credit card industry security standards, even if there is no compromise of customer information, we could incur significant fines. Security breaches also could harm our reputation, which could potentially cause decreased revenues, the loss of existing merchant credit partners, or difficulty in adding new merchant credit partners.
Internet and data security breaches also could impede our bank partners from originating loans over the Internet, cause us to lose consumers or otherwise damage our reputation or business.
Consumers generally are concerned with security and privacy, particularly on the Internet. As part of our growth strategy, we have enabled lenders to originate loans over the Internet. The secure transmission of confidential information over the Internet is essential to maintaining customer confidence in such products and services offered online.Advances in computer capabilities, new discoveries or other developments could result in a compromise or breach of the technology used by us to protect our client or consumer application and transaction data transmitted over the Internet. In addition to the potential for litigation and civil penalties described above, security breaches could damage our reputation and cause consumers to become unwilling to do business with our clients or us, particularly over the Internet. Any publicized security problems could inhibit the growth of the Internet as a means of conducting commercial transactions. Our ability to service our clients’ needs over the Internet would be severely impeded if consumers become unwilling to transmit confidential information online.
Also, a party that is able to circumvent our security measures could misappropriate proprietary information, cause interruption in our operations, damage our computers or those of our users, or otherwise damage our reputation and business.
Regulation in the areas of privacy and data security could increase our costs. We are subject to various regulations related to privacy and data security/breach, and we could be negatively impacted by these regulations. For example, we are subject to the safeguardsSafeguards guidelines under the Gramm-Leach-Bliley Act. The safeguardsSafeguards guidelines require that each financial institution develop, implement and maintain a written, comprehensive information security program containing safeguards that are appropriate to the financial institution’s size and complexity, the nature and scope of the financial institution’s activities and the sensitivity of any customer information at issue. Broad-ranging data security laws that affect our business also have been adopted by various states. Compliance with these laws regarding the protection of consumer and employee data could result in higher compliance and technology costs for us, as well as potentially significant fines and penalties for non-compliance.
In addition to the foregoing enhanced data security requirements, various federal banking regulatory agencies, and at least 48all 50 states, the District of Columbia, Puerto Rico and the Virgin Islands, have enacted data security regulations and laws requiring varying levels of consumer notification in the event of a security breach.
Also, federal legislators and regulators are increasingly pursuing new guidelines, laws and regulations that, if adopted, could further restrict how we collect, use, share and secure consumer information, which could impact some of our current or planned business initiatives.
Unplanned system interruptions or system failures could harm our business and reputation.
Any interruption in the availability of our transactional processing services due to hardware and operating system failures will reduce our revenues and profits. Any unscheduled interruption in our services results in an immediate, and possibly substantial, loss of revenues. Frequent or persistent interruptions in our services could cause current or potential consumers to believe that our systems are unreliable, leading them to switch to our competitors or to avoid our websites or services, and could permanently harm our reputation.Although our systems have been designed around industry-standard architectures to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, computer viruses, computer denial-of-service attacks, and similar events or disruptions. Some of our systems are not fully redundant, and our disaster recovery planning may not be sufficient for all eventualities. Our systems also are subject to break-ins, sabotage, and intentional acts of vandalism. Despite any precautions we may take, the occurrence of a natural disaster, a decision by any of our third-party hosting providers to close a facility we use without adequate notice for financial or other reasons, or other unanticipated problems at our hosting facilities could cause system interruptions, delays, and loss of critical data, and result in lengthy interruptions in our services. Our business interruption insurance may not be sufficient to compensate us for losses that may result from interruptions in our service as a result of system failures.
Climate change and related regulatory responses may impact our business
. Climate change as a result of emissions of greenhouse gases is a significant topic of discussion and may generate federal and other regulatory responses. It is impracticable to predict with any certainty the impact on our business of climate change or the regulatory responses to it, although we recognize that they could be significant. The most direct impact is likely to be an increase in energy costs, which would adversely impact consumers and their ability to incur and repay indebtedness. However, we are uncertain of the ultimate impact, either directionally or quantitatively, of climate change and related regulatory responses on our business.The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell your shares of our common stock when you want or at prices you find attractive.
The price of our common stock on the NASDAQ Global Select Market constantly changes. We expect that the market price of our common stock will continue to fluctuate. The market price of our common stock may fluctuate in response to numerous factors, many of which are beyond our control. These factors include the following:actual or anticipated fluctuations in our operating results;
changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;
the overall financing environment, which is critical to our value;
the operating and stock performance of our competitors;
announcements by us or our competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
changes in interest rates;
the announcement of enforcement actions or investigations against us or our competitors or other negative publicity relating to us or our industry;
changes in GAAP, laws, regulations or the interpretations thereof that affect our various business activities and segments;
general domestic or international economic, market and political conditions;
changes in ownership by executive officers, directors and parties related to them who control a majority of our common stock;
additions or departures of key personnel; and
future sales of our common stock and the transfer or cancellation of shares of common stock pursuant to a share lending agreement.
In addition, the stock markets from time to time experience extreme price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies. These broad fluctuations may adversely affect the trading price of our common stock, regardless of our actual operating performance.
Future sales of our common stock or equity-related securities in the public market, including sales of our common stock pursuant to share lending agreements or short sale transactions by purchasersholders of convertible senior notes, could adversely affect the trading price of our common stock and our ability to raise funds in new stock offerings.
We have the ability to issue preferred stock, warrants, convertible debt and other securities without shareholder approval.
Our common stock may be subordinate to classes of preferred stock issued in the future in the payment of dividends and other distributions made with respect to common stock, including distributions upon liquidation or dissolution. Our articles of incorporation permit our Board of Directors to issue preferred stock without first obtaining shareholder approval. If we issue preferred stock, these additional securities may have dividend or liquidation preferences senior to the common stock. If we issue convertible preferred stock, a subsequent conversion may dilute the current common shareholders’ interest. We have similar abilities to issue convertible debt, warrants and other equity securities.Our executive officers, directors and parties related to them, in the aggregate, control a majority of our common stock and may have the ability to control matters requiring shareholder approval.
Our executive officers, directors and parties related to them own a large enough share of our common stock to have an influence on, if not control of, the matters presented to shareholders. As a result, these shareholders may have the ability to control matters requiring shareholder approval, including the election and removal of directors, the approval of significant corporate transactions, such as any reclassification, reorganization, merger, consolidation or sale of all or substantially all of our assets and the control of our management and affairs. Accordingly, this concentration of ownership may have the effect of delaying, deferring or preventing a change of control of us, impede a merger, consolidation, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could have an adverse effect on the market price of our common stock.The right to receive payments on our convertible senior notes is subordinate to the rights of our existing and future secured creditors.
Our convertible senior notes are unsecured and are subordinate to existing and future secured obligations to the extent of the value of the assets securing such obligations. As a result, in the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding of our company, our assets generally would be available to satisfy obligations of our secured debt before any payment may be made on the convertible senior notes. To the extent that such assets cannot satisfy in full our secured debt, the holders of such debt would have a claim for any shortfall that would rank equally in right of payment (or effectively senior if the debt were issued by a subsidiary) with the convertible senior notes. In such an event, we may not have sufficient assets remaining to pay amounts on any or all of the convertible senior notes.As of September 30, 2017,March 31, 2019, Atlanticus Holdings Corporation had outstanding:
Our convertible senior notes are junior to the indebtedness of our subsidiaries. Our convertible senior notes are structurally subordinated to the existing and future claims of our subsidiaries’ creditors. Holders of the convertible senior notes are not creditors of our subsidiaries. Any claims of holders of the convertible senior notes to the assets of our subsidiaries
Note Regarding Risk Factors
The risk factors presented above are all of the ones that we currently consider material. However, they are not the only ones facing our company. Additional risks not presently known to us, or which we currently consider immaterial, also may adversely affect us. There may be risks that a particular investor views differently from us, and our analysis might be wrong. If any of the risks that we face actually occurs, our business, financial condition and operating results could be materially adversely affected and could differ materially from any possible results suggested by any forward-looking statements that we have made or might make. In such case, the trading price of our common stock or other securities could decline, and you could lose part or all of your investment.
We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.ISSUER PURCHASES OF EQUITY SECURITIES
The following table sets forth information with respect to our repurchases of common stock during the three months ended September 30, 2017.
Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs (1)(2) | |||||||||
July 1 - July 31 | — | $ | — | — | 4,912,401 | |||||||
August 1 - August 31 | 84,225 | $ | 2.49 | 17,525 | 4,894,876 | |||||||
September 1 - September 30 | 23,691 | $ | 2.48 | 23,691 | 4,871,185 | |||||||
Total | 107,916 | $ | 2.49 | 41,216 | 4,871,185 |
Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs (2) | |||||||||||||
January 1 - January 31 | — | $ | — | — | 4,737,540 | |||||||||||
February 1 - February 28 | — | $ | — | — | 4,737,540 | |||||||||||
March 1 - March 31 | 5,944 | $ | 3.56 | — | 4,737,540 | |||||||||||
Total | 5,944 | $ | 3.56 | — | 4,737,540 |
(1) | Because withholding tax-related stock repurchases are permitted outside the scope of our 5,000,000 share Board-authorized repurchase plan, these amounts exclude shares of stock returned to us by employees in satisfaction of withholding tax requirements on vested stock grants. There were |
(2) | Pursuant to a share repurchase plan authorized by our Board of Directors on May |
We will continue to evaluate our stock price relative to other investment opportunities and, to the extent we believe that the repurchase of our stock represents an appropriate return of capital, we will repurchase shares of our stock.
None.
None.
OTHER INFORMATION |
None.
Exhibit Number | |||||
Description of Exhibit | Incorporated by Reference from Atlanticus’ SEC Filings Unless Otherwise Indicated | ||||
10.1 | April 11, 2019, Definitive Proxy Statement on Schedule 14A, Appendix A | ||||
10.2 | Filed herewith | ||||
Filed herewith | |||||
10.2(b) | Assignment and Assumption Agreement, dated March 24, 2018, among Mid America Bank & Trust Company, Atlanticus Services Corporation and The Bank of Missouri | Filed herewith | |||
10.2(c) | Assignment and Assumption Agreement, dated March 24, 2018, among Mid America Bank & Trust Company, Fortiva Funding, LLC and The Bank of Missouri | Filed herewith | |||
31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) | Filed herewith | |||
31.2 | Filed herewith | ||||
32.1 | Filed herewith | ||||
101.INS | XBRL Instance Document | Filed herewith | |||
101.SCH | XBRL Taxonomy Extension Schema Document | Filed herewith | |||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith | |||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | Filed herewith | |||
101.PRE | XBRL Taxonomy Presentation Linkbase Document | Filed herewith | |||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith |
* Certain portions of this exhibit have been excluded because they are both not material and would likely cause competitive harm to the Company if publicly disclosed.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ATLANTICUS HOLDINGS CORPORATION | ||||
May 14, 2019 | By | |||
/s/ WILLIAM R. McCAMEY | ||||
William R. McCamey | ||||
Chief Financial Officer | ||||
(duly authorized officer and principal financial officer) |
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