SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report for the year ended
December 31,of
ATLANTICUS HOLDINGS CORPORATION
a Georgia Corporation
IRS Employer Identification No. 58-2336689
SEC File Number 0-53717
Five Concourse Parkway, Suite 300
Atlanta, Georgia 30328
(770) 828-2000
Atlanticus’ common stock, no par value per share, is registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the “Act”) and is listedtrades on the NASDAQ Global Select Market.
Atlanticus is not a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.
Atlanticus (1) is required to file reports pursuant to Section 13 of the Act, (2) has filed all reports required to be filed by Section 13 of the Act during the preceding 12 months and (3) has been subject to such filing requirements for the past 90 days.
Atlanticus has submitted electronically and posted on its corporate Web site every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.
Atlanticus is a smaller reporting company and is not a shell company or an emerging growth company.
The aggregate market value of Atlanticus’ common stock (based upon the closing sales price quoted on the NASDAQ Global Select Market) held by non-affiliates as of June 30, 20172019 was $18.3$21.7 million. (For this purpose, directors, officers and 10% shareholders have been assumed to be affiliates, and we also have included 1,459,233 loaned shares at June 30, 2017.2019.)
As of
MarchDOCUMENTS INCORPORATED BY REFERENCE
Portions of Atlanticus’Atlanticus' Proxy Statement for its 20182020 Annual Meeting of Shareholders are incorporated by reference into Part III.
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PART I |
Item 1. | 1 | |||
Item | 7 | |||
Item | 16 | |||
Item | 16 | |||
Item | 16 | |||
Item 4. | ||||
PART II | ||||
Item 5. | ||||
Item 6. | ||||
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |||
Item 7A. | ||||
Item 8. | ||||
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |||
Item 9A. | ||||
Item 9B. | 33 | |||
PART III |
Item | |||
Item 11. | |||
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | ||
Item 13. | Certain Relationships and Related Transactions, and Director Independence | ||
Item 14. | 34 |
PART IV | ||||
Item 15. | 35 | |||
Item 16. | 38 | |||
In this Report, except as the context suggests otherwise, the words “Company,” “Atlanticus Holdings Corporation,” “Atlanticus,” “we,” “our,” “ours” and “us” refer to Atlanticus Holdings Corporation and its subsidiaries and predecessors. Atlanticus owns Aspire
®, Emerge®, Fortiva®, Imagine®, Salute®, Tribute® and other trademarks and service marks in the United States (“U.S.”) and the United Kingdom (“U.K.”).Cautionary Notice Regarding Forward-Looking Statements
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. In this Report, both Item 1, “Business,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contain 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 I, 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;
• | the duration and magnitude of the impact the novel coronavirus, or COVID-19 ("COVID-19"), could have on credit usage and payments; | |
• | 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-
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.
BUSINESS |
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.
General
A general discussion of our business follows. For additional information about our business, please visit our website at
www.Atlanticus.com. Information contained on or available through our website is not incorporated by reference in this Report.We are a Georgia corporation formed in 2009, as successor to an entity that commenced operations in 1996. We provide various credit and related financial services and products primarily to or associated with the financially underserved consumer credit market. 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 Experian, 41% of Americans had FICO® scores of less than 700 as of the second quarter of 2019, which represents a population in excess of 90 million consumers. A recent survey conducted by Charles Schwab further found that 59% of Americans lived "paycheck to paycheck" and only 38% of people have an emergency fund.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$26 billion in consumer loans over our 21-year23-year operating history to support lenders who originate a range of consumer loan products. These products include retail credit personal loans, and credit cards marketedoriginated by lenders 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. The 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 (our “direct-to-consumer” products) 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 offeringsupporting 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 segment: 1)(1) the income earned from an investment in an equity-method investee that holds credit card receivables for which we are the servicer; and 2)(2) gains or losses associated with investments previously made in consumer finance technology platforms. These include investments in companies engaged in mobile technologies, marketplace lending and other financial technologies. These investments are carried at the lower of cost or market valuation. None of these companies are publicly-traded and there are no material pending liquidity events.
The recurring cash flows we receive within our Credit and Other Investments segment principally include those associated with (1) point-of-sale and direct-to-consumer receivables, (2) servicing compensation and (3) credit card receivables portfolios that are unencumbered or where we own a portion of the underlying structured financing facility.
We believe that our point-of-sale and direct-to-consumer receivables are generating, and will continue to generate, attractive returns on assets, thereby facilitating debt financing under terms and conditions (including advance rates and pricing) that will support attractive returns on equity, and we continue to pursue growth in this area.
We are investing in our infrastructure in order to facilitate expansion in ourexpand point-of-sale and direct-to-consumer finance and credit solutions and new product offerings. Although this has resulted in increased overhead costs,offerings, which we believe that we have the potential to grow into our existing infrastructure and providewill allow for long-term shareholder returns. In any event, we continue to closely monitor and manage our overhead costs.
Credit and Other Investments Segment.
Our Credit and Other Investments segment includes our point-of-saleactivities relating to our servicing of and direct-to-consumer finance operations,our investments in receivables from point-of-sale, direct-to-consumer personal finance and servicing ofcredit card operations, our various credit card receivables portfolios, andas well as other product developmenttesting and limited investment in consumer finance technology platformsinvestments that generally capitalizeutilize 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 merchant fees associated with the point-of-sale receivables or annual fees on our credit infrastructure.
As previously discussed, we support lenders who originate a range of consumer loan products over multiple channels. Through our point-of-sale operations, we leverage our flexible technology platform that allows retail partners and service providers to offer loan options to their customers who may have been declined by a primary lender. The same proprietary analytics and infrastructure also allows lenders to offer general purpose loan products directly to consumers with our direct-to-consumer products. We help lenders reach these consumers through a diverse origination platform that includes direct mail, Internet-baseddigital marketing and partnerships.
Our credit and other operations are heavily regulated, which may cause us to change how we conduct our operations either in response to regulation or in keeping with our goal of leading the industry in adherence to consumer-friendly practices. We have made several significantmeaningful changes to our practices over the past several years, and because our account management practices are evolutionary and dynamic, it is possible that we may make further changes to these practices, some of which may produce positive, and others of which may produce adverse, effects on our operating results and financial position. Customers at the lower end of the credit score range intrinsically have higher loss rates than do customers at the higher end of the credit score range. As a result, we price our products to reflect this higher loss rate. As such, our products are subject to greater regulatory scrutiny than the products of prime only lenders who are able to price their credit products at much lower levels than we can. See “Consumer and Debtor Protection Laws and Regulations—Credit and Other Investments Segment” and Item 1A, “Risk Factors.”
Auto Finance Segment.
The operations of our Auto Finance segment are conducted through our CAR platform, which we acquired in April 2005. CAR primarily purchases and/or services loans secured by automobiles from or for, and also provides 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.Through our CAR operations, we generate revenues on purchased loans through interest earned on the face value of the installment agreements combined with the accretion of discounts on loans purchased. We generally earn discount income over the life of the applicable loan. Additionally, we generate revenues from servicing loans on behalf of dealers for a portion of actual collections and by providing back-up servicing for similar quality assets owned by unrelated third parties. We offer a number of other products to our network of buy-here, pay-here dealers (including our floor-plan financing offering), but the majority of our activities are represented by our purchases of auto loans at discounts and our servicing of auto loans for a fee. As of December 31, 2017,2019, our CAR operations served more than 575600 dealers in 3335 states, the District of Columbia and two U.S. territories. These operations continue to perform well (achieving consistent profitability and generating positive cash flows with modestand growth).
How Do We Manage the Receivables and Mitigate Our Risks?
Credit and Other Investments Segment.
We manage our investments in receivables using creditFor our point-of-sale and direct-to-consumer finance activities as well as the accounts that are open to purchases, we generally seek to manageassist our lending partners with managing credit lines to reward financially underserved customers who are performing well and to mitigate losses from delinquent customer segments. We also employassist our lending partners with employing strategies to reduce otherwise open credit lines for customers demonstrating indicators of increased credit or bankruptcy risk. Data relating to account performance are captured and loaded into our proprietary database for ongoing analysis. We adjust account management strategies as necessary, based on the results of such analyses. Additionally, we use industry-standard fraud detection software to manage the portfolio. We route accounts to manual work queues and suspend charging privileges if the transaction-based fraud models indicate a probability of fraudulent use.
Auto Finance Segment.
Our CAR operations manage credit quality and loss mitigation at the dealer portfolio level through the implementation of dealer-specific loss reserve accounts. In most instances, the reserve accounts are cross-collateralized across all accounts presented by any single dealer. CAR monitors performance at the dealer portfolio level (by product type) to adjust pricing or the reserve account or to determine whether to terminate future account purchases from such dealer.CAR provides dealers with specific purchase guidelines based upon each product offering and delegates approval authority to assist in the monitoring of transactions during the loan acquisition process. Dealers are subject to specific approval criteria, and individual accounts typically are verified for accuracy before, during and after the acquisition process. Dealer portfolios across the business segment are monitored and compared against expected collections and peer dealer performance. Monitoring of dealer pool vintages, delinquencies and loss ratios helps determine past performance and expected future results, which are used to adjust pricing and reserve requirements. Our CAR operations also manage risk through diversifying their receivables among multiple dealers.
How Do We Collect?
Credit and Other Investments Segment.
The goal of the collections process is to collect as much of theCollectors employ various and evolving tools when collecting on our receivables, and they routinely test and evaluate new tools in their effort toward improving our collections with a greater degree of efficiency and service. These tools include programs under which we may reduce or eliminate the annual percentage rate (“APR”)contractual interest associated with a receivable may be reduced or waiveeliminated, or a certain amount of accrued fees is waived, provided a minimum number or amount of payments have been made. In some instances, wecollectors may agree to match the payment on a receivable, for example, with commensurate payments or reductions of finance charges or waivers of fees. In other situations, wecollectors may actually settle and adjust finance charges and fees on a receivable, for example, based on a commitment and follow through on a commitment to pay certain portions of the balances owed. Our collectorsCollectors may also decrease minimum payments owed under certain collection programs. Additionally, we employ re-aging techniques as discussed below. We also may occasionally use our marketing group to assist in determining various programs to assist in the collection process. Moreover, we voluntarily participate in the Consumer Credit Counseling Service (“CCCS”) program by waiving a certain percentage of a receivable that is considered our “fair share” under the CCCS program. All of our programs are utilized based on the degree of economic success and customer service they achieve.
We regularly monitor and adapt our collection strategies, techniques, technology and training to optimize our efforts to reduce delinquencies and charge offs. We use our operations systems to develop these proprietary collection strategies and techniques, and we analyze the output from these systems to identify the strategies and techniques that we believe are most likely to result in curing a delinquent accountreceivable in the most cost-effective manner, rather than treating all accountsdelinquent receivables the same based on the mere passage of time.
As in all aspects of our risk management strategies, we compare the results of each of the above strategies with other collection strategies and devote resources to those strategies that yield the best results. Results are measured based on, among other things, delinquency rates, expected losses and costs to collect. Existing strategies are then adjusted based on these results. We believe that routinely testing, measuring and adjusting collection strategies results in lower bad debt losses and operating expenses.
Interest and fees for most of our credit products we service are discontinued when loans, interest and fees receivable become contractually 90 or more days past due and we charge off loans, interest and fees receivable when they become contractually more than 180 days past due or 120 days past due for the direct-to-consumer personal loan product. However, if a payment is made that is greater than or equal to two minimum payments within a month of the charge-off date, we may reconsider whether charge-off status remains appropriate.due. For all of our products, we charge off receivables within 30 days of notification and confirmation of bankruptcy or death of the obligor. However, in some cases of death, we do not charge off receivables if there is a surviving, contractually liable individual or an estate large enough to pay the debt in full.
Our determination of whether an account is contractually past due is relevant to our delinquency and charge-off data provided under the “Credit and Other Investments Segment” caption within Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Various factors are relevant in analyzing whether an account is contractually past due (e.g., whether an account has not satisfied its minimum payment due requirement), which for us is the trigger for moving receivables through our various delinquency stages and ultimately to charge-off status. For our point-of-sale and direct-to-consumer finance accounts, we consider an account to be delinquent if the customer has not made any required payment as of the payment due date. For credit card accounts, we consider a cardholder’s receivable to be delinquent if the cardholder has failed to pay a minimum amount, computed as the greater of a stated minimum payment or a fixed percentage of the statement balance (for example 3% to 10% of the outstanding balance in some cases or in other cases 1% of the outstanding balance plus any finance charges and late fees billed in the current cycle).
Additionally, we may re-age customer accounts that meet our qualifications for re-aging. Re-aging involves changing the delinquency status of an account. It is our policy to work cooperatively with customers demonstrating a willingness and ability to repay their indebtedness and who satisfy other criteria, but are unable to pay the entire past due amount. Generally, to qualify for re-aging, an account must have been opened for at least nine months and may not be re-aged more than once in a twelve-month period or twice in a five-year period. In addition, an account on a workout program may qualify for one additional re-age in a five-year period. The customer also must have made three consecutive minimum monthly payments or the equivalent cumulative amount in the last three billing cycles. If a re-aged account subsequently experiences payment defaults, it will again become contractually delinquent and will be charged off according to our regular charge-off policy. The practice of re-aging an account may affect delinquencies and charge offs, potentially delaying or reducing such delinquencies and charge offs; however, this impact generally changes such delinquencies and charge offs by less than 10% and 5%, respectively.
As discussed above, typically, once an account 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 eliminationuse of programs under which the annual percentage rate (“APR”) charged to an account andcontractual interest associated with a cessationreceivable may be reduced or eliminated, or a certain amount of fee billing.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 the additional criteria discussed above, 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. Thus we do not recognize an impairment or write-down solely due to the re-aging process. Once an account is placed on a non-accrual status, it is closed for further purchases. We believe that re-ages help our customers to manage difficult repayment periods, return to good standing and avoid further deterioration to their credit scores. Accounts that are placed on a non-accrual status and thereafter make at least one payment qualify as troubled debt restructurings (“TDRs”). See Note 2, “Significant Accounting Policies and Consolidated Financial Statement Components-Loans, Interest and Fees Receivable-Troubled Debt Restructurings” to our consolidated financial statements included herein for further discussion of TDRs.
Auto Finance Segment.
Accounts that CAR purchases from approved dealers initially are collected by the originating branch or service center location using a combination of traditional collection practices. The collection process includes contacting the customer by phone or mail, skip tracing and using starter interrupt devices to minimize delinquencies. Uncollectible accounts in our CAR operation generally are returned to the dealer under an agreement with the dealer to charge the balance on the account against the dealer’s reserve account. We generally do not repossess autos in our CAR operation as a result of the agreements that we have with the dealers unless there are insufficient dealer reserves to offset the loss or if a dealer instructs us to do so.Consumer and Debtor Protection Laws and Regulations
Credit and Other Investments Segment.
Our U.S. business is regulated directly and indirectly under various federal and state consumer protection, collection and other laws, rules and regulations, including the federal Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “CARD Act”), the federal Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), the federal Truth In Lending Act (“TILA”), the federal Equal Credit Opportunity Act, the federal Fair Credit Reporting Act, the federal Fair Debt Collection Practices Act, the Federal Trade Commission (“FTC”) Act, the federal Gramm-Leach-Bliley Act and the federal Telemarketing and Consumer Fraud and Abuse Prevention Act. These laws, rules and regulations, among other things, impose disclosure requirements when consumer products are advertised, when an account is opened, when monthly billing statements are sent and when consumer obligations are collected. In addition, various statutes limit the liability of consumers for unauthorized use, prohibit discriminatory practices in consumer transactions, impose limitations on the types of charges that may be assessed and restrict the use of consumer credit reports and other account-related information. Many of our lending partners' products are designed for customersAuto Finance Segment.
This segment is regulated directly and indirectly under various federal and state consumer protection and other laws, rules and regulations, including the federal TILA, the federal Equal Credit Opportunity Act, the federal Fair Credit Reporting Act, the federal Fair Debt Collection Practices Act, Dodd-Frank, the federal Gramm-Leach-Bliley Act and the federal Telemarketing and Consumer Fraud and Abuse Prevention Act. In addition, various state statutes limit the interest rates and fees that may be charged, limit the types of interest computations (e.g., interest bearing or pre-computed) and refunding processes, prohibit discriminatory practices in extending credit, impose limitations on fees and other ancillary products and restrict the use of consumer credit reports and other account-related information. Many of the states in which this segment operates have various licensing requirements and impose certain financial or other conditions in connection with these licensing requirements.Privacy and Data Security Laws and Regulations. We are required to manage, use, and store large amounts of personally identifiable information, principally the confidential personal and financial data of our lending partners’ customers, in the course of our business. We depend on our IT networks and systems, and those of third parties, to process, store, and transmit that information. In the past, financial service companies have been targeted for sophisticated cyber attacks. A security breach involving our files and infrastructure could lead to unauthorized disclosure of confidential information. We take numerous measures to ensure the security of our hardware and software systems as well as customer information.
We are subject to various U.S. federal and state laws and regulations designed to protect confidential personal and financial data. For example, we must comply with guidelines under the Gramm-Leach-Bliley Act that require each financial institution to 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. Additionally, 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 customer notification in the event of a security breach.
Competition
Credit and Other Investments Segment.
We face substantial competition from financial service companies, the intensity of which varies depending upon economic and liquidity cycles. Our financial performance is, in part, a function of the performance of our investments in receivables and the aggregate outstanding amount of such receivables. The point-of-sale and direct-to-consumer finance activities of our lending partners compete with national, regional and local bankcard and consumer credit issuers, other general-purpose credit card issuers and retail credit card and merchant credit issuers. Many of these competitors are substantially larger than we are, have significantly greater financial resources than we do and have significantly lower costs of funds than we have.Auto Finance Segment.
Competition within the auto finance sector is widespread and fragmented. Our auto finance operations target automobile dealers that oftentimes are notEmployees
As of December 31, 2017,2019, we had 297319 employees, including 75 part-time employees, mostall of whom are principally employed within the U.S. We consider our relations with our employees to be good. None of our employees are covered by a collective-bargaining agreement, and we have never experienced any organized work stoppage, strike or labor dispute.
Trademarks, Trade Names and Service Marks
We have registered and continue to register, when appropriate, various trademarks, trade names and service marks used in connection with our businesses and for private-label marketing of certain of our products. We consider these trademarks, trade names and service marks to be readily identifiable with, and valuable to, our business. This Annual Report on Form 10-K also contains trade names and trademarks of other companies that are the property of their respective owners.
Additional Information
We are headquartered in Atlanta, Georgia, and our principal executive offices are located at Five Concourse Parkway, Suite 300, Atlanta, Georgia 30328. Our headquarters telephone number is (770) 828-2000, and our website is
www.Atlanticus.com. We make available free of charge on our website certain of our recent SEC filings, including our annualCertain corporate governance materials, including our Board of Directors committee charters and our Code of Business Conduct and Ethics, are posted on our website under the heading “For Investors.” From time to time, the corporate governance materials on our website may be updated as necessary to comply with rules issued by the SEC or NASDAQ, or as desirable to further the continued effective and efficient governance of our company.
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. OurEconomic 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.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.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 generallyoverall 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 beenwas 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.
Capital markets may experience periods of disruption and instability, which could limit our ability to grow our receivables. From time-to-time, capital markets may experience periods of disruption and instability. For example, from 2008 to 2009, the global capital markets were unstable as evidenced by the lack of liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of major financial institutions. Despite actions of the U.S. federal government and various foreign governments, these events contributed to worsening general economic conditions that materially and adversely impacted the broader financial and credit markets and reduced the availability of debt and equity capital for the market as a whole and financial services firms in particular. If similar adverse and volatile market conditions repeat in the future, we and other companies in the financial services sector may have to access, if available, alternative markets for debt and equity capital in order to grow our receivables.
Moreover, the re-appearance of market conditions similar to those experienced from 2008 through 2009 for any substantial length of time or worsened market conditions could make it difficult for us to borrow money or to extend the maturity of or refinance any indebtedness we may have under similar terms and any failure to do so could have a material adverse effect on our business. Unfavorable economic and political conditions, including future recessions, political instability, geopolitical turmoil and foreign hostilities, and disease, pandemics and other serious health events, also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us.
Recently, the outbreak of the novel coronavirus, or COVID-19, in many countries continues to adversely impact global commercial activity and has contributed to significant volatility in financial markets. The global impact of the outbreak has been rapidly evolving, and as cases of the virus have continued to be identified in additional countries, many countries have reacted by instituting quarantines and restrictions on travel. Such actions are creating disruption in global supply chains, and adversely impacting a number of industries, such as transportation, hospitality and entertainment. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of the coronavirus. Nevertheless, the coronavirus presents material uncertainty and risk with respect to our performance and financial results.
We may in the future have difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may cause us to reduce the volume of receivables we purchase or otherwise have a material adverse effect on our business, financial condition, results of operations and cash flows.
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.
The recent growth of our recent purchasesinvestments in point-of-sale finance and direct-to-consumer receivables may not be indicative of credit cardour ability to grow such receivables our aggregate credit cardin the future. Our investments in point-of-sale finance and direct-to-consumer receivables contracted overgrew to $908.4 million for the last several years.
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,We Operate in a Heavily Regulated Industry
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 and in a state of flux. As a result, how we value our receivables and otherwise account for our business is subject to change depending upon the changes in, and, interpretation of, those rules. Some of these issues are discussed more fully below.
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
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.
The regulatory landscape in which we operate is continually changing due to new rules, regulations and interpretations, as well as various legal actions that have been brought against others that have sought to re-characterize certain loans made by federally insured banks as loans made by third parties. If litigation on similar theories were brought against us when we work with a federally insured bank that makes loans and were such an action successful, we could be subject to state usury limits and/or state licensing requirements, loans in such states could be deemed void and unenforceable, and we could be subject to substantial penalties in connection with such loans.
The case law involving whether an originating lender, on the one hand, or third-parties, on the other hand, are the “true lenders” of a loan is still developing and courts have come to different conclusions and applied different analyses. The determination of whether a third-party service provider is the “true lender” is significant because third-parties risk having the loans they service becoming subject to a consumer’s state usury limits. A number of federal courts that have opined on the “true lender” issue have looked to who is the lender identified on the borrower’s loan documents. A number of state courts and at least one federal district court have considered a number of other factors when analyzing whether the originating lender or a third party is the “true lender,” including looking at the economics of the transaction to determine, among other things, who has the predominant economic interest in the loan being made. If we were re-characterized as a “true lender” with respect to the receivables originated by the bank that utilizes our technology platform and other services, such receivables could be deemed to be void and unenforceable in some states, the right to collect finance charges could be affected, and we could be subject to fines and penalties from state and federal regulatory agencies as well as claims by borrowers, including class actions by private plaintiffs. Even if we were not required to change our business practices to comply with applicable state laws and regulations or cease doing business in some states, we could be required to register or obtain lending licenses or other regulatory approvals that could impose a substantial cost on us. If the bank that originates loans utilizing our technology platform were subject to such a lawsuit, it may elect to terminate its relationship with us voluntarily or at the direction of its regulators, and if it lost the lawsuit, it could be forced to modify or terminate such relationship.
In addition to true lender challenges, a question regarding the applicability of state usury rates may arise when a loan is sold from a bank to a non-bank entity. In Madden v. Midland Funding, LLC, the U.S. Court of Appeals for the Second Circuit held that the federal preemption of state usury laws did not extend to the purchaser of a loan issued by a national bank. In its brief urging the U.S. Supreme Court to deny certiorari, the U.S. Solicitor General, joined by the Office of the Comptroller of the Currency (“OCC”), noted that the Second Circuit (Connecticut, New York and Vermont) analysis was incorrect. On remand, the U.S. District Court for the Southern District of New York concluded on February 27, 2017 that New York’s state usury law, not Delaware’s state usury law, was applicable and that the plaintiff’s claims under the FDCPA and state unfair and deceptive acts and practices could proceed. To that end, the court granted Madden’s motion for class certification. At this time, it is unknown whether Madden will be applied outside of the defaulted debt context in which it arose; however, recently two class actions, Cohen v. Capital One Funding, LLC, et al. and Petersen v. Chase Card Funding, LLC, et al., have relied on Madden to challenge the interest rate charged once debt was sold to securitization trusts. The facts in Madden are not directly applicable to our business, as we do not engage in practices similar to those at issue in Madden. However, to the extent that the holding in Madden was broadened to cover circumstances applicable to our business, or if other litigation on related theories were brought against us and were successful, or we were otherwise found to be the “true lender,” we could become subject to state usury limits and state licensing laws, in addition to the state consumer protection laws to which we are already subject, in a greater number of states, loans in such states could be deemed void and unenforceable, and we could be subject to substantial penalties in connection with such loans.
In response to the uncertainty Madden created as to the validity of interest rates of bank-originated loans sold in the secondary market, in November 2019, the OCC and the FDIC took action to reaffirm the “valid when made” doctrine by issuing a notice of proposed rulemaking to clarify that when a bank sells, assigns, or otherwise transfers a loan, the interest permissible prior to the transfer would continue to be permissible following the transfer. The 60-day comment periods ended January 21, 2020 and February 4, 2020, respectively, and it is anticipated that the agencies will issue final rules soon.
In September 2019, the FDIC and the OCC jointly submitted an amicus brief to the U.S. District Court for the District of Colorado in support of a debt buyer, urging the District Court to uphold the bank’s rights to enforce that debt to the debt buyer, including the bank’s right to charge interest as authorized under the laws of its home state. The brief includes related discussions of (i) the rights of federally regulated banks to “export” their home states’ interest rates by charging those rates to borrowers nationwide, first with respect to national banks under section 85 of the National Bank Act and then with respect to state banks under section 27 of the Federal Deposit Insurance Act and (ii) federal preemption of state usury laws. The portion of the brief that discusses rate exportation strongly reaffirms the OCC and the FDIC’s complete accord that section 27 and section 85 should be mirror images of each other. At the conclusion of their brief, the agencies ask the District Court to affirm the bankruptcy court’s decision in the case on the basis that affirmation would “preserve the banks’ longstanding ability to engage in loan sales, would reaffirm the traditional protections that such loan sales have received under the law, would ensure the proper functioning of the credit markets, and would promote safety and soundness in the banking sector by supporting loan sales and securitizations, which are used to manage capital and liquidity positions.”
We are dependent upon bankssupport a single bank that markets general purpose credit cards and certain other credit products directly to consumers. We acquire interests in and service the receivables originated by that bank. The bank could determine not to continue the relationship for various business reasons, or its regulators could limit its ability to issue credit cards and provide certain other credit products utilizing our technology platform and related services.
The FDIC has issued examination guidance affecting the bank that utilizes our technology platform to market general purpose credit cards and certain other credit products and these or subsequent new rules and regulations could have a significant impact on such credit products. The bank that utilizes our technology platform and other services to market general purpose credit cards and certain other credit products is supervised and examined by both the state that charters it and the FDIC. If the FDIC or a state supervisory body considers any aspect of the products originated utilizing our technology platform to be inconsistent with its guidance, the bank may be required to alter or terminate some or all of these products.
On July 29, 2016, the board of directors of the FDIC released examination guidance relating to third-party lending as part of a package of materials designed to “improve the transparency and clarity of the FDIC’s supervisory policies and practices” and consumer compliance measures that FDIC-supervised institutions should follow when lending through a business relationship with a third party. The proposed guidance, if finalized, would apply to all FDIC-supervised institutions that engage in third-party lending programs, including the bank that utilizes our technology platform and other services to market general purpose credit cards and certain other credit products.
The proposed guidance elaborates on previously issued agency guidance on managing third-party risks and specifically addresses third-party lending arrangements where an FDIC-supervised institution relies on a third party to perform a significant aspect of the lending process. The types of relationships that would be covered by the guidance include (but are not limited to) relationships for originating loans on behalf of, through or jointly with third parties, or using platforms developed by third parties. If adopted as proposed, the guidance would result in increased supervisory attention of institutions that engage in significant lending activities through third parties, including at least one examination every 12 months, as well as supervisory expectations for a third-party lending risk management program and third-party lending policies that contain certain minimum requirements, such as self-imposed limits as a percentage of total capital for each third-party lending relationship and for the overall loan program, relative to origination volumes, credit exposures (including pipeline risk), growth, loan types, and acceptable credit quality. Comments on the guidance were due October 27, 2016. While the guidance has never formally been adopted, it is our understanding that the FDIC has relied upon it in its examination of third-party lending arrangements.
Changes 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
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.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 paymentFailure to keep up with the rapid technological changes in financial services and e-commerce could harm our business. The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial and lending institutions to better serve customers and reduce costs. Our future success will depend, in part, upon our ability to address the needs of consumers by using technology to support products and services that will satisfy consumer demands for convenience, as well as to create additional efficiencies in our operations. We may not be able to effectively implement new technology-driven products and services as quickly as some of our competitors. Failure to successfully keep pace with technological change affecting the financial services industry could harm our ability to compete with our competitors. Any such failure to adapt to changes could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
If 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. Because information systems are critical to many of our operating activities, our business may be impacted by hosted system shutdowns, service disruptions or security breaches. These incidents may be caused by failures during routine operations such as system upgrades or user errors, as well as network or hardware failures, malicious or disruptive software, computer hackers, rogue employees or contractors, cyber-attacks by criminal groups, geopolitical events, natural disasters, failures or impairments of telecommunications networks, or other catastrophic events. If our information systems suffer severe damage, disruption orUnauthorized 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 theIn 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.We have elected the fair value option effective as of January 1, 2020, and we use estimates in determining the fair value of our loans. If our estimates prove incorrect, we may be required to write down the value of these assets, which could adversely affect our results of operations. Our ability to measure and report our financial position and results of operations is influenced by the need to estimate the impact or outcome of future events on the basis of information available at the time of the issuance of the financial statements. Further, most of these estimates are determined using Level 3 inputs for which changes could significantly impact our fair value measurements. A variety of factors including, but not limited to, estimated yields on consumer receivables, customer default rates, the timing of expected payments, estimated costs to service the portfolio, interest rates, and valuations of comparable portfolios may ultimately affect the fair values of our loans and finance receivables. If actual results differ from our judgments and assumptions, then it may have an adverse impact on the results of operations and cash flows. Management has processes in place to monitor these judgments and assumptions, but these processes may not ensure that our judgments and assumptions are correct.
Our allowance for uncollectible loans is determined based upon both objective and subjective factors and may not be adequate to absorb loan losses.We face the risk that customers will fail to repay their loans in full. 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. 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. Actual losses are difficult to forecast, especially if such losses are due to factors beyond our historical experience or control. As a result, our allowance for uncollectible loans may not be adequate to absorb incurred losses or prevent a material adverse effect on our business, financial condition and results of operations. Losses are the largest cost as a percentage of revenues across all of our products. Fraud and customers not being able to repay their loans are both significant drivers of loss rates. If we experienced rising credit or fraud losses this would significantly reduce our earnings and profit margins and could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
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,generally accepted accounting principles in the U.S. ("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.
The shares of Series A Convertible Preferred Stock are senior obligations, rank prior to our common stock with respect to dividends, distributions and payments upon liquidation and have other terms, such as a redemption right, that could negatively impact the value of shares of our common stock. In December 2019, we issued 400,000 shares of Series A Convertible Preferred Stock. The rights of the holders of our Series A Convertible Preferred Stock with respect to dividends, distributions and payments upon liquidation rank senior to similar obligations to our holders of common stock. Holders of the Series A Convertible Preferred Stock are entitled to receive dividends on each share of such stock equal to 6% per annum on the liquidation preference of $100. The dividends on the Series A Convertible Preferred Stock are cumulative and non-compounding and must be paid before we pay any dividends on the common stock.
In the event of our liquidation, dissolution or the winding up of our affairs, the holders of our Series A Convertible Preferred Stock have the right to receive a liquidation preference entitling them to be paid out of our assets generally available for distribution to our equity holders and before any payment may be made to holders of our common stock in an amount equal to $100 per share of Series A Convertible Preferred Stock plus any accrued but unpaid dividends.
Further, on and after January 1, 2024, the holders of the Series A Convertible Preferred Stock will have the right to require us to purchase outstanding shares of Series A Convertible Preferred Stock for an amount equal to $100 per share plus any accrued but unpaid dividends. This redemption right could expose us to a liquidity risk if we do not have sufficient cash resources at hand or are not able to find financing on sufficiently attractive terms to comply with our obligations to repurchase the Series A Convertible Preferred Stock upon exercise of such redemption right.
Our obligations to the holders of Series A Convertible Preferred Stock also could limit our ability to obtain additional financing or increase our borrowing costs, which could have an adverse effect on our financial condition and the value of our common stock.
Our outstanding Series A Convertible Preferred Stock has anti-dilution protection that, if triggered, could cause substantial dilution to our then-existing holders of common stock, which could adversely affect our stock price. The document governing the terms of our outstanding Series A Convertible Preferred Stock contains anti-dilution provisions to benefit the holders of such stock. As a result, if we, in the future, issue common stock or other derivative securities, subject to specified exceptions, for a per share price less than the then existing conversion price of the Series A Convertible Preferred Stock, an adjustment to the then current conversion price would occur. This reduction in the conversion price could result in substantial dilution to our then-existing holders of common stock, which could adversely affect the price of our common stock.
We have no current plans to pay cash dividends on our common stock for the foreseeable future, and an increase in the market price of our common stock, if any, may be the sole source of gain on your investment. With the exception of dividends payable on our Series A Convertible Preferred Stock, we currently intend to retain any future earnings for use in the operation and expansion of our business and do not expect to pay any dividends on our common stock in the foreseeable future. The declaration and payment of all future dividends on our common stock, if any, will be at the sole discretion of our board of directors, which retains the right to change our dividend policy at any time. Any decision by our board of directors to declare and pay dividends in the future will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions, restrictions on dividends imposed by the document governing the terms of the Series A Convertible Preferred Stock and other factors that our board of directors may deem relevant. Consequently, appreciation in the market price of our common stock, if any, may be the sole source of gain on your investment for the foreseeable future.
Holders of the Series A Convertible Preferred Stock are entitled to receive dividends on each share of such stock equal to 6% per annum on the liquidation preference of $100. The dividends on the Series A Convertible Preferred Stock are cumulative and non-compounding and must be paid before we pay any dividends on the common stock.
We have the ability to issue additional preferred stock, warrants, convertible debt and other securities without shareholder approval. Our common stock may be subordinate to additional 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.approval, which we did in December 2019 when we issued the Series A Convertible Preferred Stock. If we issue additional classes of preferred stock, these additional securities may have dividend or liquidation preferences senior to the common stock. If we issue additional classes of 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 inAs of December 31, 2017,2019, 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 derive from our own equity interests in those subsidiaries. Claims of our subsidiaries’ creditors will generally have priority as to the assets of our subsidiaries over our own equity interest claims and will therefore have priority over the holders of the convertible senior notes. Consequently, the convertible senior notes are effectively subordinate to all liabilities, whether or not secured, of any of our subsidiaries and any subsidiaries that we may in the future acquire or establish. Our subsidiaries’ creditors also may include general creditors and taxing authorities. As of December 31,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.None.
PROPERTIES |
We lease 335,372 square feet of office space in Atlanta, Georgia for our executive offices and the primary operations of our Credit and Other Investments segment. We have sub-leased 255,110254,710 square feet of this office space. Our Auto Finance segment principally operates from 12,807 square feet of leased office space in Lake Mary, Florida, with additional offices and branch locations in various states and territories. Our operations in the U.K., which are within our Credit and Other Investments segment, include leased space in Crawley.
LEGAL PROCEEDINGS |
We are involved in various other legal proceedings that are incidental to the conduct of our business. There are currently no other pending legal proceedings that are expected to be material to us.
MINE SAFETY DISCLOSURES |
None.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is traded on the NASDAQ Global Select Market under the symbol “ATLC.” The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock as reported on the NASDAQ Global Select Market. As of March 15, 2018,20, 2020, there were 46 record holders of our common stock, which does not include persons whose stock is held in nominee or “street name” accounts through brokers, banks and intermediaries.
2016 | High | Low |
1st Quarter 2016 | $3.48 | $2.90 |
2nd Quarter 2016 | $3.23 | $2.64 |
3rd Quarter 2016 | $3.15 | $2.72 |
4th Quarter 2016 | $3.50 | $2.71 |
2017 | High | Low |
1st Quarter 2017 | $3.07 | $2.42 |
2nd Quarter 2017 | $3.19 | $2.30 |
3rd Quarter 2017 | $2.70 | $2.14 |
4th Quarter 2017 | $2.45 | $2.15 |
ISSUER PURCHASES OF EQUITY SECURITIES
The following table sets forth information with respect to our repurchases of common stock during the three months ended December 31, 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) | |||||||||
October 1- October 31 | 7,054 | $ | 2.38 | 7,054 | 4,864,131 | |||||||
November 1 - November 30 | 11,188 | $ | 2.38 | 11,188 | 4,852,943 | |||||||
December 1 - December 31 | 25,342 | $ | 2.36 | 25,342 | 4,827,601 | |||||||
Total | 43,584 | $ | 2.37 | 43,584 | 4,827,601 |
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) | |||||||||||||
October 1 - October 31 | 85,515 | $ | 7.77 | 84,533 | 4,391,318 | |||||||||||
November 1 - November 30 | 358 | $ | 7.02 | — | 4,391,318 | |||||||||||
December 1 - December 31 | — | $ | — | — | 4,391,318 | |||||||||||
Total | 85,873 | $ | 7.77 | 84,533 | 4,391,318 |
(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 |
2019. | ||
(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.
SELECTED FINANCIAL DATA |
As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not required to provide this information.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be read in conjunction with our consolidated financial statements and the related notes included therein, where certain terms have been defined.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements. We base these forward-looking statements on our current plans, expectations and beliefs about future events. There are risks, including the factors discussed in “Risk Factors” in Item 1A and elsewhere in this Report, that our actual experience will differ materially from these expectations. For more information, see “Cautionary Notice Regarding Forward-Looking Statements” at the beginning of this Report.
In this Report, except as the context suggests otherwise, the words “Company,” “Atlanticus Holdings Corporation,” “Atlanticus,” “we,” “our,” “ours,” and “us” refer to Atlanticus Holdings Corporation and its subsidiaries and predecessors.
OVERVIEW
We utilize proprietary analytics and a flexible technology platform to enable financial institutions to provide various credit and related financial services and products to or associated with the financially underserved consumer credit market. According to data published by Experian, 41% of Americans had FICO® scores of less than 700 as of the second quarter of 2019, which represents a population in excess of 90 million consumers. A recent survey conducted by Charles Schwab further found that 59% of Americans lived "paycheck to paycheck" and only 38% of people have an emergency fund. 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$26 billion in consumer loans over our 21-year23-year operating history to support lenders who originate a range of consumer loan products. These products include retail credit personal loans, and credit cards marketedoriginated by lenders 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. The 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 offeringsupporting 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 segment: (1) the income earned from an investment in an equity-method investee that holds credit card receivables for which we are the servicer; and (2) gains or losses associated with investments previously made in consumer finance technology platforms. These include investments in companies engaged in mobile technologies, marketplace lending and other financial technologies. These investments are carried at the lower of cost or market valuation. None of these companies are publicly-traded and there are no material pending liquidity events.
The recurring cash flows we receive within our Credit and Other Investments segment principally include those associated with (1) point-of-sale and direct-to-consumer receivables, (2) servicing compensation and (3) credit card receivables portfolios that are unencumbered or where we own a portion of the underlying structured financing facility.
We believe that our point-of-sale and direct-to-consumer receivables are generating, and will continue to generate, attractive returns on assets, thereby facilitating debt financing under terms and conditions (including advance rates and pricing) that will support attractive returns on equity, and we continue to pursue growth in this area.
Within our Auto Finance segment, our CAR subsidiary operations principally purchase and/or service loans secured by automobiles from or for, and also provide floor plan financing for, a pre-qualified network of independent automotive dealers and automotive finance companies in the buy-here, pay-here, used car business. We purchase auto loans at a discount and with dealer retentions or holdbacks that provide risk protection. Also within our Auto Finance segment, we are providing certain installment lending products in addition to our traditional loans secured by automobiles.
Beyond these activities within our Credit and manageOther Investments segment, we invest in and service portfolios of credit card receivables. One of our expenses basedportfolios 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 current product offerings (and in recent years have significantly reduced our overhead infrastructure which was builtthe portfolio are insufficient to accommodate higher managed receivables levels and a much greater number of accounts serviced). As such, we are maintaining our infrastructure and incurring increased overhead and other costs in order to expand point-of-sale and direct-to-consumer finance and credit solutions and new product offerings that we believe have the potential to grow into our existing infrastructure and allow for long-term shareholder returns.
Subject to the availability of capital at attractive terms and pricing, we plan to continue to evaluate and pursue a variety of activities, including: (1) investments in additional financial assets associated with point-of-sale and direct-to-consumer finance and credit activities as well as the acquisition of interests in receivables portfolios; (2) investments in other assets or businesses that are not necessarily financial services assets or businesses;businesses and (3) the repurchase of our convertible senior notes and other debt orand our outstanding common stock.
As of January 1, 2020, we have elected the fair value option to account for certain loans receivable associated with our point-of-sale and direct-to-consumer platform that were originated on or after January 1, 2020 (the "Fair Value Receivables"). We believe the use of fair value for these receivables more closely approximates the true economics of these receivables, better matching the yields and corresponding charge-offs. We believe the fair value option also enables us to report GAAP net income that provides increased transparency into our profitability and asset quality. Receivables acquired prior to January 1, 2020 will continue to be accounted for in our 2020 and subsequent financial statements at amortized cost, net. We will estimate the Fair Value Receivables using a discounted cash flow model, which considers various factors such as expected yields on consumer receivables, customer default rates, the timing of expected payments, estimated costs to service the portfolio, interest rates, and valuations of comparable portfolios. As a result of this fair value adoption, our loans, interest and fees receivable acquired subsequent to January 1, 2020 will be carried at fair value with changes in fair value recognized directly in earnings, and certain fee billings (such as annual membership fees and merchant fees) and origination costs associated with these receivables will no longer be deferred. We will reevaluate the fair value of our Fair Value Receivables at the end of each quarter.
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the magnitude of the effect the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation on its financial condition, liquidity, operations, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020.
As a result of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) signed into law by the President on March 27, 2020, additional avenues of relief will be available to workers and families through enhanced unemployment insurance provisions and to small businesses through programs administered by the Small Business Administration (SBA). Management is currently assessing the availability of assistance under this program.
Income | |||||||||||
For the Year Ended December 31, | Increases (Decreases) | ||||||||||
(In Thousands) | 2017 | 2016 | from 2016 to 2017 | ||||||||
Total interest income | $ | 114,707 | $ | 88,622 | $ | 26,085 | |||||
Interest expense | (27,700 | ) | (20,207 | ) | (7,493 | ) | |||||
Fees and related income on earning assets: | |||||||||||
Fees on credit products | 10,427 | 3,526 | 6,901 | ||||||||
Changes in fair value of loans and fees receivable recorded at fair value | 3,456 | 1,587 | 1,869 | ||||||||
Changes in fair value of notes payable associated with structured financings recorded at fair value | 2,315 | 3,773 | (1,458 | ) | |||||||
Rental revenue | 148 | 8,235 | (8,087 | ) | |||||||
Other | (2,057 | ) | 195 | (2,252 | ) | ||||||
Other operating income: | |||||||||||
Servicing income | 3,854 | 4,087 | (233 | ) | |||||||
Other income | 1,419 | 320 | 1,099 | ||||||||
Gain on repurchase of convertible senior notes | — | 1,151 | (1,151 | ) | |||||||
Equity in income equity-method investee | 1,158 | 2,150 | (992 | ) | |||||||
Total | $ | 107,727 | $ | 93,439 | $ | 14,288 | |||||
Net recovery of losses upon charge off of loans and fees receivable recorded at fair value | (9,460 | ) | (22,096 | ) | (12,636 | ) | |||||
Provision for losses on loans and fees receivable recorded at net realizable value | 77,612 | 53,721 | (23,891 | ) | |||||||
Other operating expenses: | |||||||||||
Salaries and benefits | 22,751 | 24,026 | 1,275 | ||||||||
Card and loan servicing | 31,534 | 30,662 | (872 | ) | |||||||
Marketing and solicitation | 13,070 | 4,904 | (8,166 | ) | |||||||
Depreciation, primarily related to rental merchandise | 1,021 | 7,477 | 6,456 | ||||||||
Other | 18,449 | 7,101 | (11,348 | ) | |||||||
Net loss | (40,872 | ) | (6,341 | ) | (34,531 | ) | |||||
Net loss attributable to noncontrolling interests | 91 | 6 | 85 | ||||||||
Net loss attributable to controlling interests | (40,781 | ) | (6,335 | ) | (34,446 | ) |
Income | ||||||||||||
For the Year Ended December 31, | Increases (Decreases) | |||||||||||
(In Thousands) | 2019 | 2018 | from 2018 to 2019 | |||||||||
Total interest income | $ | 261,218 | $ | 161,168 | $ | 100,050 | ||||||
Interest expense | (50,730 | ) | (36,896 | ) | (13,834 | ) | ||||||
Fees and related income on earning assets: | ||||||||||||
Fees on credit products | 68,639 | 25,694 | 42,945 | |||||||||
Changes in fair value of loans, interest and fees receivable recorded at fair value | 1,251 | 606 | 645 | |||||||||
Changes in fair value of notes payable associated with structured financings recorded at fair value | 1,731 | 3,589 | (1,858 | ) | ||||||||
Other | (474 | ) | 103 | (577 | ) | |||||||
Other operating income: | ||||||||||||
Servicing income | 1,786 | 1,969 | (183 | ) | ||||||||
Other income | 117,903 | 39,820 | 78,083 | |||||||||
Gain on repurchase of convertible senior notes | 5,127 | — | 5,127 | |||||||||
Equity in income of equity-method investee | 1,001 | 581 | 420 | |||||||||
Total | $ | 407,452 | $ | 196,634 | $ | 210,818 | ||||||
Net losses upon impairment of loans, interest and fees receivable recorded at fair value | 897 | 549 | (348 | ) | ||||||||
Provision for losses on loans, interest and fees receivable recorded at net realizable value | 248,383 | 100,338 | (148,045 | ) | ||||||||
Other operating expenses: | ||||||||||||
Salaries and benefits | 26,229 | 23,430 | (2,799 | ) | ||||||||
Card and loan servicing | 49,459 | 37,145 | (12,314 | ) | ||||||||
Marketing and solicitation | 36,388 | 12,124 | (24,264 | ) | ||||||||
Depreciation | 1,137 | 987 | (150 | ) | ||||||||
Other | 13,196 | 18,579 | 5,383 | |||||||||
Net income | 26,210 | 7,612 | 18,598 | |||||||||
Net (income) loss attributable to noncontrolling interests | 233 | 244 | (11 | ) | ||||||||
Net income attributable to controlling interests | 26,443 | 7,856 | 18,587 | |||||||||
Net income attributable to controlling interests to common shareholders | 25,290 | 7,856 | 17,434 |
Year Ended
December 31,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 9, “Notes Payable and Variable Interest Entities,” 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 the facilities offset by new borrowings associated with growth in point-of-sale and direct-to-consumer receivables and CAR operations as evidenced within Note 9, “Notes Payable,” to our consolidated financial statements.facilities. Outstanding notes payable associated with our point-of-sale and direct-to-consumer operationsplatform increased from $112.4$366.7 million as of December 31, 20162018 to $204.0$701.2 million as of December 31, 2017.2019. We anticipate additional debt financing over the next few quarters as we continue to grow, and as such, we expect our quarterly interest expense to be above that experienced in the prior periods for these operations.
Fees and related income on earning assets.
The significant factors affecting our differing levels of fees and related income on earning assets include:increases in fees on credit products, primarily associated with growth in direct-to-consumer products and to a lesser degree by growth in point-of-sale finance products, offset somewhat by general net declines in historical credit card receivables;products; and
the effects of changes in the fair values of credit card receivables recorded at fair value and notes payable associated with structured financings recorded at fair value as described below.
We expect increasing levels of direct-to-consumer fee income for 2018throughout 2020 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 liquidatingreceivables. For credit card receivables. Additionally, for credit card accountsreceivables for which we use fair value accounting (including those that we elected the fair value option for on January 1, 2020), we expect our change in fair value of credit card receivables recorded at fair value andto increase throughout the year. Inversely, we expect our change in fair value of notes payable associated with structured financings for our legacy credit card receivables 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 theAdditionally, we expect to recognize certain fee billings (such as annual membership fees) associated with receivables and underlying debt being recorded ataccounted for under fair value as they are billed to the consumer (as opposed to deferred fee recognition), which, absent the unknown impacts COVID-19 may have on our ability to acquire new receivables or the impact it may have on our customers ability to make payments on outstanding loans and withfees receivable, will further increase the expected reductionslevels of fee income in the face amounts of such outstanding receivables and debt as we experience further historical credit card receivables liquidations and associated debt amortizing repayments. Further, as discussed above, we do not expect meaningful levels of rental revenue as existing rent-to-own contracts have effectively concluded with no new acquisitions expected. This decline in rental revenues will serve to offset some of the aforementioned growth we expect in our credit card fee income.
Servicing income.
We earn servicing income by servicing loan portfolios for third parties (including our equity-method investee).Other 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 the years ended December 31,Total other operating expense.
Total other operating expense variances for the year ended December 31,increases in salaries and benefits related to accruals madereflecting marginal growth in 2016 associated with certain long-term incentive plans forboth the number of employees at our CAR subsidiary that were not replicated in 2017;
• | increases in card and loan servicing expenses in the year ended December 31, 2019 when compared to the year ended December 31, 2018 due to growth in receivables associated with our investments in point-of-sale and direct-to-consumer receivables, which grew from $453.3 million outstanding to $908.4 million outstanding at December 31, 2018 and December 31, 2019, respectively, offset by the continued net liquidations in our legacy credit card portfolios, the receivables of which declined from $9.6 million outstanding to $6.4 million outstanding at December 31, 2018 and December 31, 2019, respectively; |
• | increases in marketing and solicitation costs for the year ended December 31, 2019 primarily due to volume-related increases in costs attributable to the growth in our direct-to-consumer and (to a lesser extent) retail point-of-sale portfolios. We expect that increased origination and brand marketing support will result in overall increases in year-over-year costs during 2020 although the frequency and timing of marketing efforts could result in reductions in quarter-over-quarter marketing costs; and | |
• | slight decreases in other expenses primarily related to realized translation gains and losses recognized during both periods. |
Certain operating costs are variable based on the levels of accounts and receivables we service (both for our own account and for others) and the pace and breadth of our growth in receivables. However, a number of our operating costs are fixed and until recently have comprised a larger percentage of our total costs based on the ongoing contraction of our historicallegacy credit card receivables. This trend is gradually reversing 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
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. Additionally, the above referenced unknown potential impacts related to COVID-19 could result in more variability in these expenses. At this point, our Credit and Other Investments segment cash inflows are sufficient to cover its direct variable costs and a portion, but not all, of its share of overhead costs (including, for example, corporate-level executive and administrative costs and our convertible senior notes interest costs). As such, if we are unable to contain overhead costs or expand revenue-earning activities to levels commensurate with such costs, then depending upon the earnings generated from our Auto Finance segment and our liquidating credit card portfolios, we may experience continuing pressure on our ability to achieve consistent profitability.
Noncontrolling interests.
We reflect the ownership interests of noncontrolling holders of equity in our majority-owned subsidiaries as noncontrolling interests in our consolidated statements of operations. Unless we enter into significant new majority-owned subsidiary ventures with noncontrolling interest holders in the future, we expect to have negligible noncontrolling interests in our majority-owned subsidiaries and negligible allocations of income or loss to noncontrolling interest holders in future quarters.On November 14, 2019, a wholly-owned subsidiary issued 50.5 million Class B preferred units at a purchase price of $1.00 per unit to an unrelated third party. The units carry a 16% preferred return to be paid quarterly, with up to 6 percentage points of the preferred return to be paid through the issuance of additional units or cash, at our election. The units have both call and put rights and are also subject to various covenants including a minimum book value, which if not satisfied, could allow for the securities to be put back to the subsidiary. Subject to satisfying certain closing conditions, the subsidiary has the right to issue up to 50.5 million additional units on the same terms. The proceeds from the transaction are being used for general corporate purposes. We have included the issuance of these Class B preferred units as temporary noncontrolling interests on the consolidated balance sheets.
Income Taxes.
We experienced an effective income taxWe net against ourreport income tax benefit line item on our consolidated statements of operationstax-related interest and penalties (including those associated with our tax liabilities (includingboth our accrued liabilities for uncertain tax positions and our unpaid tax liabilities). within our income tax line item on our consolidated statements of operations. We likewise report the reversal of suchincome tax-related interest and penalties within the income tax benefitsuch 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 years ended December 31, 2017 and 2016, $0.5 million and $0.4 million, respectively,For 2019, we reported a net accrual of net income tax-related interest and penalties are netted against those years’of $0.1 million within our income tax benefit line items.
In December 2014, we reached a settlement with the IRS concerning the tax treatment of net operating losses we incurred in 2007 and 2008 and carried back to obtain refunds of federal income taxes paid in earlier years dating back to 2003. Our net unpaid income tax assessment associated with that settlement was $7.4 million at December 31, 2017; this amount excludes unpaid interest and penalties on the tax assessment, the accruals for which aggregated $4.1 million at December 31, 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. During the fourth quarter of 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 (such $3.7 million remaining unpaid assessment relating to the 2006 year to which we had originally carried back the aforementioned net operating losses). In July 2018, we paid $5.4 million to the IRS to cover the $3.7 million unpaid income tax assessment and most of the interest that had accrued thereon. Subsequently, during the three months ended September 30, 2018, the IRS refunded $0.5 million of our $5.4 million payment, and in 2019, we paid $0.7 million to the IRS to cover the interest on the 2006 income tax liability. Although we have paid all assessed income taxes related to this matter, we still have an outstanding accrued liability for failure-to-pay penalties (and accrued interest thereon) related to this matter. We are pursuing complete abatement of the subjectfailure-to-pay penalties of $0.9 million, and once this matter underlying our amended return claims and submitted supplemental information to address matters on whichis resolved through either abatement or payment, 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 discountsmerchant fees associated with the point-of-sale receivables or annual fees on our direct-to-consumer receivables.
We record (i) the finance charges, discountmerchant fee 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.
Managed Receivables
We make various references within our discussion of the Credit and Other Investments segment to our managed receivables. Historically, ourOur managed receivables data included the current period results for our ownership in receivables, regardless of the manner of accounting. This included those receivables that are shown as Loans and fees receivable, gross on our consolidated balance sheet, the liquidating credit card portfolios underlying our Loans and fees receivable, at fair value on our consolidated balance sheet and those liquidating credit card portfolios underlying non-consolidated equity-method investees. In order to provide data that are more reflective of our current operations, we have changed our methodology for calculating managed receivables data to includeincludes only the performance of those receivables underlying consolidated subsidiaries and excludeexcludes from managed receivables data the performance of receivables held by our equity method investee. As the receivables underlying our equity method investee reflect a small and diminishing portion of our overall receivables base, we do not believe their inclusion or exclusion in the overall results is material. Additionally, we now calculate average managed receivables based on the quarter endingquarter-end balances. In this Report, we have calculated managed receivables and the related ratios for all periods presented in accordance with this new methodology.
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 our managed receivables because it provides 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 an understanding that: (1) 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; (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 option; and (4) when applicable, we exclude from our managed receivables data certain reimbursements received in respect of one of our portfolios which resulted in pre-tax income benefits within our net recovery of charge offimpairment of loans, interest and fees receivable recorded at fair value line item on our consolidated statements of operations totaling approximately $0 for the three months ended December 31, 2017, $2.9$0.4 million for the three months ended September 30, 2017, $1.12018 and $1.7 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, and $5.9 million for the three months ended March 31, 2016.2018. 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 determine the future effects ofreceive any suchfurther material reimbursements that may be received.
A reconciliation of our Loans, interest and fees receivable, at fair value to the assets underlying those receivables which are included in our managed receivables are as follows (in thousands):
At or for the Three Months Ended | |||||||||||||||
2017 | 2016 | ||||||||||||||
Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | ||||||||
Loans and fees receivable, gross | 16,601 | 18,180 | 20,102 | 21,922 | 24,229 | 28,313 | 28,514 | 32,271 | |||||||
Fair value adjustment | (5,492) | (6,161) | (7,332) | (8,331) | (8,581) | (9,868) | (7,994) | (8,535) | |||||||
Loans and fees receivable, at fair value | 11,109 | 12,019 | 12,770 | 13,591 | 15,648 | 18,445 | 20,520 | 23,736 |
At or for the Three Months Ended | ||||||||||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||||||||||
Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | |||||||||||||||||||||||||
Loans, interest and fees receivable, gross | 6,404 | 7,070 | 7,803 | 8,664 | 9,575 | 10,504 | 13,790 | 15,557 | ||||||||||||||||||||||||
Fair value adjustment | (2,018 | ) | (2,545 | ) | (2,899 | ) | (3,270 | ) | (3,269 | ) | (3,379 | ) | (5,504 | ) | (6,144 | ) | ||||||||||||||||
Loans, interest and fees receivable, at fair value | 4,386 | 4,525 | 4,904 | 5,394 | 6,306 | 7,125 | 8,286 | 9,413 |
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 our allowance for uncollectible loans, interest and fees receivable for our other credit product receivables that we report at net realizable value. Our strategy for managing delinquency and receivables losses consists of account management throughout the life of the receivable. This strategy includes credit line management and pricing based on the risks. See also our discussion of collection strategies under the “How Do We Collect?” in Item 1, “Business”.The 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 | ||||||||||||||||||||||
Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | ||||||||||||||||
Period-end managed receivables | $333,286 | $303,080 | $267,637 | $247,569 | $238,493 | $219,016 | $193,253 | $145,753 | |||||||||||||||
Percent 30 or more days past due | 13.7 | % | 12.1 | % | 11.5 | % | 11.5 | % | 12.7 | % | 11.7 | % | 8.9 | % | 11.4 | % | |||||||
Percent 60 or more days past due | 9.8 | % | 8.3 | % | 7.8 | % | 8.3 | % | 8.8 | % | 7.8 | % | 5.8 | % | 8.4 | % | |||||||
Percent 90 or more days past due | 6.5 | % | 5.5 | % | 4.9 | % | 5.5 | % | 5.5 | % | 4.9 | % | 3.7 | % | 6.0 | % | |||||||
Average managed receivables | $318,183 | $285,359 | $257,603 | $243,031 | $228,755 | $206,135 | $169,503 | $143,874 | |||||||||||||||
Total yield ratio | 39.5 | % | 36.5 | % | 35.1 | % | 34.8 | % | 33.4 | % | 35.6 | % | 35.8 | % | 36.1 | % | |||||||
Combined gross charge-off ratio | 20.1 | % | 18.2 | % | 21.1 | % | 22.4 | % | 20.1 | % | 12.6 | % | 13.9 | % | 16.1 | % |
At or for the Three Months Ended | ||||||||||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||||||||||
Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | |||||||||||||||||||||||||
Period-end managed receivables | $ | 914,828 | $ | 776,102 | $ | 610,129 | $ | 480,928 | $ | 462,862 | $ | 406,057 | $ | 371,331 | $ | 337,848 | ||||||||||||||||
Percent 30 or more days past due | 15.3 | % | 12.9 | % | 11.5 | % | 13.7 | % | 13.2 | % | 12.7 | % | 11.8 | % | 12.1 | % | ||||||||||||||||
Percent 60 or more days past due | 11.4 | % | 9.2 | % | 8.2 | % | 10.3 | % | 9.5 | % | 9.3 | % | 8.5 | % | 9.1 | % | ||||||||||||||||
Percent 90 or more days past due | 8.1 | % | 6.1 | % | 5.8 | % | 7.5 | % | 6.7 | % | 6.4 | % | 5.7 | % | 6.5 | % | ||||||||||||||||
Averaged managed receivables | $ | 845,465 | $ | 693,116 | $ | 545,529 | $ | 471,895 | $ | 434,460 | $ | 388,694 | $ | 354,590 | $ | 335,567 | ||||||||||||||||
Total yield ratio | 50.0 | % | 49.7 | % | 47.0 | % | 46.5 | % | 44.3 | % | 43.2 | % | 41.6 | % | 41.0 | % | ||||||||||||||||
Combined gross charge-off ratio | 22.4 | % | 17.6 | % | 23.8 | % | 23.6 | % | 21.6 | % | 19.7 | % | 22.4 | % | 24.2 | % |
The following table presents additional trends and data with respect to our current point-of-sale (“Retail”) and direct-to-consumer operations (“Direct”) receivables (dollars in thousands). Results of our historicallegacy credit card receivables portfolios are excluded:
Retail - At or for the Three Months Ended | ||||||||||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||||||||||
Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | |||||||||||||||||||||||||
Period-end managed receivables | $ | 397,690 | $ | 365,652 | $ | 308,382 | $ | 255,922 | $ | 257,772 | $ | 238,851 | $ | 223,873 | $ | 207,231 | ||||||||||||||||
Percent 30 or more days past due | 13.2 | % | 11.6 | % | 10.4 | % | 12.7 | % | 13.6 | % | 13.4 | % | 12.4 | % | 12.6 | % | ||||||||||||||||
Percent 60 or more days past due | 9.7 | % | 8.2 | % | 7.3 | % | 9.8 | % | 9.9 | % | 9.8 | % | 8.8 | % | 9.4 | % | ||||||||||||||||
Percent 90 or more days past due | 6.8 | % | 5.6 | % | 5.0 | % | 7.2 | % | 7.1 | % | 6.9 | % | 5.8 | % | 6.8 | % | ||||||||||||||||
Average APR | 22.1 | % | 22.5 | % | 24.0 | % | 24.8 | % | 25.0 | % | 24.7 | % | 24.8 | % | 24.2 | % | ||||||||||||||||
Receivables purchased during period | $ | 116,327 | $ | 133,528 | $ | 123,533 | $ | 69,120 | $ | 80,096 | $ | 70,860 | $ | 74,391 | $ | 60,932 |
Direct - At or for the Three Months Ended | ||||||||||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||||||||||
Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | |||||||||||||||||||||||||
Period-end managed receivables | $ | 510,734 | $ | 403,380 | $ | 293,944 | $ | 216,342 | $ | 195,515 | $ | 156,702 | $ | 133,668 | $ | 115,060 | ||||||||||||||||
Percent 30 or more days past due | 17.0 | % | 14.2 | % | 12.8 | % | 15.1 | % | 13.0 | % | 12.1 | % | 11.5 | % | 12.2 | % | ||||||||||||||||
Percent 60 or more days past due | 12.8 | % | 10.3 | % | 9.3 | % | 11.2 | % | 9.3 | % | 8.9 | % | 8.5 | % | 9.2 | % | ||||||||||||||||
Percent 90 or more days past due | 9.1 | % | 6.7 | % | 6.7 | % | 8.0 | % | 6.4 | % | 6.0 | % | 5.9 | % | 6.4 | % | ||||||||||||||||
Average APR | 27.0 | % | 28.2 | % | 28.5 | % | 27.9 | % | 28.1 | % | 27.6 | % | 27.2 | % | 26.9 | % | ||||||||||||||||
Receivables purchased during period | $ | 195,243 | $ | 174,026 | $ | 123,776 | $ | 60,733 | $ | 69,585 | $ | 48,729 | $ | 48,966 | $ | 33,747 |
At or for the Three Months Ended | ||||||||
2017 | ||||||||
Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | |||||
Retail | Direct | Retail | Direct | Retail | Direct | Retail | Direct | |
Period-end managed receivables | $206,877 | $109,808 | 193,403 | $91,497 | 180,830 | $66,705 | 161,876 | $63,771 |
Percent 30 or more days past due | 14.0% | 12.9% | 14.0% | 8.3% | 12.3% | 9.3% | 11.8% | 10.8% |
Percent 60 or more days past due | 10.1% | 9.1% | 9.9% | 5.0% | 8.4% | 6.2% | 8.6% | 7.4% |
Percent 90 or more days past due | 7.2% | 5.3% | 6.9% | 2.7% | 5.6% | 3.4% | 6.1% | 3.8% |
Average APR | 24.2% | 31.0% | 26.7% | 30.0% | 26.7% | 30.0% | 26.5% | 30.3% |
Receivables purchased during period | $64,036 | $38,338 | $59,293 | $38,005 | $65,786 | $15,051 | $64,617 | $5,782 |
At or for the Three Months Ended | ||||||||
2016 | ||||||||
Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | |||||
Retail | Direct | Retail | Direct | Retail | Direct | Retail | Direct | |
Period-end managed receivables | $141,261 | $73,003 | $110,542 | $80,161 | $89,836 | $74,903 | $76,844 | $36,638 |
Percent 30 or more days past due | 13.4% | 10.8% | 13.8% | 7.9% | 12.6% | 3.5% | 13.1% | 5.5% |
Percent 60 or more days past due | 9.6% | 6.9% | 9.5% | 4.9% | 8.3% | 2.0% | 9.8% | 3.5% |
Percent 90 or more days past due | 6.4% | 3.6% | 6.5% | 2.3% | 5.4% | 1.1% | 7.3% | 1.8% |
Average APR | 26.3% | 30.5% | 25.5% | 30.6% | 25.0% | 30.8% | 24.9% | 30.0% |
Receivables purchased during period | $60,118 | $5,602 | $44,871 | $15,852 | $35,478 | $45,562 | $27,233 | $12,830 |
The following discussion relates to the tables above.
Managed receivables levels.
We experienced overall quarterly receivables growth throughoutDelinquencies.
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 with the younger average age of the newerAs we continue to invest in our newer point-of-sale and direct-to-consumer receivables, our delinquency rates have increased.increased when compared to the same periods in prior years. This is largely a result of the risk profiles (and corresponding expected returns) for these receivables. Our delinquency rates have continued to be somewhat lower than what we ultimately expect for our new point-of-sale and direct-to-consumer receivables given the continued growth and age of the related accounts. This trend can be seen in periods of large growth in the charts above which result in artificially lowlower delinquency rates. If and when growth for these product lines moderates, we expect increased overall delinquency rates as the existing receivables mature through their peak charge-off periods. Additionally, absent the unknown impacts COVID-19 may have on our ability to acquire new receivables or the impact it may have on our customers ability to make payments on outstanding loans and fees receivable and the corresponding impact on our delinquency rates, we expect to continue to see seasonal payment patterns on these receivables which impact our delinquencies. For example, delinquency rates historically are lower in the first quarter of each year due to the benefits of seasonally strong payment patterns associated with year-end tax refunds for most consumers.
Total yield ratio
. Currently, we are experiencing growth inAbsent the unknown impacts COVID-19 may have on our ability to acquire new receivables or the impact it may have on our customers ability to make payments on outstanding loans and fees receivable, we expect total yield ratios to continue to fluctuate somewhat based on the relative mix of growth in point-of-sale receivables and our higher yielding direct-to-consumer credit card receivables. This growth will be offset somewhat by the continued liquidation and thus reduced impacts of our historical loans and fees receivable, at fair value.
Combined gross charge-off ratio.
We charge off our Credit and Other Investments segment receivables when they become contractually more than 180 days pastGrowth within point-of-sale finance and direct-to-consumer receivables has resulted in increases in our charge-off rates over time. Our recentfirst quarter 2018 combined gross charge-off ratios benefited in the first few quarters of 2016 from growth we experienced in our point-of-sale operations and more directly from growth in our direct-to-consumer receivables. Many of these receivables reached peak charge off periods in the fourth quarter of 2016 but continued to negatively impact the first and second quarters of 2017. Additionally, we made substantial investments in our personal loan offerings in the second quarter of 2016 which did not reach their peak-charge off period until the fourth quarter of 2016, thus positively impacting our second and third quarter combined gross charge-off ratios and negatively impacting the same ratios in the fourth quarter of 2016 and the first and second quarters of 2017. Our fourth quarter 2017 combined gross charge-off ratio reflectsreflect further significant investments during the second and third quarters inlate 2017 in direct-to-consumer receivables, which reached their peak charge off periods during the fourth quarter of 2017.
The 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, given the following: (1) higher expected charge off rates on the point-of-sale and direct-to-consumer receivables corresponding with higher yields on these receivables, (2) continued testing of receivables with higher risk profiles, which could lead to periodic increases in combined gross charge-offs, (3) the low charge-off ratios experienced in the second 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.
Average APR.
Our average annual percentage rate (“APR”) charged to customers varies by receivable type, credit history and other factors. TheReceivables 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.Auto Finance Segment
CAR, our auto finance platform acquired in April 2005, principally purchases and/or services loans secured by automobiles from or for, and also provides 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 have expanded these operations to also
Collectively, as of December 31, 2017,2019, we served more than 575600 dealers through our Auto Finance segment in 3335 states, the District of Columbia and two U.S. territories.
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.
Analysis of Statistical Data
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 | ||||||||||||||||||||||||||||||
Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | ||||||||||||||||||||||||
Period-end managed receivables | $ | 77,213 | $ | 74,923 | $ | 76,387 | $ | 72,121 | $ | 76,433 | $ | 73,624 | $ | 78,010 | $ | 75,747 | |||||||||||||||
Percent 30 or more days past due | 12.8 | % | 13.0 | % | 11.7 | % | 10.0 | % | 14.2 | % | 12.7 | % | 12.3 | % | 10.2 | % | |||||||||||||||
Percent 60 or more days past due | 5.0 | % | 5.0 | % | 4.0 | % | 4.2 | % | 5.4 | % | 4.5 | % | 3.9 | % | 4.2 | % | |||||||||||||||
Percent 90 or more days past due | 2.4 | % | 2.2 | % | 1.4 | % | 2.1 | % | 2.4 | % | 1.8 | % | 1.5 | % | 2.2 | % | |||||||||||||||
Average managed receivables | $ | 76,068 | $ | 75,655 | $ | 74,254 | $ | 74,278 | $ | 75,029 | $ | 75,817 | $ | 76,878 | $ | 75,513 | |||||||||||||||
Total yield ratio | 37.9 | % | 38.8 | % | 39.2 | % | 39.3 | % | 39.5 | % | 40.3 | % | 39.6 | % | 38.5 | % | |||||||||||||||
Combined gross charge-off ratio | 3.0 | % | 1.1 | % | 2.5 | % | 2.5 | % | 2.8 | % | 2.9 | % | 3.2 | % | 2.8 | % | |||||||||||||||
Recovery ratio | 1.5 | % | 1.7 | % | 2.0 | % | 1.6 | % | 1.6 | % | 1.1 | % | 1.6 | % | 1.4 | % |
At or for the Three Months Ended | ||||||||||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||||||||||
Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | |||||||||||||||||||||||||
Period-end managed receivables | $ | 89,785 | $ | 89,451 | $ | 89,490 | $ | 90,208 | $ | 88,057 | $ | 85,338 | $ | 83,872 | $ | 78,436 | ||||||||||||||||
Percent 30 or more days past due | 15.2 | % | 14.5 | % | 13.3 | % | 11.4 | % | 14.7 | % | 13.3 | % | 10.8 | % | 8.8 | % | ||||||||||||||||
Percent 60 or more days past due | 6.2 | % | 5.9 | % | 5.4 | % | 5.3 | % | 5.7 | % | 4.3 | % | 3.6 | % | 3.3 | % | ||||||||||||||||
Percent 90 or more days past due | 2.9 | % | 3.1 | % | 2.6 | % | 2.9 | % | 2.5 | % | 1.7 | % | 1.4 | % | 1.6 | % | ||||||||||||||||
Average managed receivables | $ | 89,618 | $ | 89,471 | $ | 89,849 | $ | 89,133 | $ | 86,698 | $ | 84,605 | $ | 81,154 | $ | 77,825 | ||||||||||||||||
Total yield ratio | 36.3 | % | 36.4 | % | 36.7 | % | 36.0 | % | 36.1 | % | 37.9 | % | 38.2 | % | 37.9 | % | ||||||||||||||||
Combined gross charge-off ratio | 4.0 | % | 2.7 | % | 4.9 | % | 2.7 | % | 2.8 | % | 0.9 | % | 0.5 | % | 2.1 | % | ||||||||||||||||
Recovery ratio | 1.3 | % | 1.8 | % | 1.8 | % | 1.3 | % | 0.9 | % | 0.9 | % | 1.0 | % | 1.5 | % |
Managed receivables.
We expect modest growth in the level of our managed receivables for 2020 when compared to the same periods in prior years in both the U.S. and U.S.Delinquencies.
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. Yields on our CAR products over the last few quarters are consistent with ourCombined 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 inTotal yield ratio.
Represents an annualized fraction, the numerator of which includes (as appropriate for each applicable disclosed segment) the: 1) finance charge and late fee income billed on all consolidated outstanding receivables and the amortization of the accretable yield component of our acquisition discounts for portfolio purchases, collectively included in the consumer loans, including past due fees category on our consolidated statements of income; plus 2) credit card fees (including over-limit fees, cash advance fees, returned check fees and interchange income), earned, amortized amounts of annual membership fees and activation fees with respect to certain credit card receivables, collectively included in our fees and related income on earning assets category on our consolidated statements of income; plus 3) servicing, other income andCombined 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 fees and discounts, as reflected in Note 2 “Significant Accounting Policies and Consolidated Financial StatementLIQUIDITY, FUNDING AND CAPITAL RESOURCES
As discussed elsewhere in this 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) obtainingadding new retail partners to our platform 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 December 31, 20172019 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 | $ | 49.4 | |
Revolving credit facility (expiring November 1, 2018) that is secured by the financial and operating assets of our CAR operations | 24.8 | ||
Revolving credit facility (expiring December 31, 2019) that is secured by certain receivables and restricted cash | 19.8 | ||
Revolving credit facility (expiring December 21, 2019) that is secured by certain receivables and restricted cash | 3.8 | ||
Senior secured term loan from related parties (expiring November 21, 2018) that is secured by certain assets of the Company with an annual interest rate equal to 9.0% | 40.0 | ||
Total | $ | 137.8 |
Revolving credit facility (expiring November 1, 2021) that is secured by certain assets of our CAR subsidiary | $ | 39.1 | ||
Revolving credit facility (expiring March 31, 2020) that is secured by certain receivables and restricted cash | 19.4 | |||
Revolving credit facility (expiring July 15, 2021) that is secured by certain receivables and restricted cash | 14.6 | |||
Revolving credit facility (expiring December 21, 2020) that is secured by certain receivables and restricted cash | 8.6 | |||
Revolving credit facility (expiring September 19, 2021) that is secured by certain receivables and restricted cash | 15.0 | |||
Amortizing debt facility (expiring September 30, 2021) that is sescured by certain receivables and restricted cash | 10.0 | |||
Total | $ | 106.7 |
Further details concerning the above debt facilities and our convertible senior notes are provided in Note 9, “Notes Payable and Variable Interest Entities,” and Note 10, “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.
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$90.0 million (subsequently reduced to $70.0 million) of such notes (of which $65.0$25.8 million was outstanding as of December 31, 2017
In June 2018 and again in November 2018, we (through a wholly owned subsidiary) expanded the above mentioned program to sell up to an additional $100.0 million of notes ($200.0 million in total notes through the June and November 2018 expansions) which are secured by the receivables and other assets of the trust (of which $0.0 million was outstanding as of December 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 3.75% and LIBOR plus 4.875%, respectively. The above facilities mature on June 11, 2021 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. The weighted average interest rate on the securities is 5.76%.
In June 2019, we sold $200.0 million of ABS secured by certain credit card receivables. A portion of the proceeds from the sale was used to pay-down our existing facilities associated with our credit card receivables. The terms of the ABS allow for a two-year revolving structure with a subsequent 12-month to 18-month amortization period. The weighted average interest rate on the securities is fixed at 5.37%.
In September 2019, we extended the maturity date of the revolving credit facility secured by the financial and operating assets of CAR to November 1, 2021, and, in October 2019, we expanded the borrowing capacity to $55.0 million. All other material terms remain unchanged.
In November 2019, we sold $200.0 million of ABS secured by certain credit card receivables. A portion of the proceeds from the sale was used to pay-down our existing facilities associated with our credit card receivables and the remaining proceeds were available to fund the acquisition of future receivables. The terms of the ABS allow for a three-year revolving structure with a subsequent 12-month to 18-month amortization period. The weighted average interest rate on the securities is fixed at 4.91%.
On November 26, 2014, we reachedand certain of our subsidiaries entered into a settlementLoan and Security Agreement with the IRS concerning the tax treatmentDove Ventures, LLC, a Nevada limited liability company (“Dove”). The agreement provided for a senior secured term loan facility in an amount of net operating losses we incurred in 2007 and 2008 and carried backup 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$40.0 million at any time outstanding. On December 31, 2017; this amount excludes unpaid interest27, 2019, the Company issued 400,000 shares of its Series A Preferred Stock (10,000,000 shares authorized, 400,000 shares outstanding) with an aggregate initial liquidation preference of $40.0 million, in exchange for full satisfaction of the $40.0 million that the Company owed Dove under the Loan and penaltiesSecurity Agreement. Dividends on the tax assessment,preferred stock are 6% per annum (cumulative, non-compounding) and are payable as declared, and in preference to any common stock dividends, in cash. The Series A Preferred Stock is perpetual and has no maturity date. The Company may, at its option, redeem the accruals for which aggregated $4.1 millionshares of Series A Preferred Stock on or after January 1, 2025 at December 31, 2017. Priora redemption price equal to our filing amended return claims that would have eliminated$100 per share, plus any accumulated and unpaid dividends. At the $7.4 million assessment (and corresponding interest and penalties) underrequest of a negotiated provisionmajority of the IRS settlement,holders of the IRS filedSeries A Preferred Stock, the Company is required to offer to redeem all of the Series A Preferred Stock at a lien (asredemption price equal to $100 per share, plus any accumulated and unpaid dividends, at the option of the holders thereof, on or after January 1, 2024. Upon the election by the holders of a majority of the Series A Preferred Stock, each share of the Series A Preferred Stock is customarilyconvertible into the case) associated withnumber of shares of the assessment. Subsequently,Company’s common stock as is determined by dividing (i) the sum of (a) $100 and (b) any accumulated and unpaid dividends on such share by (ii) an IRS examination team deniedinitial conversion price equal to $10 per share, subject to adjustment in certain circumstances to prevent dilution.
The use of the London Interbank Offered Rate (“LIBOR”) is expected to be phased out by the end of 2021. Currently, LIBOR is used as a reference rate for certain of our amended return claims, and we filed a protest with IRS Appeals. Duringfinancial instruments. In any event, the fourth quartermajority of 2017, we attended an IRS Appeals conference relatedour revolving credit facilities mature prior to the subject matter underlyingexpected phase out of LIBOR. At this time, there is no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. Going forward, we will work with our amended return claimslenders to use suitable alternative reference rates for our financial instruments. We will continue to monitor, assess and submitted supplemental information to address matters on whichplan for the IRS Appeals Officer needed additional support. If our amended return claims are ultimately denied in whole or in part by the IRS, our liquidity position would be reduced by the amountphase out of tax, interest and penalties owed.
At December 31, 2017,2019, we had $41.5$135.4 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 years ended December 31, 20172019 and 20162018 are as follows:
• | During the year ended December 31, 2019, we generated $100.0 million of cash flows from operations compared to our generating $42.9 million of cash flows from operations during the year ended December 31, 2018. The increase in cash provided by operating activities was principally related to a deferred payment program started with an unrelated third-party for a significant portion of our marketing expenditures and increases in finance collections associated with growing point-of-sale and direct-to-consumer receivables. Offsetting this increase was reimbursements received in the second and third quarters of 2018 in respect of one of our portfolios with no corresponding receipt during 2019 as well as the settlement of aforementioned litigation. |
• | During the year ended December 31, 2019, we used $433.7 million of cash from our investing activities, compared to use of $134.5 million of cash from investing activities during the year ended December 31, 2018. This increase in cash used is primarily due to significant increases in the level of investments for 2019 in the point-of-sale and direct-to-consumer receivables relative to the same period in 2018 and which we expect to continue to make throughout 2020. Slightly offsetting this increase in cash used by investing activities are returns on our aforementioned investments in point-of-sale and direct-to-consumer receivables which contributed positively to our cash generated from investing activities. |
• | During the year ended December 31, 2019, we generated $368.7 million of cash in financing activities, compared to our generating $161.7 million of cash in financing activities during the year ended December 31, 2018. In both periods, the data reflect borrowings associated with point-of-sale and direct-to-consumer receivables offset by net repayments of amortizing debt facilities as payments are made on the underlying receivables that serve as collateral. Further, on November 14, 2019, a wholly-owned subsidiary issued 50.5 million Class B preferred units at a purchase price of $1.00 per unit. |
Beyond our immediate financing efforts discussed throughout this Report,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 theinvestments in point-of-sale and direct-to-consumer finance operationsreceivables 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 December 31, 2017 to repurchase an additional 4,827,601up to 5,000,000 shares of our common stock through June 30, 2018.
CONTRACTUAL OBLIGATIONS, COMMITMENTS AND OFF-BALANCE-SHEET ARRANGEMENTS
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 11, “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, discounts and merchant fees 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 platform, 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 customer's 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.
As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not required to provide this information.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
See the Index to Financial Statements in Item 15, “Exhibits and Financial Statement Schedules.”
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of December 31, 2017,2019, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under 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 December 31, 2017.
Management’s Report on Internal Control over Financial Reporting
Management of Atlanticus Holdings Corporation is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Act) for Atlanticus Holdings Corporation and our subsidiaries. Our management conducted an evaluation of the effectiveness of internal control over financial reporting as of December 31, 2017,2019, based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)
Based on our evaluation under the COSO 2013 framework, management has concluded that internal control over financial reporting was effective as of December 31, 2017.
This Annual Report does not include an attestation report of our independent public accounting firm regarding internal control over financial reporting. Management’s report is not subject to attestation by our independent public accounting firm pursuant to SEC rules that permit us to provide only management’s report in this Annual Report.
Changes in Internal Control Over Financial Reporting
During the quarter ended December 31, 2017,2019, 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.
Limitations on Controls
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this Item will be set forth in our Proxy Statement for the 20182020 Annual Meeting of Shareholders in the sections entitled “Proposal One: Election of Directors,” “Executive Officers of Atlanticus,” “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports” and “Corporate Governance” and is incorporated by reference.
EXECUTIVE COMPENSATION |
The information required by this Item will be set forth in our Proxy Statement for the 20182020 Annual Meeting of Shareholders in the section entitled “Executive and Director Compensation” and is incorporated by reference.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this Item will be set forth in our Proxy Statement for the 20182020 Annual Meeting of Shareholders in the sections entitled “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” and is incorporated by reference.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this Item will be set forth in our Proxy Statement for the 20182020 Annual Meeting of Shareholders in the sections entitled “Related Party Transactions” and “Corporate Governance” and is incorporated by reference.
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this Item will be set forth in our Proxy Statement for the 20182020 Annual Meeting of Shareholders in the section entitled “Auditor Fees” and is incorporated by reference.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
The following documents are filed as part of this Report:
1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
2. Financial Statement Schedules
None.
Exhibit Number | ||||
Incorporated by Reference from Atlanticus’ SEC Filings Unless Otherwise Indicated(1) | ||||
3.1 | ||||
Articles of Amendment Establishing Cumulative Convertible Preferred Stock, Series A | December 30, 2019, Form 8-K, exhibit 3.1 | |||
3.2 | Amended and Restated Bylaws (as amended through May 12, 2017) | |||
4.1 | Description of Common Stock of Atlanticus Holdings Corporation | Filed herewith | ||
4.2 | ||||
4.3 | ||||
4.4 | ||||
10.1 | ||||
10.2† | ||||
10.2(a)† | ||||
10.2(b)† | ||||
10.2(c)† | ||||
10.2(d)† | ||||
10.2(e)† | ||||
10.2(f)† | ||||
10.3† | A | |||
10.4† | Amended and Restated Employment Agreement for David G. Hanna | |||
10.5† | ||||
Employment Agreement for Jeffrey A. Howard | ||||
10.6† | ||||
10.7† | ||||
10.8 | ||||
10.9 | ||||
10.9(a) |
10.10 | ||||
Assumption Agreement dated June 30, 2009 between Atlanticus Holdings Corporation (formerly CompuCredit Holdings Corporation) and Atlanticus Services Corporation (formerly CompuCredit Corporation) | ||||
10.11 | ||||
10.11(a)* | Filed herewith | |||
First Amendment to the Amended and Restated Series 2017-One Indenture Supplement for Perimeter Master Note Business Trust, dated November 16, 2018 | Filed herewith | |||
10.11(c)* | Second Amendment to the Amended and Restated Series 2017-One Indenture Supplement for Perimeter Master Note Business Trust, dated September 20, 2019 | Filed herewith |
Filed herewith | ||||
10.13(i) | Ninth Amendment to Loan and Security Agreement, dated December 20, 2019 | Filed herewith | ||
10.13(j) | Payoff Letter, dated December 27, 2019, between Dove Ventures, LLC and Atlanticus Holdings Corporation | Filed herewith |
Exhibit Number | Description of Exhibit | Incorporated by Reference from Atlanticus’ SEC Filings Unless Otherwise Indicated(1) | ||
Program Management Agreement, dated April 1, 2017, between Mid America Bank & Trust Company and Atlanticus Services Corporation | May 14, 2019, Form 10-Q, exhibit 10.2 | |||
10.14(a)* | May 14, 2019, Form 10-Q, exhibit 10.2(a) | |||
10.14(b) | Assignment and Assumption Agreement, dated March 24, 2018, among Mid America Bank & Trust Company, Atlanticus Services Corporation and The Bank of Missouri | May 14, 2019, Form 10-Q, exhibit 10.2(b) | ||
10.14(c) | Assignment and Assumption Agreement, dated March 24, 2018, among Mid America Bank & Trust Company, Fortiva Funding, LLC and The Bank of Missouri | May 14, 2019, Form 10-Q, exhibit 10.2(c) | ||
10.15* | Amended and Restated Operating Agreement of Access Financial Holdings, LLC, dated November 14, 2019 | Filed herewith | ||
21.1 | Subsidiaries of the Registrant | Filed herewith | ||
23.1 | Consent of BDO USA, LLP | Filed herewith | ||
31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) | Filed herewith | ||
31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) | Filed herewith | ||
32.1 | ||||
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 |
† | |
Management contract, compensatory plan or arrangement. |
(1) | |
Documents incorporated by reference from SEC filings made prior to June 2009 were filed under CompuCredit Corporation (now Atlanticus Services Corporation) (File No. 000-25751), our predecessor issuer. |
* | |
Certain portions of this document |
FORM 10-K SUMMARY |
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Atlanta, State of Georgia, on April 2, 2018.
Atlanticus Holdings Corporation | |||
By: | /s/ David G. Hanna | ||
David G. Hanna Chief Executive Officer and Chairman of the Board |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons in the capacities and on the dates indicated.
Signature | Title | Date |
/s/David G. Hanna David G. Hanna | Chief Executive Officer and Chairman of the Board (Principal Executive Officer) | March 30, 2020 |
/s/William R. McCamey William R. McCamey | Chief Financial Officer (Principal Financial Officer) | |
/s/Mitchell C. Saunders Mitchell C. Saunders | Chief Accounting Officer (Principal Accounting Officer) | |
/s/Jeffrey A. Howard Jeffrey A. Howard | Director | March 30, 2020 |
/s/Deal W. Hudson Deal W. Hudson | Director | March 30, 2020 |
/s/Mack F. Mattingly Mack F. Mattingly | Director | March 30, 2020 |
/s/Thomas G. Rosencrants Thomas G. Rosencrants | Director | March 30, 2020 |
Shareholders and Board of Directors
Atlanticus Holdings Corporation
Atlanta, Georgia
Opinion on the consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Atlanticus Holdings Corporation (the “Company”) and subsidiaries as of December 31, 20172019 and 2016,2018, the related consolidated statements of operations, and comprehensive loss,income, shareholders’ deficit,equity (deficit), and cash flows for each of the two years in the period ended December 31, 2017,2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 20172019 and 2016,2018, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2017
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2002.
Atlanta, Georgia
March 30, 2020
Consolidated Balance Sheets
(Dollars in thousands)
December 31, | December 31, | |||||||
2019 | 2018 | |||||||
Assets | ||||||||
Unrestricted cash and cash equivalents (including $78.7 million and $16.8 million associated with variable interest entities at December 31, 2019 and December 31, 2018, respectively) | $ | 135,379 | $ | 60,968 | ||||
Restricted cash and cash equivalents (including $25.9 million and $61.0 million associated with variable interest entities at December 31, 2019 and December 31, 2018, respectively) | 41,015 | 80,786 | ||||||
Loans, interest and fees receivable: | ||||||||
Loans, interest and fees receivable, at fair value (including $3.9 million and $5.7 million associated with variable interest entities at December 31, 2019 and December 31, 2018, respectively) | 4,386 | 6,306 | ||||||
Loans, interest and fees receivable, gross (including $857.2 million and $403.4 million associated with variable interest entities at December 31, 2019 and December 31, 2018, respectively) | 998,209 | 541,344 | ||||||
Allowances for uncollectible loans, interest and fees receivable (including $168.8 million and $57.4 million associated with variable interest entities at December 31, 2019 and December 31, 2018, respectively) | (186,329 | ) | (79,211 | ) | ||||
Deferred revenue (including $40.7 million and $13.2 million associated with variable interest entities at December 31, 2019 and December 31, 2018, respectively) | (90,307 | ) | (43,897 | ) | ||||
Net loans, interest and fees receivable | 725,959 | 424,542 | ||||||
Property at cost, net of depreciation | 2,738 | 3,625 | ||||||
Investments in equity-method investee | 1,957 | 2,476 | ||||||
Deposits | 104 | 124 | ||||||
Operating lease right-of-use assets | 14,091 | — | ||||||
Prepaid expenses and other assets | 15,023 | 10,087 | ||||||
Total assets | $ | 936,266 | $ | 582,608 | ||||
Liabilities | ||||||||
Accounts payable and accrued expenses | $ | 41,617 | $ | 105,765 | ||||
Operating lease liabilities | �� | 22,259 | — | |||||
Notes payable, at face value (including $701.1 million and $366.7 million associated with variable interest entities at December 31, 2019 and December 31, 2018, respectively) | 749,209 | 390,927 | ||||||
Notes payable to related parties | — | 40,000 | ||||||
Notes payable associated with structured financings, at fair value (associated with variable interest entities) | 3,920 | 5,651 | ||||||
Convertible senior notes | 24,091 | 62,142 | ||||||
Income tax liability | 5,785 | 252 | ||||||
Total liabilities | 846,881 | 604,737 | ||||||
Commitments and contingencies (Note 11) | ||||||||
Preferred stock, no par value, 10,000,000 shares authorized: | ||||||||
Series A preferred stock, 400,000 shares issued and outstanding at December 31, 2019 (liquidation preference - $40.0 million); 0 shares issued and outstanding at December 31, 2018 (Note 4) | 40,000 | — | ||||||
Class B preferred units issued to noncontrolling interests (Note 4) | 49,050 | — | ||||||
Shareholders' Equity | ||||||||
Common stock, no par value, 150,000,000 shares authorized: 15,885,314 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at December 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 | 212,692 | 213,435 | ||||||
Accumulated other comprehensive income | — | 3,558 | ||||||
Retained deficit | (211,786 | ) | (238,784 | ) | ||||
Total shareholders’ equity (deficit) | 906 | (21,791 | ) | |||||
Noncontrolling interests | (571 | ) | (338 | ) | ||||
Total equity (deficit) | 335 | (22,129 | ) | |||||
Total liabilities, preferred stock and shareholders' equity (deficit) | $ | 936,266 | $ | 582,608 |
December 31, 2017 | December 31, 2016 | ||||||
Assets | |||||||
Unrestricted cash and cash equivalents | $ | 41,484 | $ | 76,052 | |||
Restricted cash and cash equivalents | 29,174 | 16,589 | |||||
Loans and fees receivable: | |||||||
Loans and fees receivable, at fair value | 11,109 | 15,648 | |||||
Loans and fees receivable, gross | 393,898 | 290,697 | |||||
Allowances for uncollectible loans and fees receivable | (62,970 | ) | (43,275 | ) | |||
Deferred revenue | (36,956 | ) | (23,639 | ) | |||
Net loans and fees receivable | 305,081 | 239,431 | |||||
Property at cost, net of depreciation | 3,229 | 3,829 | |||||
Investment in equity-method investee | 4,244 | 6,725 | |||||
Deposits | 252 | 505 | |||||
Prepaid expenses and other assets | 42,149 | 19,416 | |||||
Total assets | $ | 425,613 | $ | 362,547 | |||
Liabilities | |||||||
Accounts payable and accrued expenses | $ | 115,737 | $ | 86,768 | |||
Notes payable, at face value, net | 226,238 | 141,166 | |||||
Notes payable to related parties | 40,000 | 40,000 | |||||
Notes payable associated with structured financings, at fair value | 9,240 | 12,276 | |||||
Convertible senior notes | 61,393 | 60,791 | |||||
Income tax liability | 9,132 | 15,769 | |||||
Total liabilities | 461,740 | 356,770 | |||||
Commitments and contingencies (Note 11) | |||||||
Equity | |||||||
Common stock, no par value, 150,000,000 shares authorized: 15,291,884 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at December 31, 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 | 212,785 | 211,646 | |||||
Accumulated other comprehensive loss | (2,178 | ) | — | ||||
Retained deficit | (246,640 | ) | (205,859 | ) | |||
Total shareholders’ equity | (36,033 | ) | 5,787 | ||||
Noncontrolling interests | (94 | ) | (10 | ) | |||
Total equity | (36,127 | ) | 5,777 | ||||
Total liabilities and equity | $ | 425,613 | $ | 362,547 |
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
For the Year Ended December 31, | ||||||||
2019 | 2018 | |||||||
Interest income: | ||||||||
Consumer loans, including past due fees | $ | 260,832 | $ | 160,968 | ||||
Other | 386 | 200 | ||||||
Total interest income | 261,218 | 161,168 | ||||||
Interest expense | (50,730 | ) | (36,896 | ) | ||||
Net interest income before fees and related income on earning assets and provision for losses on loans, interest and fees receivable | 210,488 | 124,272 | ||||||
Fees and related income on earning assets | 71,147 | 29,992 | ||||||
Net losses upon impairment of loans, interest and fees receivable recorded at fair value | (897 | ) | (549 | ) | ||||
Provision for losses on loans, interest and fees receivable recorded at net realizable value | (248,383 | ) | (100,338 | ) | ||||
Net interest income, fees and related income on earning assets | 32,355 | 53,377 | ||||||
Other operating income: | ||||||||
Servicing income | 1,786 | 1,969 | ||||||
Other income | 117,903 | 39,820 | ||||||
Gain on repurchase of convertible senior notes | 5,127 | - | ||||||
Equity in income of equity-method investee | 1,001 | 581 | ||||||
Total other operating income | 125,817 | 42,370 | ||||||
Other operating expense: | ||||||||
Salaries and benefits | 26,229 | 23,430 | ||||||
Card and loan servicing | 49,459 | 37,145 | ||||||
Marketing and solicitation | 36,388 | 12,124 | ||||||
Depreciation | 1,137 | 987 | ||||||
Other | 13,196 | 18,579 | ||||||
Total other operating expense | 126,409 | 92,265 | ||||||
Income before income taxes | 31,763 | 3,482 | ||||||
Income tax (expense) benefit | (5,553 | ) | 4,130 | |||||
Net income | 26,210 | 7,612 | ||||||
Net loss attributable to noncontrolling interests | 233 | 244 | ||||||
Net income attributable to controlling interests | $ | 26,443 | $ | 7,856 | ||||
Preferred dividends | $ | (1,153 | ) | $ | - | |||
Net income attributable to common shareholders | $ | 25,290 | $ | 7,856 | ||||
Net income attributable to common shareholders per common share—basic | $ | 1.74 | $ | 0.56 | ||||
Net income attributable to common shareholders per common share—diluted | $ | 1.66 | $ | 0.56 |
For the Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Interest income: | ||||||||
Consumer loans, including past due fees | $ | 114,488 | $ | 88,389 | ||||
Other | 219 | 233 | ||||||
Total interest income | 114,707 | 88,622 | ||||||
Interest expense | (27,700 | ) | (20,207 | ) | ||||
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable | 87,007 | 68,415 | ||||||
Fees and related income on earning assets | 14,289 | 17,316 | ||||||
Net recovery of charge off of loans and fees receivable recorded at fair value | 9,460 | 22,096 | ||||||
Provision for losses on loans and fees receivable recorded at net realizable value | (77,612 | ) | (53,721 | ) | ||||
Net interest income, fees and related income on earning assets | 33,144 | 54,106 | ||||||
Other operating income: | ||||||||
Servicing income | 3,854 | 4,087 | ||||||
Other income | 1,419 | 320 | ||||||
Gain on repurchase of convertible senior notes | — | 1,151 | ||||||
Equity in income of equity-method investee | 1,158 | 2,150 | ||||||
Total other operating income | 6,431 | 7,708 | ||||||
Other operating expense: | ||||||||
Salaries and benefits | 22,751 | 24,026 | ||||||
Card and loan servicing | 31,534 | 30,662 | ||||||
Marketing and solicitation | 13,070 | 4,904 | ||||||
Depreciation | 1,021 | 7,477 | ||||||
Other | 18,449 | 7,101 | ||||||
Total other operating expense | 86,825 | 74,170 | ||||||
Loss before income taxes | (47,250 | ) | (12,356 | ) | ||||
Income tax benefit | 6,378 | 6,015 | ||||||
Net loss | (40,872 | ) | (6,341 | ) | ||||
Net loss attributable to noncontrolling interests | 91 | 6 | ||||||
Net loss attributable to controlling interests | $ | (40,781 | ) | $ | (6,335 | ) | ||
Net loss attributable to controlling interests per common share—basic | $ | (2.93 | ) | $ | (0.46 | ) | ||
Net loss attributable to controlling interests per common share—diluted | $ | (2.93 | ) | $ | (0.46 | ) |
Consolidated Statements of Comprehensive Loss
(Dollars in thousands)
For the Year Ended December 31, | ||||||||
2019 | 2018 | |||||||
Net income | $ | 26,210 | $ | 7,612 | ||||
Other comprehensive income (loss): | ||||||||
Foreign currency translation adjustment | 2,282 | 5,774 | ||||||
Reclassifications of foreign currency translation gains to Other operating expense on the consolidated statements of operations | (5,840 | ) | (38 | ) | ||||
Income tax expense related to other comprehensive income | — | — | ||||||
Comprehensive income | 22,652 | 13,348 | ||||||
Comprehensive loss attributable to noncontrolling interests | 233 | 244 | ||||||
Comprehensive income attributable to controlling interests | $ | 22,885 | $ | 13,592 | ||||
Comprehensive income attributable to controlling interests to common shareholders | $ | 21,732 | $ | 13,592 |
For the Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Net loss | $ | (40,872 | ) | $ | (6,341 | ) | ||
Other comprehensive income: | ||||||||
Foreign currency translation adjustment | (2,178 | ) | — | |||||
Reclassifications of foreign currency translation adjustment to Other operating expense on the consolidated statements of operations | — | 600 | ||||||
Income tax benefit related to other comprehensive loss | — | — | ||||||
Comprehensive loss | (43,050 | ) | (5,741 | ) | ||||
Comprehensive loss attributable to noncontrolling interests | 91 | 6 | ||||||
Comprehensive loss attributable to controlling interests | $ | (42,959 | ) | $ | (5,735 | ) |
Consolidated Statements of Shareholders’ Deficit
For the Years Ended December 31, 20172019 and 2016
(Dollars in thousands)
Common Stock | ||||||||||||||||||||||||||||||||||||
Shares Issued | Amount | Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Deficit | Noncontrolling Interests | Total Equity (Deficit) | Temporary Equity Associated with Noncontrolling Interests | Series A Preferred Stock | ||||||||||||||||||||||||||||
Balance at December 31, 2017 | 15,291,884 | $ | — | $ | 212,785 | $ | (2,178 | ) | $ | (246,640 | ) | $ | (94 | ) | $ | (36,127 | ) | $ | — | $ | — | |||||||||||||||
Stock options exercises and proceeds related thereto | 20,300 | — | 50 | — | — | — | 50 | — | — | |||||||||||||||||||||||||||
Compensatory stock issuances, net of forfeitures | 533,177 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Deferred stock-based compensation costs | — | — | 1,323 | — | — | — | 1,323 | — | — | |||||||||||||||||||||||||||
Redemption and retirement of shares | (281,787 | ) | — | (723 | ) | — | — | — | (723 | ) | — | — | ||||||||||||||||||||||||
Comprehensive income (loss) | — | — | — | 5,736 | 7,856 | (244 | ) | 13,348 | — | |||||||||||||||||||||||||||
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 | — | — | |||||||||||||||||||||||||||
Accretion of discount associated with issuance of subsidiary equity | — | — | (50 | ) | — | — | — | (50 | ) | 50 | — | |||||||||||||||||||||||||
Preferred dividends | — | — | (1,103 | ) | — | — | — | (1,103 | ) | — | — | |||||||||||||||||||||||||
Stock option exercises and proceeds related thereto | 469,701 | — | 1,215 | — | — | — | 1,215 | — | — | |||||||||||||||||||||||||||
Compensatory stock issuances, net of forfeitures | 209,500 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Contributions by preferred shareholders | — | — | — | — | — | — | — | 50,500 | 40,000 | |||||||||||||||||||||||||||
Costs associated with contributions by preferred shareholders | — | — | — | — | — | — | — | (1,500 | ) | — | ||||||||||||||||||||||||||
Deferred stock-based compensation costs | — | — | 1,712 | — | — | — | 1,712 | — | — | |||||||||||||||||||||||||||
Redemption and retirement of shares | (357,461 | ) | — | (2,517 | ) | — | — | — | (2,517 | ) | — | — | ||||||||||||||||||||||||
Comprehensive income (loss) | — | — | — | (3,558 | ) | 26,443 | (233 | ) | 22,652 | — | — | |||||||||||||||||||||||||
Balance at December 31, 2019 | 15,885,314 | $ | — | $ | 212,692 | $ | — | $ | (211,786 | ) | $ | (571 | ) | $ | 335 | $ | 49,050 | $ | 40,000 |
Common Stock | ||||||||||||||||||||||||||
Shares Issued | Amount | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Retained Deficit | Noncontrolling Interests | Total Equity | ||||||||||||||||||||
Balance at December 31, 2015 | 15,332,041 | $ | — | $ | 211,083 | $ | (600 | ) | $ | (199,524 | ) | $ | (8 | ) | $ | 10,951 | ||||||||||
Stock options exercises and proceeds related thereto | 5,999 | 14 | — | — | — | 14 | ||||||||||||||||||||
Compensatory stock issuances, net of forfeitures | 321,068 | — | — | — | — | — | — | |||||||||||||||||||
Contributions from owners of noncontrolling interests | — | — | — | — | — | 4 | 4 | |||||||||||||||||||
Amortization of deferred stock-based compensation costs | — | — | 1,416 | — | — | — | 1,416 | |||||||||||||||||||
Redemption and retirement of shares | (311,022 | ) | — | (949 | ) | — | — | — | (949 | ) | ||||||||||||||||
Tax effects of stock-based compensation costs | — | — | 82 | — | — | — | 82 | |||||||||||||||||||
Other comprehensive income (loss) | — | — | — | 600 | (6,335 | ) | (6 | ) | (5,741 | ) | ||||||||||||||||
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 | — | — | 1,528 | — | — | — | 1,528 | |||||||||||||||||||
Redemption and retirement of shares | (158,202 | ) | — | (389 | ) | — | — | — | (389 | ) | ||||||||||||||||
Other comprehensive loss | — | — | — | (2,178 | ) | (40,781 | ) | (91 | ) | (43,050 | ) | |||||||||||||||
Balance at December 31, 2017 | 15,291,884 | $ | — | $ | 212,785 | $ | (2,178 | ) | $ | (246,640 | ) | $ | (94 | ) | $ | (36,127 | ) |
Consolidated Statements of Cash Flows
(Dollars in thousands)
For the Year Ended December 31, | ||||||||
2019 | 2018 | |||||||
Operating activities | ||||||||
Net income | $ | 26,210 | $ | 7,612 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation, amortization and accretion, net | 7,693 | 987 | ||||||
Losses upon impairment of loans, interest and fees receivable recorded at fair value | 897 | 549 | ||||||
Provision for losses on loans, interest and fees receivable | 248,383 | 100,338 | ||||||
Interest expense from accretion of discount on notes | 818 | 890 | ||||||
Income from accretion of merchant fees and discount associated with receivables purchases | (116,252 | ) | (75,517 | ) | ||||
Unrealized gain on loans, interest and fees receivable and underlying notes payable held at fair value | (2,982 | ) | (4,195 | ) | ||||
Amortization of deferred loan costs | 3,518 | 2,128 | ||||||
Income from equity-method investments | (1,001 | ) | (581 | ) | ||||
Gain on repurchase of convertible senior notes | (5,127 | ) | — | |||||
Deferred stock-based compensation costs | 1,712 | 1,323 | ||||||
Lease liability payments | (10,080 | ) | — | |||||
Changes in assets and liabilities: | ||||||||
Decrease (increase) in uncollected fees on earning assets | 1,765 | (8,754 | ) | |||||
Increase (decrease) in income tax liability | 5,533 | (8,880 | ) | |||||
Decrease in deposits | 20 | 126 | ||||||
(Decrease) increase in accounts payable and accrued expenses | (52,720 | ) | (5,411 | ) | ||||
Other | (8,424 | ) | 32,241 | |||||
Net cash provided by operating activities | 99,963 | 42,856 | ||||||
Investing activities | ||||||||
Proceeds from equity-method investee | 1,520 | 2,349 | ||||||
Investments in earning assets | (1,098,764 | ) | (607,981 | ) | ||||
Proceeds from earning assets | 663,805 | 472,497 | ||||||
Purchases and development of property, net of disposals | (250 | ) | (1,383 | ) | ||||
Net cash used in investing activities | (433,689 | ) | (134,518 | ) | ||||
Financing activities | ||||||||
Noncontrolling interests contributions | 50,500 | — | ||||||
Issuance costs for nonontrolling interests | (1,500 | ) | — | |||||
Proceeds from issuance of preferred stock | 40,000 | — | ||||||
Proceeds from exercise of stock options | 1,215 | 50 | ||||||
Purchase and retirement of outstanding stock | (2,517 | ) | (723 | ) | ||||
Proceeds from borrowings | 873,340 | 632,043 | ||||||
Repayment of borrowings | (592,318 | ) | (469,623 | ) | ||||
Net cash provided by financing activities | 368,720 | 161,747 | ||||||
Effect of exchange rate changes on cash | (354 | ) | 1,011 | |||||
Net increase in cash and cash equivalents | 34,640 | 71,096 | ||||||
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 | $ | 176,394 | $ | 141,754 | ||||
Supplemental cash flow information | ||||||||
Cash paid for interest | $ | 46,302 | $ | 33,467 | ||||
Net cash income tax payments | $ | 20 | $ | 4,750 |
For the Year Ended December 31, | |||||||
2017 | 2016 | ||||||
Operating activities | |||||||
Net loss | $ | (40,872 | ) | $ | (6,341 | ) | |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | |||||||
Depreciation of rental merchandise | 27 | 5,273 | |||||
Depreciation, amortization and accretion, net | 994 | 2,204 | |||||
Losses upon charge off of loans and fees receivable recorded at fair value | 3,624 | 6,110 | |||||
Provision for losses on loans and fees receivable | 77,612 | 53,721 | |||||
Interest expense from accretion of discount on convertible senior notes | 548 | 515 | |||||
Income from accretion of discount associated with receivables purchases | (59,119 | ) | (41,953 | ) | |||
Unrealized gain on loans and fees receivable and underlying notes payable held at fair value | (5,771 | ) | (5,360 | ) | |||
Income from equity-method investments | (1,158 | ) | (2,150 | ) | |||
Gain on repurchase of convertible senior notes | — | (1,151 | ) | ||||
Changes in assets and liabilities: | |||||||
Increase in uncollected fees on earning assets | (2,688 | ) | (4,687 | ) | |||
Decrease in income tax liability | (6,637 | ) | (6,452 | ) | |||
Decrease in deposits | 253 | 320 | |||||
Increase in accounts payable and accrued expenses | 23,341 | 41,436 | |||||
Additions to rental merchandise | — | (634 | ) | ||||
Other | (15,619 | ) | (1,836 | ) | |||
Net cash (used in) provided by operating activities | (25,465 | ) | 39,015 | ||||
Investing activities | |||||||
(Increase) decrease in restricted cash | (12,564 | ) | 3,869 | ||||
Proceeds from equity-method investee | 3,639 | 5,548 | |||||
Investments in earning assets | (466,740 | ) | (381,212 | ) | |||
Proceeds from earning assets | 383,179 | 296,304 | |||||
Purchases and development of property, net of disposals | (395 | ) | (349 | ) | |||
Net cash used in investing activities | (92,881 | ) | (75,840 | ) | |||
Financing activities | |||||||
Noncontrolling interests contributions, net | 7 | 4 | |||||
Purchase and retirement of outstanding stock | (389 | ) | (949 | ) | |||
Proceeds from borrowings | 324,997 | 242,388 | |||||
Repayment of borrowings | (239,976 | ) | (177,984 | ) | |||
Net cash provided by financing activities | 84,639 | 63,459 | |||||
Effect of exchange rate changes on cash | 144 | (1,615 | ) | ||||
Net (decrease) increase in unrestricted cash | (33,563 | ) | 25,019 | ||||
Unrestricted cash and cash equivalents at beginning of period | 76,052 | 51,033 | |||||
Unrestricted cash and cash equivalents at end of period | $ | 42,489 | $ | 76,052 | |||
Supplemental cash flow information | |||||||
Cash paid for interest | $ | 25,478 | $ | 19,481 | |||
Net cash income tax payments | $ | 258 | $ | 437 | |||
Supplemental non-cash information | |||||||
Issuance of stock options and restricted stock | $ | 1,364 | $ | 2,310 |
See accompanying notes.
Notes to Consolidated Financial Statements
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 partnerspartner 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 industriesmarket segments 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.
Additionally, we report within our Credit and Other Investments segment: 1) the servicing income from our legacy credit card receivables, 2) the income earned from an investment in an equity-method investee that holds credit card receivables for which we are the servicer; and 2)3) gains or losses associated with investments previously made in consumer finance technology platforms. These include investments in companies engaged in mobile technologies, marketplace lending and other financial technologies. These investments are carried at the lower of cost or market valuation. None of these companies are publicly-traded and there are no material pending liquidity events.
Within our Auto Finance segment, our CAR subsidiary operations principally purchase and/or service loans secured by automobiles from or for, and also provide floor plan financing for, a pre-qualified network of independent automotive dealers and automotive finance companies in the buy-here, pay-here, used car business. We purchase auto loans at a discount and with dealer retentions or holdbacks that provide risk protection. Also within our Auto Finance segment, we are providing certain installment lending products in addition to our traditional loans secured by automobiles.
2. | |
Significant Accounting Policies and Consolidated Financial Statement Components |
The following is a summary of significant accounting policies we follow in preparing our consolidated financial statements, as well as a description of significant components of our consolidated financial statements.
Basis of Presentation and Use of Estimates
We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the U.S. (“GAAP”). The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our consolidated financial statements, as well as the reported amounts of revenues and expenses during each reporting period. We base these estimates on information available to us as of the date of the financial statements. Actual results could differ materially from these estimates. Certain estimates, such as credit losses, payment rates, costs of funds, discount rates and the yields earned on credit card receivables, significantly affect the reported amount of credit card receivables that we report at
We have eliminated all significant intercompany balances and transactions for financial reporting purposes.
Unrestricted cash and cash equivalents consist of cash, money market investments and overnight deposits. We consider all highly liquid cash investments with low interest rate risk and original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates market. We maintain unrestricted cash and cash equivalents for general operating purposes and to meet our longer term debt obligations. The majority of these cash balances are not insured.
Restricted Cash
Restricted cash as of December 31, 20172019 and 20162018 includes certain collections on loans, interest and fees receivable, the cash balances of which are required to be distributed to noteholders under our debt facilities. Our restricted cash balances also include minimum cash balances held in accounts at the request of certain of our business partners.
Loans, Interest and Fees Receivable
Loans, Interest and Fees Receivable, at Fair Value.
Loans, interest and fees receivable held at fair value represent receivables underlying credit card securitization trusts, and which qualify as a variable interest entity ("VIE"), that are consolidated onto our consolidated balance sheet, some portfolios of which are unencumbered and some of which are still encumbered under structured financing facilities. Further details concerning our loans, interest and fees receivable held at fair value are presented within Note 6, “Fair Values of Assets and Liabilities.”Loans, Interest and Fees Receivable
We show both an allowance for uncollectible loans, interest and fees receivable and unearned fees (or “deferred revenue”) for our loans, interest and fees receivable (i.e., as opposed to those carried 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. EachWhile each of these categories has unique features, they share many of the same credit risk characteristics and thus share a similar approach to the establishment of an allowance for loan losses. Each portfolio segmentssegment 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 toattributes for each type of receivable pool: historical loss rates; current delinquency and roll-rate trends; vintage analyses based on the number of months an account has been in existence; the effects of changes in the economy on our customers; changes in underwriting criteria; and estimated recoveries. For our Auto Finance segment we may further reduce the expected charge-off, taking into consideration specific dealer level reserves which may allow us to offset our losses and, in the case of secured loans, the impact of collateral available to offset a potential loss. Conversely, for receivables in our Credit and Other Investments segment, which generally do not have a secured interest in collateral, we look to reserve for the gross expected exposure to charge-offs.
These reserves are considered in conjunction with (and potentially reduced by) any unearned fees and discounts that may be applicable for an outstanding loan receivable. A considerable amount of judgment is required to assess the ultimate amount of uncollectible loans, interest and fees receivable, and we continuously evaluate and update our methodologies to determine the most appropriate allowance necessary. We may individually evaluate a receivable or pool of receivables for impairment (as indicated in the table below) if circumstances indicate that the receivable or pool of receivables may be at higher risk for non-performance than other receivables. This may occurreceivables (e.g., if a particular retail or auto-finance partner has indications of non-performance (such as a bankruptcy) that could impact the underlying pool of receivables we purchased from the partner.
Certain of our loans, interest and fees receivable also contain components of deferred revenue including discountsmerchant fees on the purchases of receivables for our point-of-sale receivables and annual fee billings for our direct-to-consumer credit card offerings.receivables. Our point-of-sale and auto finance loans, interest and fees receivable include principal balances and associated fees and interest due from customers which are earned each period a loan is outstanding, net of the unearned portion of merchant fees and loan discounts. Additionally, many of our direct-to-consumer credit card offeringsreceivables have an annual membership fee that is billed to the consumer on card activation and for each anniversary of that date thereafter. As of December 31, 20172019 and December 31, 2016,2018, the weighted average remaining accretion period for the $37.0$90.3 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 Year ended December 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 | (161.5 | ) | (3.5 | ) | (83.4 | ) | (248.4 | ) | ||||||||
Charge offs | 80.2 | 4.6 | 68.1 | 152.9 | ||||||||||||
Recoveries | (4.6 | ) | (1.4 | ) | (5.6 | ) | (11.6 | ) | ||||||||
Balance at end of period | $ | (121.3 | ) | $ | (1.6 | ) | $ | (63.4 | ) | $ | (186.3 | ) |
For the Year Ended December 31, 2017 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||
Allowance for uncollectible loans and fees receivable: | ||||||||||||||||
Balance at beginning of period | $ | (1.4 | ) | $ | (2.1 | ) | $ | (39.8 | ) | $ | (43.3 | ) | ||||
Provision for loan losses | (19.2 | ) | (1.9 | ) | (56.5 | ) | (77.6 | ) | ||||||||
Charge offs | 3.8 | 3.0 | 57.0 | 63.8 | ||||||||||||
Recoveries | (1.4 | ) | (1.3 | ) | (3.2 | ) | (5.9 | ) | ||||||||
Balance at end of period | $ | (18.2 | ) | $ | (2.3 | ) | $ | (42.5 | ) | $ | (63.0 | ) |
As of December 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 | $ | — | $ | (0.4 | ) | $ | (0.1 | ) | $ | (0.5 | ) | |||||
Balance at end of period collectively evaluated for impairment | $ | (121.3 | ) | $ | (1.2 | ) | $ | (63.3 | ) | $ | (185.8 | ) | ||||
Loans, interest and fees receivable: | ||||||||||||||||
Loans, interest and fees receivable, gross | $ | 509.2 | $ | 89.8 | $ | 399.2 | $ | 998.2 | ||||||||
Loans, interest and fees receivable individually evaluated for impairment | $ | — | $ | 2.1 | $ | 0.1 | $ | 2.2 | ||||||||
Loans, interest and fees receivable collectively evaluated for impairment | $ | 509.2 | $ | 87.7 | $ | 399.1 | $ | 996.0 |
For the Year ended December 31, 2018 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||
Allowance for uncollectible loans, interest and fees receivable: | ||||||||||||||||
Balance at beginning of period | $ | (18.2 | ) | $ | (2.3 | ) | $ | (42.5 | ) | $ | (63.0 | ) | ||||
Provision for loan losses | (46.6 | ) | (0.3 | ) | (53.4 | ) | (100.3 | ) | ||||||||
Charge offs | 29.9 | 2.2 | 58.2 | 90.3 | ||||||||||||
Recoveries | (0.5 | ) | (0.9 | ) | (4.8 | ) | (6.2 | ) | ||||||||
Balance at end of period | $ | (35.4 | ) | $ | (1.3 | ) | $ | (42.5 | ) | $ | (79.2 | ) |
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 |
As of December 31, 2017 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||
Allowance for uncollectible loans and fees receivable: | ||||||||||||||||
Balance at end of period individually evaluated for impairment | $ | — | $ | (0.2 | ) | $ | (0.2 | ) | $ | (0.4 | ) | |||||
Balance at end of period collectively evaluated for impairment | $ | (18.2 | ) | $ | (2.1 | ) | $ | (42.3 | ) | $ | (62.6 | ) | ||||
Loans and fees receivable: | ||||||||||||||||
Loans and fees receivable, gross | $ | 87.2 | $ | 77.8 | $ | 228.9 | $ | 393.9 | ||||||||
Loans and fees receivable individually evaluated for impairment | $ | — | $ | 0.4 | $ | 0.2 | $ | 0.6 | ||||||||
Loans and fees receivable collectively evaluated for impairment | $ | 87.2 | $ | 77.4 | $ | 228.7 | $ | 393.3 |
For the Year Ended December 31, 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 | (2.6 | ) | (51.8 | ) | (53.7 | ) | |||||||||
Charge offs | 1.8 | 3.3 | 32.6 | 37.7 | ||||||||||||
Recoveries | (2.7 | ) | (1.1 | ) | (2.0 | ) | (5.8 | ) | ||||||||
Balance at end of period | $ | (1.4 | ) | $ | (2.1 | ) | $ | (39.8 | ) | $ | (43.3 | ) |
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 |
Delinquent loans, interest and fees receivable reflect the principal, fee and interest components of loans we did not collect on or prior to the contractual due date. Amounts we believe we will not ultimately collect are included as a component in our overall allowance for uncollectible loans, interest and fees receivable. For most products we service other than our Auto Finance receivables, we discontinue charging interest and fees for most of our credit productsare discontinued when loans, interest and fees receivable become contractually 90 or more days past due. We charge off our Credit and Other Investments and Auto Finance segment receivables when they become contractually more than 180 days past due or 120 days past due for the direct-to-consumer personal loan product.due. For all of our products, we charge off receivables within 30 days of notification and confirmation of a customer’s bankruptcy or death. However, in some cases of death, we do not charge off receivables if there is a surviving, contractually liable individual or an estate large enough to pay the debt in full.
Recoveries on accounts previously charged off are credited to the allowance for uncollectible loans, interest and fees receivable and effectively offset our provision for losses on loans, interest and fees receivable recorded at net realizable value on our consolidated statements of operations. (All of the above discussion relates only to our loans, interest and fees receivable for which we use net realizable value, i.e., as opposed to fair value accounting. For loans, interest and fees receivable recorded at fair value, recoveries offset losses upon charge offimpairment of the underlying loans, interest and fees receivable recorded at fair value, net of recoveries on our consolidated statements of operations.)
We consider loan delinquencies a key indicator of credit quality because this measure provides the best ongoing estimate of how a particular class of receivables is performing. An aging of our delinquent loans, interest and fees receivable, gross (in millions) by class of receivable as of
December 31,As of December 31, 2019 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||
30-59 days past due | $ | 21.7 | $ | 8.1 | $ | 14.0 | $ | 43.8 | ||||||||
60-89 days past due | 18.5 | 3.0 | 11.5 | 33.0 | ||||||||||||
90 or more days past due | 46.6 | 2.6 | 27.2 | 76.4 | ||||||||||||
Delinquent loans, interest and fees receivable, gross | 86.8 | 13.7 | 52.7 | 153.2 | ||||||||||||
Current loans, interest and fees receivable, gross | 422.4 | 76.1 | 346.5 | 845.0 | ||||||||||||
Total loans, interest and fees receivable, gross | $ | 509.2 | $ | 89.8 | $ | 399.2 | $ | 998.2 | ||||||||
Balance of loans greater than 90-days delinquent still accruing interest and fees | $ | — | $ | 1.9 | $ | — | $ | 1.9 |
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 |
Balance at December 31, 2017 | Credit Cards | Auto Finance | Other Unsecured Lending Products | Total | ||||||||||||
30-59 days past due | $ | 3.2 | $ | 6.4 | $ | 9.0 | $ | 18.6 | ||||||||
60-89 days past due | 3.3 | 2.1 | 7.1 | 12.5 | ||||||||||||
90 or more days past due | 4.9 | 1.9 | 15.7 | 22.5 | ||||||||||||
Delinquent loans and fees receivable, gross | 11.4 | 10.4 | 31.8 | 53.6 | ||||||||||||
Current loans and fees receivable, gross | 75.8 | 67.4 | 197.1 | 340.3 | ||||||||||||
Total loans and fees receivable, gross | $ | 87.2 | $ | 77.8 | $ | 228.9 | $ | 393.9 | ||||||||
Balance of loans 90 or more days past due and still accruing interest and fees | $ | — | $ | 1.6 | $ | — | $ | 1.6 |
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 |
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 theThe following table details by class of receivable, the number and amount of TDRs,modified loans, including TDRs that have been re-aged, as of December 31, 20172019 and December 31, 2016:2018:
As of | ||||||||||||||||
December 31, 2019 | December 31, 2018 | |||||||||||||||
Point-of-sale | Direct-to-consumer | Point-of-sale | Direct-to-consumer | |||||||||||||
Number of TDRs | 10,682 | 14,553 | 6,095 | 3,584 | ||||||||||||
Number of TDRs that have been re-aged | 2,788 | 2,854 | 2,759 | 1,111 | ||||||||||||
Amount of TDRs on non-accrual status (in thousands) | $ | 14,468 | $ | 13,037 | $ | 4,885 | $ | 1,942 | ||||||||
Amount of TDRs on non-accrual status above that have been re-aged (in thousands) | $ | 5,118 | $ | 3,104 | $ | 3,782 | $ | 955 | ||||||||
Carrying value of TDRs (in thousands) | $ | 8,864 | $ | 7,312 | $ | 3,333 | $ | 1,363 | ||||||||
TDRs - Performing (carrying value, in thousands)* | $ | 6,754 | $ | 6,106 | $ | 2,525 | $ | 1,191 | ||||||||
TDRs - Nonperforming (carrying value, in thousands)* | $ | 2,110 | $ | 1,206 | $ | 808 | $ | 172 |
As of December 31, | ||||||||||||
2017 | 2016 | |||||||||||
Point-of-sale | Direct-to-consumer | Point-of-sale | Direct-to-consumer | |||||||||
Number of accounts on non-accrual status | 11,432 | 6,681 | 7,350 | 1,449 | ||||||||
Number of accounts on non-accrual status above that have been re-aged | 915 | 80 | 560 | 9 | ||||||||
Amount of receivables on non-accrual status (in thousands) | $ | 17,169 | $ | 7,067 | $10,346 | $4,728 | ||||||
Amount of receivables on non-accrual status above that have been re-aged (in thousands) | $ | 1,570 | $ | 86 | $865 | $10 | ||||||
Carrying value of receivables on non-accrual status (in thousands) | $ | 4,247 | $ | 1,173 | $2,432 | $474 | ||||||
TDRs - Performing (carrying value, in thousands)* | $ | 2,368 | $ | 508 | $1,279 | $279 | ||||||
TDRs - Nonperforming (carrying value, in thousands)* | $ | 1,879 | $ | 666 | $1,153 | $195 |
*“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 31,409 and 21,997 accounts in the amount of $43.3 million and $33.2 million during the twelve month periods ended December 31, 2019 and December 31, 2018, respectively, that qualified as TDRs. The following table details by class of receivable, the number of accounts and carrying valuebalance of loans that completed a modification (including those that were classified as TDRs) within the prior twelve months and subsequently charged off.defaulted.
Twelve Months Ended | ||||||||||||||||
December 31, 2019 | December 31, 2018 | |||||||||||||||
Point-of-sale | Direct-to-consumer | Point-of-sale | Direct-to-consumer | |||||||||||||
Number of accounts | 2,835 | 3,339 | 6,903 | 5,415 | ||||||||||||
Loan balance at time of charge off (in thousands) | $ | 4,397 | $ | 3,545 | $ | 9,634 | $ | 4,963 |
2017 | 2016 | |||||||||||
Point-of-Sale | Direct-to-Consumer | Point-of-Sale | Direct-to-Consumer | |||||||||
Number of accounts | 1,720 | 870 | 1,645 | 381 | ||||||||
Loan balance at time of charge off (in thousands) | $ | 2,675 | $ | 2,466 | $1,681 | $1,149 |
Property at Cost, Net of Depreciation
We capitalize costs related to internal development and implementation of software used in our operating activities in accordance with applicable accounting literature. These capitalized costs consist almost exclusively of fees paid to third-party consultants to develop code and install and test software specific to our needs and to customize purchased software to maximize its benefit to us.
We record our property at cost less accumulated depreciation or amortization. We compute depreciation expense using the straight-line method over the estimated useful lives of our assets, which are approximately 5 years for furniture, fixtures and equipment, and 3 years for computers and software. We amortize leasehold improvements over the shorter of their estimated useful lives or the terms of their respective underlying leases.
We periodically review our property to determine if it is impaired. We incurred no impairment costs in 20172019 and $0.6 million of suchno impairment costs in 2016.
Investment in Equity-Method Investee
We account for an investment using the equity method of accounting if we have the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist based on ownership interest, although other factors, such as representation on an investee’s board of managers, specific voting and veto rights held by each investor and the effects of commercial arrangements, are considered in determining whether equity method accounting is appropriate. We record our interests in the income of our equity-method investee within the equity in income of equity-method investee category on our consolidated statements of operations.
We use the equity method for our 66.7% investment in a limited liability company formed in 2004 to acquire a portfolio of credit card receivables. We account for this investment using the equity method of accounting due to specific voting and veto rights held by each investor, which do not allow us to control this investee.
We evaluate our investments in the equity-method investee for impairment each quarter by comparing the carrying amount of the investment to its fair value. Because no active market exists for the investee’s limited liability company membership interest,interests, we evaluate our investment for impairment based on our evaluation of the fair value of the equity-method investee’s net assets relative to its carrying value. If we ever were to determine that the carrying value of our investment in the equity-method investee was greater than its fair value, we would write the investment down to its fair value.
Prepaid expenses and other assets include amounts paid to third parties for marketing and other services as well as amounts owed to us by third parties. Prepaid amounts are expensed as the underlying related services are performed. Also included are (1) commissions paid associated with our various office leases which we amortize into expense over the lease terms, (2) amounts due from a third party in respect of a servicing agreement totaling $30.4 million as of December 31, 2017, (3) ongoing deferred costs associated with service contracts and (4)(3) investments in consumer finance technology platforms carried at the lower of cost or market valuation. In the fourth quarter of 2017, we incurred a $2.1 million write down of the carrying value associated with one of these investments.
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. Commencing in July 2019, accounts payable and accrued expenses includes payments owed under a deferred payment program started with an unrelated third-party for a portion of our marketing expenditures. As a result of this agreement, we were able to extend the payment terms associated with our growing marketing spend between 10-37 months. Also included within accounts payable and accrued expenses are amounts which may be owedpayable in respect of one of our portfolios.
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, discounts and discountsmerchant fees paid or received associated with aan installment or auto loan are generally deferred and amortized over the average life of the related loans using the effective interest method. Finance
Fees and Related Income on Earning Assets
Fees and related income on earning assets primarily include: (1)(1) fees associated with ourthe credit products, including the receivables underlying our U.S. point-of-sale finance and direct-to-consumer activities,platform, and our historicallegacy credit card receivables; (2)(2) changes in the fair value of loans, interest and fees receivable recorded at fair value; (3)(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)(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.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.
The components (in thousands) of our fees and related income on earning assets are as follows:
Year Ended December 31, | ||||||||
2019 | 2018 | |||||||
Fees on credit products | $ | 68,639 | $ | 25,694 | ||||
Changes in fair value of loans, interest and fees receivable recorded at fair value | 1,251 | 606 | ||||||
Changes in fair value of notes payable associated with structured financings recorded at fair value | 1,731 | 3,589 | ||||||
Other | (474 | ) | 103 | |||||
Total fees and related income on earning assets | $ | 71,147 | $ | 29,992 |
Year ended December 31, | ||||||||
2017 | 2016 | |||||||
Fees on credit products | $ | 10,427 | $ | 3,526 | ||||
Changes in fair value of loans and fees receivable recorded at fair value | 3,456 | 1,587 | ||||||
Changes in fair value of notes payable associated with structured financings recorded at fair value | 2,315 | 3,773 | ||||||
Rental revenue | 148 | 8,235 | ||||||
Other | (2,057 | ) | 195 | |||||
Total fees and related income on earning assets | $ | 14,289 | $ | 17,316 |
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 recoverylosses upon impairment of charge off of loans, interest and fees receivable recorded at fair value on our consolidated statements of operations. See Note 6, “Fair Values of Assets and Liabilities,” for further discussion of these receivables and their effects on our consolidated statements of operations.
Other income
Other income includes revenues associated with ancillary product offerings and interchange revenues. We recognize these fees as income in the period earned. Included in Other income for 2019 is $105.9 million associated with reductions in accruals related to one of our portfolios. The accrual was based upon our estimate of the amount that may be claimed by customers and was 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 were subjective, mainly due to uncertainty associated with future claims volumes and the resolution costs, if any, per claim. As of December 31, 2019, we had no reserves associated with this matter. For 2018, Other income also includes the receipt of £34 million (approximately $42.9 million) in settlement of litigation, resulting in income recognition of approximately $36.2 million after adjusting for amounts previously recorded.
Revenue from Contracts with Customers
In the first quarter of 2018, we adopted Accounting Standards Update (“ASU”) No.2014-09, “Revenue from Contracts with Customers” under the modified retrospective transition method. There was no material change in the timing of revenue recognition upon adoption. 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 | ||||||||||||
For the Year ended December 31, 2019 | Other Investments | Auto Finance | Total | |||||||||
Interchange revenues, net (1) | $ | 8,495 | $ | — | $ | 8,495 | ||||||
Servicing income | 857 | 929 | 1,786 | |||||||||
Service charges and other customer related fees | 3,407 | 66 | 3,473 | |||||||||
Total revenue from contracts with customers | $ | 12,759 | $ | 995 | $ | 13,754 |
(1) Interchange revenue is presented net of customer reward expense.
Credit and | ||||||||||||
For the Year ended December 31, 2018 | Other Investments | Auto Finance | Total | |||||||||
Interchange revenues, net (1) | $ | 2,881 | $ | — | $ | 2,881 | ||||||
Servicing income | 947 | 1,022 | 1,969 | |||||||||
Service charges and other customer related fees | 637 | 69 | 706 | |||||||||
Total revenue from contracts with customers | $ | 4,465 | $ | 1,091 | $ | 5,556 |
(1) Interchange revenue is presented net of customer reward expense.
Card and Loan Servicing Expenses
Card and loan servicing costs primarily include collections and customer service expenses. Within this category of expenses are personnel, service bureau, cardholder correspondence and other direct costs associated with our collections and customer service efforts. Card and loan servicing costs also include outsourced collections and customer service expenses. We expense card and loan servicing costs as we incur them, with the exception of prepaid costs, which we expense over respective service periods.
Marketing and Solicitation Expenses
We expense product solicitation costs, including printing, credit bureaus, list processing, telemarketing, postage, and Internetinternet marketing fees, as we incur these costs or expend resources.
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
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 do 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. Net future minimum lease payments totaled $12.2 million as of December 31, 2017, as disclosed inmaterial change upon adoption. See Note 8, “ Leases”. 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.
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)(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)(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 December 31, 2017, 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.statements other than the development described below.
As of January 1, 2020, we have elected the fair value option to account for certain loans receivable associated with our point-of-sale and direct-to-consumer platform that were originated on or after January 1, 2020 (the "Fair Value Receivables"). We believe the use of fair value for these receivables more closely approximates the true economics of these receivables, better matching the yields and corresponding charge-offs. We believe the fair value option also enables us to report GAAP net income that provides increased transparency into our profitability and asset quality. Receivables acquired prior to January 1, 2020 will continue to be accounted for in our 2020 and subsequent financial statements at amortized cost, net. We will estimate the Fair Value Receivables using a discounted cash flow model, which considers various factors such as expected yields on consumer receivables, customer default rates, the timing of expected payments, estimated costs to service the portfolio, interest rates, and valuations of comparable portfolios. As a result of this fair value adoption, our loans, interest and fees receivable acquired subsequent to January 1, 2020 will be carried at fair value with changes in fair value recognized directly in earnings, and certain fee billings (such as annual membership fees and merchant fees) and origination costs associated with these receivables will no longer be deferred. We will reevaluate the fair value of our Fair Value Receivables at the end of each quarter.
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the magnitude of the effect the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation on its financial condition, liquidity, operations, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020.
As a result of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) signed into law by the President on March 27, 2020, additional avenues of relief will be available to workers and families through enhanced unemployment insurance provisions and to small businesses through programs administered by the Small Business Administration (SBA). Management is currently assessing the availability of assistance under this program.
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
December 31,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:
Year ended December 31, 2017 | Credit and Other Investments | Auto Finance | Total | |||||||||||||||||||||
Year ended December 31, 2019 | Credit and Other Investments | Auto Finance | Total | |||||||||||||||||||||
Interest income: | ||||||||||||||||||||||||
Consumer loans, including past due fees | $ | 86,395 | $ | 28,093 | $ | 114,488 | $ | 229,388 | $ | 31,444 | $ | 260,832 | ||||||||||||
Other | 219 | — | 219 | 386 | — | 386 | ||||||||||||||||||
Total interest income | 86,614 | 28,093 | 114,707 | 229,774 | 31,444 | 261,218 | ||||||||||||||||||
Interest expense | (26,702 | ) | (998 | ) | (27,700 | ) | (49,065 | ) | (1,665 | ) | (50,730 | ) | ||||||||||||
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable | $ | 59,912 | $ | 27,095 | $ | 87,007 | ||||||||||||||||||
Net interest income before fees and related income on earning assets and provision for losses on loans, interest and fees receivable | $ | 180,709 | $ | 29,779 | $ | 210,488 | ||||||||||||||||||
Fees and related income on earning assets | $ | 14,170 | $ | 119 | $ | 14,289 | $ | 70,984 | $ | 163 | $ | 71,147 | ||||||||||||
Servicing income | $ | 3,010 | $ | 844 | $ | 3,854 | $ | 857 | $ | 929 | $ | 1,786 | ||||||||||||
Depreciation of rental merchandise | $ | (27 | ) | $ | — | $ | (27 | ) | ||||||||||||||||
Gain on repurchase of convertible senior notes | $ | 5,127 | $ | — | $ | 5,127 | ||||||||||||||||||
Equity in income of equity-method investee | $ | 1,158 | $ | — | $ | 1,158 | $ | 1,001 | $ | — | $ | 1,001 | ||||||||||||
(Loss) income before income taxes | $ | (54,387 | ) | $ | 7,137 | $ | (47,250 | ) | ||||||||||||||||
Income tax benefit (expense) | $ | 9,417 | $ | (3,039 | ) | $ | 6,378 | |||||||||||||||||
Income before income taxes | $ | 25,005 | $ | 6,758 | $ | 31,763 | ||||||||||||||||||
Income tax expense | $ | (3,830 | ) | $ | (1,723 | ) | $ | (5,553 | ) | |||||||||||||||
Total assets | $ | 359,563 | $ | 66,050 | $ | 425,613 | $ | 856,354 | $ | 79,912 | $ | 936,266 |
Year ended December 31, 2016 | Credit and Other Investments | Auto Finance | Total | |||||||||||||||||||||
Year ended December 31, 2018 | Credit and Other Investments | Auto Finance | Total | |||||||||||||||||||||
Interest income: | ||||||||||||||||||||||||
Consumer loans, including past due fees | $ | 59,614 | $ | 28,775 | $ | 88,389 | $ | 131,096 | $ | 29,872 | $ | 160,968 | ||||||||||||
Other | 233 | — | 233 | 200 | — | 200 | ||||||||||||||||||
Total interest income | 59,847 | 28,775 | 88,622 | 131,296 | 29,872 | 161,168 | ||||||||||||||||||
Interest expense | (19,011 | ) | (1,196 | ) | (20,207 | ) | (35,564 | ) | (1,332 | ) | (36,896 | ) | ||||||||||||
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable | $ | 40,836 | $ | 27,579 | $ | 68,415 | ||||||||||||||||||
Net interest income before fees and related income on earning assets and provision for losses on loans, interest and fees receivable | $ | 95,732 | $ | 28,540 | $ | 124,272 | ||||||||||||||||||
Fees and related income on earning assets | $ | 17,214 | $ | 102 | $ | 17,316 | $ | 29,912 | $ | 80 | $ | 29,992 | ||||||||||||
Servicing income | $ | 3,115 | $ | 972 | $ | 4,087 | $ | 947 | $ | 1,022 | $ | 1,969 | ||||||||||||
Gain on repurchase of convertible senior notes | $ | 1,151 | $ | — | $ | 1,151 | ||||||||||||||||||
Depreciation of rental merchandise | $ | (5,273 | ) | $ | — | $ | (5,273 | ) | ||||||||||||||||
Equity in income of equity-method investee | $ | 2,150 | $ | — | $ | 2,150 | $ | 581 | $ | — | $ | 581 | ||||||||||||
(Loss) income before income taxes | $ | (18,915 | ) | $ | 6,559 | $ | (12,356 | ) | $ | (6,767 | ) | $ | 10,249 | $ | 3,482 | |||||||||
Income tax benefit (expense) | $ | 8,390 | $ | (2,375 | ) | $ | 6,015 | $ | 6,345 | $ | (2,215 | ) | $ | 4,130 | ||||||||||
Total assets | $ | 293,576 | $ | 68,971 | $ | 362,547 | $ | 507,232 | $ | 75,376 | $ | 582,608 |
4. | |
Shareholders’ Equity and Preferred Stock |
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 provided for a senior secured term loan facility in an amount of up to $40.0 million at any time outstanding. On December 27, 2019, the Company issued 400,000 shares (10,000,000 shares authorized, 400,000 shares outstanding) of its Series A Preferred Stock with an aggregate initial liquidation preference of $40.0 million, in exchange for full satisfaction of the $40.0 million that the Company owed Dove under the Loan and Security Agreement. Dividends on the preferred stock are 6% per annum (cumulative, non-compounding) and are payable as declared, and in preference to any common stock dividends, in cash. The Series A Preferred Stock is perpetual and has no maturity date. The Company may, at its option, redeem the shares of Series A Preferred Stock on or after January 1, 2025 at a redemption price equal to $100 per share, plus any accumulated and unpaid dividends. At the request of a majority of the holders of the Series A Preferred Stock, the Company shall offer to redeem all of the Series A Preferred Stock at a redemption price equal to $100 per share, plus any accumulated and unpaid dividends, at the option of the holders thereof, on or after January 1, 2024. Upon the election by the holders of a majority of the Series A Preferred Stock, each share of the Series A Preferred Stock is convertible into the number of shares of the Company’s common stock as is determined by dividing (i) the sum of (a) $100 and (b) any accumulated and unpaid dividends on such share by (ii) an initial conversion price equal to $10 per share, subject to certain adjustment in certain circumstances to prevent dilution. Given the redemption rights contained within the Series A Preferred Stock, we account for the outstanding preferred stock as temporary equity in the consolidated balance sheets.
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.
During the years ended December 31, 20172019 and 2016,2018, we repurchased and contemporaneously retired 158,202357,461 and 311,022281,787 shares of our common stock at an aggregate cost of $389,000$2,517,000 and $949,000,$723,000, 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
December 31,On November 14, 2019, a wholly-owned subsidiary issued 50.5 million Class B preferred units at a purchase price of $1.00 per unit to an unrelated third party. The units carry a 16% preferred return to be paid quarterly, with up to 6 percentage points of the preferred return to be paid through the issuance of additional units or cash, at our election. The units have both call and put rights and are also subject to various covenants including a minimum book value, which if not satisfied, could allow for the securities to be put back to the subsidiary. Subject to satisfying certain closing conditions, the subsidiary has the right to issue up to 50.5 million additional units on the same terms. The proceeds from the transaction will be used for general corporate purposes. We have included the issuance of these Class B preferred units as temporary noncontrolling interest on the consolidated balance sheets.
5. | |
Investment in Equity-Method Investee |
Our equity-method investment outstanding at December 31, 2017 2019consists 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 | ||||||||
December 31, 2019 | December 31, 2018 | |||||||
Loans, interest and fees receivables, at fair value | $ | 2,757 | $ | 3,546 | ||||
Total assets | $ | 2,922 | $ | 3,732 | ||||
Total liabilities | $ | 13 | $ | 18 | ||||
Members’ capital | $ | 2,909 | $ | 3,714 |
Year ended December 31, | ||||||||
2019 | 2018 | |||||||
Net interest income (loss), fees and related income on earning assets | $ | 1,505 | $ | 875 | ||||
Net income | $ | 1,318 | $ | 613 | ||||
Net income attributable to investee | $ | 1,001 | $ | 581 |
As of | |||||||
December 31, 2017 | December 31, 2016 | ||||||
Loans and fees receivable, at fair value | $ | 6,123 | $ | 9,650 | |||
Total assets | $ | 6,392 | $ | 10,291 | |||
Total liabilities | $ | 26 | $ | 204 | |||
Members’ capital | $ | 6,366 | $ | 10,087 |
Year ended December 31, | |||||||
2017 | 2016 | ||||||
Net interest income, fees and related income on earning assets | $ | 1,742 | $ | 3,249 | |||
Net income | $ | 1,370 | $ | 2,714 | |||
Net income attributable to our equity investment in investee | $ | 1,158 | $ | 2,150 |
6. | |
Fair Values of Assets and Liabilities |
We elected the fair value option with respect to our investments in equity securities, included in other assets, as well as our credit card loans, interest and fees receivable portfolios, the retained interests in which we historically recorded at fair value under securitization structures that were off balance sheet prior to accounting rules changes requiring their consolidation into our financial statements. The legal structure qualifies as a VIE but is consolidated as the Company is the primary beneficiary. With respect to our
equity securities, we decided to carry these assets at fair value due to our intent to invest and redeem these investments with expected frequency. For our credit card loans, interest and fees receivable portfolios underlying our formerly off-balance-sheet securitization structures, we elected the fair value option because, at the time of election, in contrast to substantially all of our other assets, we had significant experiences in determining the fair value of these assets in connection with our historical fair value accounting for our retained interests in their associated securitization structures. Because we elected to account for the credit card receivables underlying our formerly off-balance-sheet securitization structures at fair value, accounting rules require that we account for the notes payable issued by such securitization structures at fair value as well. For our other credit card receivables that have never been owned by our formerly off-balance-sheet securitization structures, we have not elected the fair value option, and we record such receivables at net realizable value within loans, interest and fees receivable, net on our consolidated balance sheets.
For all of our other debt other than the notes payable underlying our formerly off-balance sheet credit card securitization structures, we have not elected the fair value option. Nevertheless, pursuant to applicable requirements, we include disclosures of the fair value of this other debt to the extent practicable within the disclosures below. Additionally, we have other liabilities, associated with consolidated legacy credit card securitization trusts, that we are required to carry at fair value in our consolidated financial statements, and they also are addressed within the disclosures below.
Where applicable as noted above, we account for our financial assets and liabilities at fair value based upon a three-tiered valuation system. In general, fair values determined by Level 1 inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Fair values determined by Level 2 inputs use inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset
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
December 31,Assets – As of December 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 | $ | — | $ | — | $ | 781,208 | $ | 721,573 | ||||||||
Loans, interest and fees receivable, at fair value | $ | — | $ | — | $ | 4,386 | $ | 4,386 |
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 December 31, 2017 (1) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Carrying Amount of Assets | ||||||||||||
Loans and fees receivable, net for which it is practicable to estimate fair value | $ | — | $ | — | $ | 324,945 | $ | 293,972 | ||||||||
Loans and fees receivable, at fair value | $ | — | $ | — | $ | 11,109 | $ | 11,109 |
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 |
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 our loans, interest and fees receivable included in the above tables, we assess the fair value of these assets based on our estimate of future cash flows net of servicing costs, and to the extent that such cash flow estimates change from period to period, any such changes are considered to be attributable to changes in instrument-specific credit risk.
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 yearyears ended December 31, 20172019 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 | 1,251 | 606 | ||||||
Settlements | (3,171 | ) | (5,395 | ) | ||||
Impact of foreign currency translation | — | (14 | ) | |||||
Balance at December 31, | $ | 4,386 | $ | 6,306 |
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 | 3,456 | 1,587 | |||||
Settlements | (8,049 | ) | (12,335 | ) | |||
Impact of foreign currency translation | 54 | (310 | ) | ||||
Balance at December 31, | $ | 11,109 | $ | 15,648 |
The unrealized gains and losses for assets within the Level 3 category presented in the tables above include changes in fair value that are attributable to both observable and unobservable inputs. Impacts related to foreign currency translation are included as a component of other operating expense on the consolidated statements of operations.operations when recognized.
Net Revaluation of Loans, Interest and Fees Receivable. We record the net revaluation of loans, interest and fees receivable (including those pledged as collateral) in the fees and related income on earning assets category in our consolidated statements of operations, specifically as changes in fair value of loans, interest and fees receivable recorded at fair value. The net revaluation of loans, interest and fees receivable is based on the present value of future cash flows using a valuation model of expected cash flows and the estimated cost to service and collect those cash flows. We estimate the present value of these future cash flows using a valuation model consisting of internally developed estimates of assumptions third-partythird-party market participants would use in determining fair value, including estimates of net collected yield, principal payment rates, expected principal credit loss rates, costs of funds, discount rates and servicing costs. Accrued interestInterest income on receivables underlying our asset classes that are carried at fair value in our consolidated financial statements is recorded in Interest income - Consumer loans, including past due fees in our Consolidated Statements of Operations.
For Level 3 assets carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) quantitative information about the valuation techniques and the inputs used in the fair value measurement as of
December 31,Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurement | Fair Value at December 31, 2019 (in thousands) | Valuation Technique | Unobservable Input | Range (Weighted Average) | |||||||
Loans, interest and fees receivable, at fair value | $ | 4,386 | Discounted cash flows | Gross yield | 27.5% to 59.4% (31.0%) | ||||||
Principal payment rate | 2.2% to 5.5% (2.6%) | ||||||||||
Expected credit loss rate | 10.5% to 39.4% (13.7%) | ||||||||||
Servicing rate | 11.3% to 16.9% (11.9%) | ||||||||||
Discount rate | 14.3% to 14.3% (14.3%) |
Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurement | 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 December 31, 2017 | Valuation Technique | Unobservable Input | Range (Weighted Average) | ||||||
Loans and fees receivable, at fair value | $ | 11,109 | Discounted cash flows | Gross yield | 15.8% to 27.4% (24.5%) | |||||
Principal payment rate | 1.9% to 3.6% (2.6%) | |||||||||
Expected credit loss rate | 9.4% to 10.4% (9.7%) | |||||||||
Servicing rate | 10.2% to 12.3% (10.5%) | |||||||||
Discount rate | 6.0% to 14.2% (12.8%) |
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
December 31,Liabilities – As of December 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 | $ | — | $ | — | $ | 720,687 | $ | 720,687 | ||||||||
Amortizing debt facilities | $ | — | $ | — | $ | 28,522 | $ | 28,522 | ||||||||
Notes payable to related parties | $ | — | $ | — | $ | — | $ | — | ||||||||
Convertible senior notes | $ | — | $ | 16,920 | $ | — | $ | 24,091 | ||||||||
Liabilities carried at fair value | ||||||||||||||||
Notes payable associated with structured financings, at fair value | $ | — | $ | — | $ | 3,920 | $ | 3,920 |
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 December 31, 2017 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Carrying Amount of Liabilities | ||||||||||||
Liabilities not carried at fair value | ||||||||||||||||
Revolving credit facilities | $ | — | $ | — | $ | 160,854 | $ | 160,854 | ||||||||
Amortizing debt facilities | $ | — | $ | — | $ | 65,384 | $ | 65,384 | ||||||||
Senior secured term loan | $ | ��� | $ | — | $ | 40,000 | $ | 40,000 | ||||||||
5.875% convertible senior notes | $ | — | $ | 43,588 | $ | — | $ | 61,393 | ||||||||
Liabilities carried at fair value | ||||||||||||||||
Notes payable associated with structured financings, at fair value | $ | — | $ | — | $ | 9,240 | $ | 9,240 |
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 | $ | — | $ | — | $ | 83,184 | $ | 83,184 | ||||||||
Amortizing debt facilities | $ | — | $ | — | $ | 57,982 | $ | 57,982 | ||||||||
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 |
For our material notes payable, we assess the fair value of these liabilities based on our estimate of future cash flows generated from their underlying credit card receivables collateral, net of servicing compensation required under the note facilities, and to the extent that such cash flow estimates change from period to period, any such changes are considered to be attributable to changes in instrument-specific credit risk. Gains and losses associated with fair value changes for our notes payable associated with structured financing liabilities that are carried at fair value are detailed on our fees and related income on earning assets table within Note 2, “Significant Accounting Policies and Consolidated Financial Statement Components.” For our 5.875% convertible senior notes due 2035 (“5.875% convertible senior notes”), we assess fair value based upon the most recent trade data available from third-party providers. We have seen no data that would suggest thatevaluated the fair value of our other Creditthird party debt by analyzing the expected repayment terms and Other Investments segment debt is materially different from its carrying amount as evidencedcredit spreads included in our recent financing arrangements obtained with similar terms. These recent financing arrangements provide positive evidence that the underlying data used in our assessment of fair value has not changed relative to the general market and therefore the fair value of our debt continues to be the same as the carrying value. See Note 9, “Notes Payable and Variable Interest Entities,” for further discussion on our other notes payable.
For our material Level 3 liabilities carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) a reconciliation of the beginning and ending balances for the yearyears ended December 31, 20172019 and 2016.2018.
Notes Payable Associated with Structured Financings, at Fair Value | ||||||||
2019 | 2018 | |||||||
Balance at January 1, | $ | 5,651 | $ | 9,240 | ||||
Total (gains) losses—realized/unrealized: | ||||||||
Net revaluations of notes payable associated with structured financings, at fair value | (1,731 | ) | (3,589 | ) | ||||
Repayments on outstanding notes payable, net | — | — | ||||||
Balance at December 31, | $ | 3,920 | $ | 5,651 |
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 | (2,315 | ) | (3,773 | ) | |||
Repayments on outstanding notes payable, net | (721 | ) | (4,921 | ) | |||
Ending balance, December 31, | $ | 9,240 | $ | 12,276 |
The unrealized gains and losses for liabilities within the Level 3 category presented in the table above include changes in fair value that are attributable to both observable and unobservable inputs. We provide below a brief description of the valuation techniques used for Level 3 liabilities.
Net Revaluation of Notes Payable Associated with Structured Financings, at Fair Value.
We record the net revaluations of notes payable associated with structured financings, at fair value, in the changes in fair value of notes payable associated with structured financings line item within the fees and related income on earning assets category of our consolidated statements of operations. The legal entity associated with the securitization transaction is consolidated as a VIE as the Company is deemed the primary beneficiary of the entity. The Company is not liable for the full face value of the liability in the VIE so it is carried at fair value based upon amounts the borrower will receive from the legal entity. The net revaluation of these notes is based on the present value of future cash flows utilized in repayment of the outstanding principal and interest under the facilities using a valuation model of expected cash flows net of the contractual service expenses within the facilities. We estimate the present value of these future cash flows using a valuation model consisting of internally developed estimates of assumptionsFor 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 December 31, 20172019 and December 31, 2016:2018:
Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurement | Fair Value at December 31, 2019 (in thousands) | Valuation Technique | Unobservable Input | Weighted Average | |||||||
Notes payable associated with structured financings, at fair value | $ | 3,920 | Discounted cash flows | Gross yield | 27.5 | % | |||||
Principal payment rate | 2.2 | % | |||||||||
Expected credit loss rate | 10.5 | % | |||||||||
Discount rate | 14.3 | % |
Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurement | 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 December 31, 2017 | Valuation Technique | Unobservable Input | Weighted Average | |||||||
Notes payable associated with structured financings, at fair value | $ | 9,240 | Discounted cash flows | Gross yield | 25.9 | % | |||||
Principal payment rate | 2.5 | % | |||||||||
Expected credit loss rate | 9.4 | % | |||||||||
Discount rate | 14.2 | % |
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
December 31,As of December 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 | $ | 644 | $ | 5,280 | ||||
Aggregate fair value of loans, interest and fees receivable that are reported at fair value | $ | 466 | $ | 3,920 | ||||
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) | $ | 1 | $ | 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 | $ | 185 |
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 December 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 | $ | 3,920 | $ | 5,651 |
As of December 31, 2017 | Loans and Fees Receivable at Fair Value | Loans and Fees Receivable Pledged as Collateral under Structured Financings at Fair Value | ||||||
Aggregate unpaid principal balance within loans and fees receivable that are reported at fair value | $ | 4,416 | $ | 11,349 | ||||
Aggregate fair value of loans and fees receivable that are reported at fair value | $ | 1,869 | $ | 9,240 | ||||
Aggregate fair value of receivables carried at fair value that are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies) | $ | 5 | $ | 17 | ||||
Aggregate excess of balance of unpaid principal receivables within loans and fees receivable that are reported at fair value and are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies) over the fair value of such loans and fees receivable | $ | 107 | $ | 369 |
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 December 31, 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 | $ | 9,240 | $ | 12,276 |
7. | |
Property |
Details (in thousands) of our property on our consolidated balance sheets are as follows:
As of December 31, | ||||||||
2019 | 2018 | |||||||
Software | $ | 3,543 | $ | 3,467 | ||||
Furniture and fixtures | 6,431 | 6,307 | ||||||
Data processing and telephone equipment | 7,675 | 7,625 | ||||||
Leasehold improvements | 10,570 | 10,570 | ||||||
Other | 1,156 | 1,156 | ||||||
Total cost | 29,375 | 29,125 | ||||||
Less accumulated depreciation | (26,637 | ) | (25,500 | ) | ||||
Property, net | $ | 2,738 | $ | 3,625 |
As of December 31, | ||||||||
2017 | 2016 | |||||||
Software | $ | 5,542 | $ | 5,194 | ||||
Furniture and fixtures | 6,252 | 6,191 | ||||||
Data processing and telephone equipment | 11,196 | 11,008 | ||||||
Leasehold improvements | 10,651 | 10,638 | ||||||
Total cost | 33,641 | 33,031 | ||||||
Less accumulated depreciation | (30,412 | ) | (29,202 | ) | ||||
Property, net | $ | 3,229 | $ | 3,829 |
Depreciation expense totaled $1.0$1.1 million and $2.2$1.0 million for the years ended December 31, 20172019 and 2016,2018, respectively.
8. | Leases |
We lease premises and certain equipment under cancelable and non-cancelable leases, some of which contain renewal options under various terms. Total rental expense for continuing operations associated with these operating leases was $1.7 million in 20172019 and $1.5$1.7 million in 2016.2018, net of sublease income of $5.1 million and $5.1 million for the years ended December 31, 2019 and 2018, respectively. During the fourth quarter of 2006, we entered into a 15-year lease in Atlanta, Georgia for 335,372 square feet in Atlanta, Georgia (net of space which was surrendered to the landlord through our exercise of a termination option)option and therefore not included in the computed impact of adoption), 255,110254,710 square feet of which we have subleased, and the remainder of which houses our corporate offices. In connection with this lease, we received a $21.2 million construction allowance for the build-out of our new corporate offices. We are amortizing the construction allowance as a reduction of rent expense over the term of the lease. The terms of the sublease arrangements 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 Year ended December 31, | ||||||||
2019 | 2018 | |||||||
Operating lease cost, gross | $ | 6,875 | $ | 6,758 | ||||
Sublease income | (5,133 | ) | (5,080 | ) | ||||
Net Operating lease cost | $ | 1,742 | $ | 1,678 | ||||
Cash paid under operating leases, gross | $ | 10,080 | $ | 9,913 | ||||
Weighted average remaining lease term - months | 29 | |||||||
Weighted average discount rate | 6.9 | % |
As of December 31, 2017, the future minimum rental commitments (in thousands) for all non-cancelable operating leases with initial or remaining terms2019, maturities of more than one year (both gross and net of any sublease income) arelease liabilities were as follows:
Gross Lease Payment | Payments received from Sublease | Net Lease Payment | ||||||||||
2020 | $ | 10,213 | $ | (7,115 | ) | $ | 3,098 | |||||
2021 | 10,221 | (7,315 | ) | 2,906 | ||||||||
2022 | 4,407 | (3,112 | ) | 1,295 | ||||||||
2023 | 126 | — | 126 | |||||||||
2024 | 30 | — | 30 | |||||||||
Thereafter | — | — | — | |||||||||
Total lease payments | 24,997 | (17,542 | ) | 7,455 | ||||||||
Less imputed interest | (2,738 | ) | ||||||||||
Total | $ | 22,259 |
Gross | Sublease Income | Net | ||||||||||
2018 | $ | 9,865 | $ | (6,741 | ) | $ | 3,124 | |||||
2019 | 9,783 | (6,930 | ) | 2,853 | ||||||||
2020 | 9,808 | (7,126 | ) | 2,682 | ||||||||
2021 | 9,832 | (7,327 | ) | 2,505 | ||||||||
2022 | 4,157 | (3,117 | ) | 1,040 | ||||||||
Thereafter | — | — | — | |||||||||
Total | $ | 43,445 | $ | (31,241 | ) | $ | 12,204 |
In addition, we occasionally lease certain equipment under cancelable and non-cancelable leases, which are accounted for as capital leases in our consolidated financial statements. As of December 31, 2017,2019, we had no material non-cancelable capital leases with initial or remaining terms of more than one year.
9. | Notes Payable and Variable Interest Entities |
The Company contributes certain receivables to VIEs. These entities are sometimes established to facilitate 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.
The following table presents a summary of VIEs in which we had continuing involvement or held a variable interest (in millions):
As of | ||||||||
December 31, 2019 | December 31, 2018 | |||||||
Unrestricted cash and cash equivalents | $ | 78.7 | $ | 16.8 | ||||
Restricted cash and cash equivalents | $ | 25.9 | $ | 61.0 | ||||
Loans, interest and fees receivable, at fair value | $ | 3.9 | $ | 5.7 | ||||
Loans, interest and fees receivable, gross | $ | 857.2 | $ | 403.4 | ||||
Allowances for uncollectible loans, interest and fees receivable | $ | (168.8 | ) | $ | (57.4 | ) | ||
Deferred revenue | $ | (40.7 | ) | $ | (13.2 | ) | ||
Total Assets held by VIEs | $ | 756.2 | $ | 416.3 | ||||
Notes Payable, at face value held by VIEs | $ | 701.1 | $ | 366.7 | ||||
Notes Payable, at fair value held by VIEs | $ | 3.9 | $ | 5.7 | ||||
Maximum exposure to loss due to involvement with VIEs | $ | 654.3 | $ | 438.5 |
Notes Payable Associated with Structured Financings, at Fair Value
Scheduled (in millions) in the table below are (1)(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 | ||||||||
December 31, 2019 | December 31, 2018 | |||||||
Securitization facility (stated maturity of December 2021), outstanding face amount of $101.3 million as of December 31, 2019 ($101.3 million as of December 31, 2018) bearing interest at a weighted average 6.9% interest rate, based upon LIBOR, at December 31, 2019 (7.5% at December 31, 2018), which is secured by credit card receivables and restricted cash aggregating $3.9 million as of December 31, 2019 ($5.7 million as of December 31, 2018) in carrying amount | $ | 3.9 | $ | 5.7 |
Carrying Amounts at Fair Value as of | |||||||
December 31, 2017 | December 31, 2016 | ||||||
Amortizing securitization facility (stated maturity of December 2021), outstanding face amount of $101.3 million as of December 31, 2017 ($102.0 million as of December 31, 2016) bearing interest at a weighted average 6.7% interest rate at December 31, 2017 (6.1% at December 31, 2016), which is secured by credit card receivables and restricted cash aggregating $9.2 million as of December 31, 2017 ($12.3 million as of December 31, 2016) in carrying amount | $ | 9.2 | $ | 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 $9.2$3.9 million in fair value of the structured financing notefacility indicated 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
December 31,As of | ||||||||
December 31, 2019 | December 31, 2018 | |||||||
Revolving credit facilities at a weighted average interest rate equal to 6.0% at December 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 $740.4 million as of December 31, 2019 ($468.8 million at December 31, 2018) | ||||||||
Revolving credit facility, not to exceed $55.0 million (expiring November 1, 2021) (1) (2) (3) | $ | 39.1 | $ | 30.0 | ||||
Revolving credit facility, not to exceed $50.0 million (expiring October 30, 2022) (2) (3) (4) (5) | 40.5 | 49.9 | ||||||
Revolving credit facility, not to exceed $20.0 million (expiring March 31, 2020) (2) (4) (5) | 19.4 | — | ||||||
Revolving credit facility, not to exceed $70.0 million (expiring February 8, 2022) (3) (4) (5) (6) | 25.8 | 61.0 | ||||||
Revolving credit facility, not to exceed $100.0 million (expiring June 11, 2021) (3) (4) (5) (6) | — | 80.5 | ||||||
Revolving credit facility, not to exceed $15.0 million (expiring July 15, 2021) (2) (4) (5) | 14.6 | — | ||||||
Revolving credit facility, not to exceed $100.0 million (expiring November 16, 2020) (3) (4) (5) (6) | — | 8.0 | ||||||
Revolving credit facility, not to exceed $167.3 million (expiring November 15, 2023) (3) (4) (5) (6) | 167.3 | 167.3 | ||||||
Revolving credit facility, not to exceed $200.0 million (expiring December 15, 2022) (3) (4) (5) (6) | 200.0 | — | ||||||
Revolving credit facility, not to exceed $200.0 million (expiring May 15, 2024) (3) (4) (5) (6) | 200.0 | — | ||||||
Revolving credit facility, not to exceed $15.0 million (expiring December 21, 2020) (2) (3) (4) (5) | 8.6 | — | ||||||
Revolving credit facility, not to exceed $50.0 million (expiring September 19, 2021) (2) (3) (4) (5) | 15.0 | — | ||||||
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 | ||||||
Unsecured term debt (expiring August 26, 2024) with an annual rate equal to 8.0% (3) | 17.4 | — | ||||||
Amortizing debt facility (expiring September 30, 2021) with an annual rate equal to 6.2% (2) (3) (4) (5) | 10.0 | — | ||||||
Senior secured term loan to related parties (paid-off on December 27, 2019) that was secured by certain assets of the Company with an annual rate equal to 9.0% (3) | — | 40.0 | ||||||
Total notes payable before unamortized debt issuance costs and discounts | 758.9 | 437.9 | ||||||
Unamortized debt issuance costs and discounts | (9.7 | ) | (7.0 | ) | ||||
Total notes payable outstanding | $ | 749.2 | $ | 430.9 |
As of | |||||||
December 31, 2017 | December 31, 2016 | ||||||
Revolving credit facilities at a weighted average interest rate equal to 7.8% at December 31, 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 $216.0 million as of December 31, 2017 ($127.9 million at December 31, 2016) | |||||||
Revolving credit facility, not to exceed $40.0 million (expiring November 1, 2019) (1) | 24.8 | 29.2 | |||||
Revolving credit facility, not to exceed $50.0 million (expiring October 30, 2019) (2) (3) | 49.4 | 34.7 | |||||
Revolving credit facility, not to exceed $12.0 million (expiring December 21, 2019) (2) (3) | 3.8 | — | |||||
Revolving credit facility, not to exceed $20.0 million (expiring December 31, 2019) (2) (3) | 19.8 | 19.5 | |||||
Revolving credit facility, not to exceed $90.0 million (expiring February 8, 2022) (2) (4) | 65.0 | — | |||||
Amortizing facilities at a weighted average interest rate equal to 6.0% at December 31, 2017 (5.4% at December 31, 2016) secured by certain receivables and restricted cash with a combined aggregate carrying amount of $77.9 million as of December 31, 2017 ($69.9 million as of December 31, 2016) | |||||||
Amortizing debt facility (repaid in June 2017) (2) (3) (5) | — | 20.4 | |||||
Amortizing debt facility (repaid in September 2017) (2) (3) | — | 9.7 | |||||
Amortizing debt facility (expiring March 31, 2018) (2) (3) (5) | 3.7 | 14.6 | |||||
Amortizing debt facility (expiring June 30, 2018) (2) (3) (5) | 18.3 | — | |||||
Amortizing debt facility (expiring December 12, 2018) (2) (3) | 6.0 | 6.0 | |||||
Amortizing debt facility (expiring September 14, 2018) (2) (3) | 7.5 | 7.5 | |||||
Amortizing debt facility (expiring November 30, 2018) (2) (3) (5) | 20.5 | — | |||||
Amortizing debt facility (expiring April 22, 2019) (2) (3) (5) | 10.0 | — | |||||
Other facilities | |||||||
Senior secured term loan from related parties (expiring November 21, 2018) that is secured by certain assets of the Company with an annual interest rate equal to 9.0% (4) | 40.0 | 40.0 | |||||
Total notes payable before unamortized debt issuance costs and discounts | 268.8 | 181.6 | |||||
Unamortized debt issuance costs and discounts | 2.6 | 0.4 | |||||
Total notes payable outstanding, net | $ | 266.2 | $ | 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) | See below for additional information. |
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. |
(5) | |
(6) | Creditors do not have recourse against the general assets of the Company but only to the collateral within the VIEs. |
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”).Dove. The agreement provides for a senior secured term loan facility in an amount of up to $40.0 million at any time outstanding. TheOn December 27, 2019, the Company issued 400,000 shares (aggregate initial liquidation preference of $40 million) of its Series A Preferred Stock in exchange for full satisfaction of the $40.0 million that the Company owed Dove under the Loan and Security Agreement was fully drawn with $40.0 million outstanding as of December 31, 2017. In November 2017, the agreement was amended to extend the maturity date of the term loan to November 21, 2018. All other terms remain unchanged.
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 $40.5 million was drawn as of December 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 3.0%. The facility matures on October 30, 2022 and 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 facility 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 an initial $40.0 million borrowing limit available to the extent of outstanding eligible principal receivables of our CAR subsidiary (of which $39.1 million was drawn as of December 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 periods subsequent to October 2016, we amended the original agreement to either extend the maturity date and/or expand the capacity of this revolving credit facility. As of December 31, 2019, the borrowing limit was $55.0 million and the maturity was November 1, 2021. There were no other material changes to the existing terms or conditions as a result of these amendments and the new maturity date and borrowing limit are 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 (subsequently reduced to $70.0 million) of such notes (of which $65.0$25.8 million was outstanding as of December 31, 2017)2019) to an unaffiliated third party pursuant to a facility that can be drawn upon to the extent of outstanding eligible receivables. Interest ratesThe interest rate on the notes range from 8.0% tois fixed at 14.0%.
In December 2017, we (through a wholly owned subsidiary) entered a revolving credit facility with a (as subsequently amended) $15.0 million revolving borrowing limit that is available to the extent of outstanding eligible principal receivables (of which $8.6 million was drawn as of December 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 3.5%. The facility matures on December 21, 2020 and is subject to certain affirmative covenants, including payment, delinquency and charge-off tests, 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.
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 $0.0 million was outstanding as of December 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 3.75% and LIBOR plus 4.875%, respectively. The facilities mature on June 11, 2021 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 September 2018, we (through a wholly owned subsidiary) entered a revolving credit facility with a (as subsequently amended) $50.0 million revolving borrowing limit that is available to the extent of outstanding eligible principal receivables (of which $15.0 million was drawn as of December 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 6.5%. The loan is subject to certain affirmative covenants, including a charge-off and delinquency 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.
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%.
In June 2019, we (through a wholly owned subsidiary) entered a revolving credit facility with a $15.0 million revolving borrowing limit that is available to the extent of outstanding eligible principal receivables (of which $14.6 million was drawn as of December 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 the prime rate. The note is guaranteed by Atlanticus.
In June 2019, we sold $200.0 million of ABS secured by certain credit card receivables. A portion of the proceeds from the sale was used to pay-down our existing facilities associated with our credit card receivables. The terms of the ABS allow for a two-year revolving structure with a subsequent 12-month to 18-month amortization period. The weighted average interest rate on the securities is fixed at 5.37%.
In August 2019, we repurchased $54.4 million in face amount of our outstanding convertible senior notes for $16.3 million in cash (including accrued interest) and the issuance of a $17.4 million term note, which bears interest at a fixed rate of 8.0% and is due in August 2024. See Note 10 "Convertible Senior Notes" for additional information.
In September 2019, we (through a wholly owned subsidiary) entered a term facility with a $30.0 million revolving borrowing limit (of which $10.0 was drawn as of December 31, 2019) that is available to the extent of outstanding eligible principal receivables. 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 4.5%. The facility matures on September 30, 2021 and 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, which is required to maintain certain minimum liquidity levels.
In November 2019, we sold $200.0 million of ABS secured by certain credit card receivables. A portion of the proceeds from the sale was used to pay-down our existing facilities associated with our credit card receivables and the remaining proceeds were available to fund the acquisition of future receivables. The terms of the ABS allow for a three-year revolving structure with a subsequent 12-month to 18-month amortization period. The weighted average interest rate on the securities is fixed at 4.91%.
As of December 31, 2019, we are in compliance with the covenants underlying our various notes payable.
10. | |
Convertible Senior Notes |
In November 2005, we issued $300.0$300.0 million aggregate principal amount of 5.875% convertible senior notes due November 30,2035 (“5.875% convertible senior notes”). The 5.875% convertible senior notes are unsecured, subordinate to existing and future secured obligations and structurally subordinate to existing and future claims of our subsidiaries’ creditors. These notes (net of repurchases since the issuance dates) are reflected within convertible senior notes on our consolidated balance sheets. No put rights exist under our 5.875% convertible senior notes.
On August 26, 2019, we repurchased $5.0$54.4 million aggregate principalin face amount of our outstanding 5.875% convertible senior notes for $2.3$16.3 million plusin cash (including accrued interest) and the issuance of a $17.4 million term note, which bears interest from unrelated third parties.at a fixed rate of 8.0% and is due in August 2024. The purchaserepurchase resulted in a gain of $1.2approximately $5.1 million (net of the convertible senior notes’ applicable share of deferred costs, which were written off in connection with the repurchases)repurchase). Upon acquisition, the notes were retired.
The following summarizes (in thousands) components of our consolidated balance sheets associated with our convertible senior notes:
As of | ||||||||
December 31, 2019 | December 31, 2018 | |||||||
Face amount of convertible senior notes | $ | 33,839 | $ | 88,280 | ||||
Discount | (9,748 | ) | (26,138 | ) | ||||
Net carrying value | $ | 24,091 | $ | 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 | |||||||
December 31, 2017 | December 31, 2016 | ||||||
Face amount of 5.875% convertible senior notes | $ | 88,280 | $ | 88,280 | |||
Discount | (26,887 | ) | (27,489 | ) | |||
Net carrying value | $ | 61,393 | $ | 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 | $ | — | $ | — |
During certain periods and subject to certain conditions, the remaining $88.3$33.8 million of outstanding 5.875% convertible senior notes as of December 31, 20172019 (as referenced in the table above) are convertible by holders into cash and, if applicable, shares of our common stock at an adjusted effective conversion rate of 40.63 shares of common stock per $1,000 principal amount of notes, subject to further adjustment; the conversion rate is based on an adjusted conversion price of $24.61 per share of common stock. Upon any conversion of the notes, we will deliver to holders of the notes cash of up to $1,000 per $1,000 aggregate principal amount of notes and, at our option, either cash or shares of our common stock in respect of the remainder of the conversion obligation, if any. The maximum number of shares of common stock that any note holder may receive upon conversion is fixed at 40.63 shares per $1,000 aggregate principal amount of notes, and we have a sufficient number of authorized shares of our common stock to satisfy this conversion obligation. We are required to pay contingent interest on the notes during a 6-month period if the average trading price of the notes is above a specified level. Thus far we have not paid any contingent interest on these notes. In addition, holders of the notes may require us to repurchase the notes for cash upon certain specified events.
In conjunction with the offering of the 5.875% convertible senior notes, we entered into a 30-year share lending agreement with Bear, Stearns International Limited (“BSIL”) and Bear, Stearns & Co. Inc, as agent for BSIL, pursuant to which we lent BSIL 5,677,950 shares of our common stock in exchange for a fee of $0.001 per loaned share upon consummation of the agreement. We exclude the loaned shares from earnings per share computations.stock. The obligations of Bear Stearns were assumed by JP Morgan in 2008. JP Morgan (as the guarantor of the obligation) is required to return the loaned shares to us at the end of the 30-year term of the share lending agreement or earlier upon the occurrence of specified events. Such events include the bankruptcy of JP Morgan, its failure to make payments when due, its failure to post collateral when required or return loaned shares when due, notice of its inability to perform obligations, or its untrue representations. If an event of default occurs, then the borrower (JP Morgan) may settle the obligation in cash. Further, in the event that JP Morgan’s credit rating drops below A/A2, it would be required to post collateral for the market value of the lent shares ($3.513.1 million based on the 1,459,233 shares remaining outstanding under the share lending arrangement as of December 31, 2017)2019). JP Morgan has agreed to use the loaned shares for the purpose of directly or indirectly facilitating the hedging of our convertible senior notes by the holders thereof or for such other purpose as reasonably determined by us. We deem it highly remote that any event of default will occur and therefore cash settlement, while an option, is an unlikely scenario.
We analogize the share lending agreement to a prepaid forward contract, which we have evaluated under applicable accounting guidance. We determined that the instrument was not a derivative in its entirety and that the embedded derivative would not require separate accounting. The net effect on shareholders’ equity of the shares lent pursuant to the share lending agreement, which includes our requirement to lend the shares and the counterparties’ requirement to return the shares, is the fee received upon our lending of the shares.
Accounting for Convertible Senior Notes
Under applicable accounting literature, the accounting for the issuance of the notes includes (1) allocation of the issuance proceeds between the notes and additional paid-in capital, (2) establishment of a discount to the face amount of the notes equal to the portion of the issuance proceeds that are allocable to additional paid-in capital, (3) creation of a deferred tax liability related to the discount on the notes, and (4) an allocation of issuance costs between the portion of such costs considered to be associated with the notes and the portion of such costs considered to be associated with the equity component of the notes’ issuances (i.e., additional paid-in capital). We are amortizing the discount to the remaining face amount of the notes into interest expense over the expected life of the notes, which results in a corresponding release of associated deferred tax liability. Amortization for the years ended December 31, 20172019 and 20162018 totaled $0.5 million and $0.5$0.6 million, respectively. Actual incurred interest (based on the contractual interest rates within the two convertible senior notes series)rate) totaled $5.2$3.9 million and $5.3$5.2 million for the years ended December 31, 20172019 and 2016,2018, respectively. We will amortize the discount remaining at December 31, 20172019 into interest expense over the expected term of the 5.875% convertible senior notes (currently expected to be October 2035). The weighted average effective interest rate for the 5.875% convertible senior notes was 9.2% for all periods presented.
11. | |
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 allowfloor plan financing allows 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-partythird-party originating and other financial institutions, we have pledged security (collateral) related to their issuance of consumer credit and purchases thereunder, of which $10.8$15.1 million remains pledged as of December 31, 2017 2019to support various ongoing contractual obligations.
Under agreements with third-partythird-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, “Leases”.
Litigation
We are involved in various other legal proceedings that are incidental to the conduct of our business, none of whichbusiness. There are currently no pending legal proceedings that are expected to be material to us.
12. | |
Income Taxes |
Deferred tax assets and liabilities reflect the effects of tax losses, credits, and the future income tax effects of temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The current and deferred portions (in thousands) of federal, foreign and state income tax benefit or expense are as follows:
For the Year Ended December 31, | ||||||||
2019 | 2018 | |||||||
Federal income tax (expense) benefit: | ||||||||
Current tax benefit (expense) | $ | 279 | $ | 5,932 | ||||
Deferred tax (expense) benefit | (5,395 | ) | (1,159 | ) | ||||
Total federal income tax (expense) benefit | $ | (5,116 | ) | $ | 4,773 | |||
Foreign income tax benefit (expense): | ||||||||
Current tax benefit (expense) | $ | 25 | $ | (53 | ) | |||
Deferred tax (expense) benefit | (15 | ) | 3 | |||||
Total foreign income tax benefit (expense) | $ | 10 | $ | (50 | ) | |||
State and other income tax (expense) benefit: | ||||||||
Current tax expense | $ | (709 | ) | $ | (3 | ) | ||
Deferred tax benefit (expense) | 262 | (590 | ) | |||||
Total state and other income tax expense | $ | (447 | ) | $ | (593 | ) | ||
Total income tax (expense) benefit | $ | (5,553 | ) | $ | 4,130 |
For the Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Federal income tax benefit: | ||||||||
Current tax (expense) benefit | $ | (113 | ) | $ | 59 | |||
Deferred tax benefit | 6,187 | 5,884 | ||||||
Total federal income tax benefit | $ | 6,074 | $ | 5,943 | ||||
Foreign income tax expense: | ||||||||
Current tax expense | $ | (94 | ) | $ | (41 | ) | ||
Deferred tax benefit | 8 | 3 | ||||||
Total foreign income tax expense | $ | (86 | ) | $ | (38 | ) | ||
State and other income tax benefit: | ||||||||
Current tax benefit (expense) | $ | 16 | $ | (116 | ) | |||
Deferred tax benefit | 374 | 226 | ||||||
Total state and other income tax benefit | $ | 390 | $ | 110 | ||||
Total income tax benefit | $ | 6,378 | $ | 6,015 |
We experienced an effective income tax benefit ratesexpense rate of 13.5% and 48.7%17.5% for the yearsyear ended December 31, 2017, and 2016, respectively.2019, compared to a negative effective income tax expense rate of 118.6% for the year ended December 31, 2018. Our effective income tax benefitexpense rate for the year ended December 31, 2017 is2019 was below the statutory rate principally due to (1) interest and penalties that we accrued on unpaidas a result of the release of federal tax liabilities and (2) our establishment of valuation allowances against our net federal deferred tax assets associated with our net loss incurred in this year.allowances. Our negative effective income tax benefitexpense rate for the year ended December 31, 2016 is above2018 was significantly below the statutory rate principally due to incomeas a result of our U.K. subsidiary (1) that is not subjectsettlement during 2018 of an IRS examination of our 2008 tax return and the carryback of its resulting net operating losses to pre-2008 tax years. The settlement resulted in the U.S.,a decrease in our federal tax valuation allowance and (2) the U.K.net reductions in our accruals of interest on liabilities for uncertain tax on which was fully offset by a release of U.K. valuation allowances.
We net against ourreport income tax benefit line item on our consolidated statements of operationstax-related interest and penalties (including those associated with our tax liabilities (includingboth our accrued liabilities for uncertain tax positions and our unpaid tax liabilities). within our income tax line item on our consolidated statements of operations. We likewise report the reversal of suchincome tax-related interest and penalties within the income tax benefitsuch 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 years ended December 31, 2017 and 2016, $0.5 million and $0.4 million, respectively,For 2019, we reported a net accrual of net income tax-related interest and penalties are netted against those years’of $0.1 million within our income tax benefit line items.
In December 2014, we reached a settlement with the IRS concerning the tax treatment of net operating losses we incurred in 2007 and 2008 and carried back to obtain refunds of federal income taxes paid in earlier years dating back to 2003. Our net unpaid income tax assessment associated with that settlement was $7.4 million at December 31, 2017; this amount excludes unpaid interest and penalties on the tax assessment, the accruals for which aggregated $4.1 million at December 31, 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. During the fourth quarter of 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 (such $3.7 million remaining unpaid assessment relating to the 2006 year to which we had originally carried back the aforementioned net operating losses). In July 2018, we paid $5.4 million to the IRS to cover the $3.7 million unpaid income tax assessment and most of the interest that had accrued thereon. Subsequently, during the three months ended September 30, 2018, the IRS refunded $0.5 million of our $5.4 million payment, and in 2019, we paid $0.7 million to the IRS to cover the interest on the 2006 income tax liability. Although we have paid all assessed income taxes related to this matter, we still have an outstanding accrued liability for failure-to-pay penalties (and accrued interest thereon) related to this matter. We are pursuing complete abatement of the subjectfailure-to-pay penalties of $0.9 million, and once this matter underlying our amended return claims and submitted supplemental information to address matters on whichis resolved through either abatement or payment, we expect the IRS Appeals Officer needed additional support.to remove the aforementioned lien in due course.
The following table reconciles our effective income tax expense or benefit rates for 20172019 and 2016:2018:
For the Year Ended December 31, | ||||||||
2019 | 2018 | |||||||
Statutory expense rate | 21.0 | % | 21.0 | % | ||||
Increase (decrease) in statutory tax expense rate resulting from: | ||||||||
Federal valuation allowance | (4.4 | ) | (132.0 | ) | ||||
Global intangible low-taxed income | 0.8 | 9.6 | ||||||
Interest and penalties related to uncertain tax positions and IRS settlement adjustment | 0.6 | (27.2 | ) | |||||
Foreign taxes, net of valuation allowance | (0.5 | ) | (8.2 | ) | ||||
Permanent and other prior year true ups and tax effect of non-controlling interest | (1.1 | ) | 4.7 | |||||
State taxes, net of valuation allowance | 1.1 | 13.5 | ||||||
Effective expense (benefit) rate | 17.5 | % | (118.6 | )% |
For the Year Ended December 31, | ||||||
2017 | 2016 | |||||
Statutory benefit rate | 35.0 | % | 35.0 | % | ||
Increase (decrease) in statutory tax benefit rate resulting from: | ||||||
Changes in valuation allowances | (12.7 | ) | 6.2 | |||
Interest and penalties related to uncertain tax positions | (0.9 | ) | (0.1 | ) | ||
Foreign income taxes | 0.6 | 7.5 | ||||
Permanent and other prior year true ups | (0.4 | ) | (0.5 | ) | ||
Impact of change in federal tax rate | (8.7 | ) | — | |||
State and other income taxes, net | 0.6 | 0.6 | ||||
Effective benefit rate | 13.5 | % | 48.7 | % |
As of December 31, 20172019 and December 31, 2016,2018, the respective significant components (in thousands) of our deferred tax assets and liabilities were:
As of December 31, | ||||||||
2019 | 2018 | |||||||
Deferred tax assets: | ||||||||
Software development costs/fixed assets | $ | — | $ | 108 | ||||
Goodwill and intangible assets | 113 | 895 | ||||||
Provision for loan loss | 36,172 | 19,479 | ||||||
Equity-based compensation | 792 | 748 | ||||||
Accrued expenses | 386 | 307 | ||||||
Accruals for state taxes and interest associated with unrecognized tax benefits | 108 | 87 | ||||||
Federal net operating loss carry-forward | 18,643 | 44,485 | ||||||
Minimum tax credit carry-forward | 520 | 1,015 | ||||||
Foreign net operating loss carry-forward | 537 | 256 | ||||||
Other | 40 | 151 | ||||||
State tax benefits, primarily from net operating losses | 40,937 | 42,318 | ||||||
Deferred tax assets, gross | $ | 98,248 | $ | 109,849 | ||||
Valuation allowances | (39,161 | ) | (40,830 | ) | ||||
Deferred tax assets net of valuation allowance | $ | 59,087 | $ | 69,019 | ||||
Deferred tax liabilities: | ||||||||
Prepaid expenses and other | $ | (1,217 | ) | $ | (210 | ) | ||
Software development costs/fixed assets | (176 | ) | — | |||||
Equity in income of equity-method investee | (1,154 | ) | (1,092 | ) | ||||
Credit card fair value election differences | (21,513 | ) | (21,021 | ) | ||||
Market discount on loans | (29,834 | ) | (21,749 | ) | ||||
Deferred costs | (542 | ) | (469 | ) | ||||
Convertible senior notes | (9,309 | ) | (22,106 | ) | ||||
Cancellation of indebtedness income | — | (1,882 | ) | |||||
Deferred tax liabilities, gross | $ | (63,745 | ) | $ | (68,529 | ) | ||
Deferred tax (liabilities) assets, net | $ | (4,658 | ) | $ | 490 |
As of December��31, | ||||||||
2017 | 2016 | |||||||
Deferred tax assets: | ||||||||
Software development costs/fixed assets | $ | 83 | $ | — | ||||
Goodwill and intangible assets | 1,801 | 3,798 | ||||||
Provision for loan loss | 16,320 | 18,353 | ||||||
Equity-based compensation | 604 | 670 | ||||||
Accrued expenses | 113 | 1,678 | ||||||
Accruals for state taxes and interest associated with unrecognized tax benefits | 78 | 286 | ||||||
Federal net operating loss carry-forward | 49,098 | 70,778 | ||||||
Alternative minimum tax credit carry-forward | 2,005 | 2,145 | ||||||
Foreign net operating loss carry-forward | 362 | 374 | ||||||
State tax benefits | 44,643 | 35,409 | ||||||
Deferred tax assets, gross | $ | 115,107 | $ | 133,491 | ||||
Valuation allowances | (48,242 | ) | (33,924 | ) | ||||
Deferred tax assets net of valuation allowance | $ | 66,865 | $ | 99,567 | ||||
Deferred tax liabilities: | ||||||||
Prepaid expenses and other | $ | (194 | ) | $ | (184 | ) | ||
Software development costs/fixed assets | — | (157 | ) | |||||
Equity in income of equity-method investee | (1,054 | ) | (1,455 | ) | ||||
Other | (511 | ) | (58 | ) | ||||
Credit card fair value election differences | (32,464 | ) | (42,939 | ) | ||||
Deferred costs | (466 | ) | (696 | ) | ||||
Convertible senior notes | (20,098 | ) | (28,921 | ) | ||||
Cancellation of indebtedness income | (9,841 | ) | (29,491 | ) | ||||
Deferred tax liabilities, gross | $ | (64,628 | ) | $ | (103,901 | ) | ||
Deferred tax assets (liabilities), net | $ | 2,237 | $ | (4,334 | ) |
We undertook a detailed review of our deferred taxes and determined that a valuation allowance was required for certain deferred tax assets in the U.S. for states and various foreign jurisdictions (including U.S. territories).in the U.K. We reduce our deferred tax assets by a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible. In making our valuation allowance determinations, we consider all available
Certain of our deferred tax assets relate to federal, foreign and state net operating losses, capital losses, and credits, as noted in the above table, and we have no other net operating losses, capital losses, or credit carry-forwardscarryforwards other than those noted herein. We have recorded a federal deferred tax asset of $49.1$18.0 million reflecting the tax benefit of(based on federal net operating loss and capital loss carryforwards of $85.6 million, which expire in varying amounts between 2029 and 2033.
Our subsidiaries file federal, state and/or foreign income tax returns. In the normal course of our business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the U.S., the U.K., and various U.S. states and territories. With a few exceptions of a non-material nature and considering our 2008-related settlement with the exception of our 2008 tax-settlement-related claimsIRS discussed previously, we are no longer subject to federal, state, local, or foreign income tax examinations for years prior to 2013.2015.
Reconciliations (in thousands) of our unrecognized tax benefits from the beginning to the end of 20172019 and 2016,2018, respectively, are as follows:
2019 | 2018 | |||||||
Balance at January 1, | $ | (414 | ) | $ | (373 | ) | ||
Reductions based on tax positions related to prior years | 13 | 51 | ||||||
Additions based on tax positions related to the current year | (83 | ) | (71 | ) | ||||
Interest and penalties accrued | (29 | ) | (21 | ) | ||||
Balance at December 31, | $ | (513 | ) | $ | (414 | ) |
2017 | 2016 | |||||||
Balance at January 1, | $ | (818 | ) | $ | (1,798 | ) | ||
Reductions based on tax positions related to prior years | 583 | 1,167 | ||||||
Additions based on tax positions related to the current year | (87 | ) | (82 | ) | ||||
Interest and penalties accrued | (51 | ) | (105 | ) | ||||
Balance at December 31, | $ | (373 | ) | $ | (818 | ) |
Further, our unrecognized tax benefits that, if recognized, would affect the effective tax rate are not material at only $0.5 million and $0.4 million and $0.8 million at December 31, 2017,2019, and 2016,2018, respectively.
13. | |
Net |
We compute net income (loss) attributable to controlling interests per common share by dividing net income (loss) attributable to controlling interests by the weighted-average number of shares of common sharesstock (including participating securities) outstanding during the period, as discussed below. Diluted computations applicable in financial reporting periods in which we report income reflect the potential dilution to the basic income per share of common sharestock computations that could occur if securities or other contracts to issue common stock were exercised, were converted into common stock or were to result in the issuance of common stock that would share in our results of operations. In performing our net income (loss) attributable to controlling interests per share of common sharestock computations, we apply accounting rules that require us to include all unvested stock awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of shares outstanding in our basic and diluted calculations. Common stock and certain unvested share-based payment awards earn dividends equally, and we have included all outstanding restricted stock awards in our basic and diluted calculations for current and prior periods.
The following table sets forth the computations of net lossincome attributable to controlling interests per share of common sharestock (in thousands, except per share data):
For the Year Ended December 31, | ||||||||
2019 | 2018 | |||||||
Numerator: | ||||||||
Net income attributable to controlling interests | $ | 26,443 | $ | 7,856 | ||||
Preferred stock dividends and accretion | (1,153 | ) | — | |||||
Net income attributable to common shareholders | $ | 25,290 | $ | 7,856 | ||||
Denominator: | ||||||||
Basic (including unvested share-based payment awards) (1) | 14,499 | 13,927 | ||||||
Effect of dilutive stock compensation arrangements | 774 | 75 | ||||||
Diluted (including unvested share-based payment awards) (1) | 15,273 | 14,002 | ||||||
Net income attributable to common shareholders per share—basic | $ | 1.74 | $ | 0.56 | ||||
Net income attributable to common shareholders per share—diluted | $ | 1.66 | $ | 0.56 |
For the Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Numerator: | ||||||||
Net loss attributable to controlling interests | $ | (40,781 | ) | $ | (6,335 | ) | ||
Denominator: | ||||||||
Basic (including unvested share-based payment awards) (1) | 13,925 | 13,867 | ||||||
Effect of dilutive stock compensation arrangements (2) | 15 | 70 | ||||||
Diluted (including unvested share-based payment awards) (1) | 13,940 | 13,937 | ||||||
Net loss attributable to controlling interests per common share—basic | $ | (2.93 | ) | $ | (0.46 | ) | ||
Net loss attributable to controlling interests per common share—diluted | $ | (2.93 | ) | $ | (0.46 | ) |
(1) | Shares related to unvested share-based payment awards included in our basic and diluted share counts were |
As their effects were anti-dilutive, we excluded stock options to purchase 0.5 million and 2.9 million shares from our net income attributable to controlling interests per share of common stock calculations for the years ended December 31, 2019 and 2018, respectively. Additionally, as their effects were anti-dilutive, we excluded all shares associated with our Series A Preferred Stock. See Note 16 "Related Party Transactions" for a further discussion of our Series A Preferred Stock.
For the years ended
December 31,14. | Stock-Based Compensation |
We currently have
two stock-based compensation plans, the Second Amended and Restated Employee Stock Purchase Plan (the “ESPP”) and theExercises and vestings under our stock-based compensation plans resulted in $0 inno income tax-related charges to additional paid-in capital during the yearyears ended
Restricted Stock and Restricted Stock Unit Awards
During the yearyears ended December 31, 2017 2019and 2016,2018, we granted 102,000229,500 and
Stock Options
Our Fourth Amended 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 maymust be less than, equal to or greater than the market price on the date the option is granted. The option period may not exceed 510 years from the date of grant. The vesting requirements for options could range from 0 to 5 years.are determined by the Compensation Committee of the Board of Directors. We had expense of $0.9$0.7 million and $0.8$0.6 million related to stock option-related compensation costs during the years ended December 31, 2017 2019and 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 | (469,701 | ) | $ | 2.59 | ||||||||||||
Cancelled/Forfeited | (14,000 | ) | $ | 3.13 | ||||||||||||
Outstanding at December 31, 2019 | 2,687,499 | $ | 3.66 | 2.2 | $ | 14,386,956 | ||||||||||
Exercisable at December 31, 2019 | 1,076,836 | $ | 3.50 | 1.5 | $ | 5,930,463 |
December 31, 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 | (7,333 | ) | $ | 3.04 | ||||||||
Outstanding at December 31, 2017 | 2,619,334 | $ | 3.04 | 3.3 | $ | 17,312 | ||||||
Exercisable at December 31, 2017 | 794,871 | $ | 2.92 | 2.1 | $ | 17,312 |
We had $0.9$0.5 million and $0.7$1.2 million of unamortized deferred compensation costs associated with non-vested stock options as of December 31, 2017 2019and 2016, December 31, 2018, respectively.
15. | |
Employee Benefit Plans |
We maintain a defined contribution retirement plan (“401(k) plan”) for our U.S. employees that provides for a matching contribution by us. All full time U.S. employees are eligible to participate in the 401(k) plan. Our U.K. credit card subsidiary offers eligible employees membership in a Group Personal Pension Plan which is set up with Friends Provident. This plan is a defined contribution plan in which all permanent employees who have completed 3 months of continuous service are eligible to join the plan. Company matching contributions are available to U.K. employees who contribute a minimum of 3% of their salaries under our Group Personal Pension Plan and to U.S. employees who participate in our 401(k) plan. We made matching contributions under our U.S. and U.K. plans of $272,005$285,618 and $307,361$285,477 in 20172019 and 2016,2018, respectively.
Also, all employees, excluding executive officers, are eligible to participate in the ESPP. Under the ESPP, employees can elect to have up to 10% of their annual wages withheld to purchase our common stock up to a fair market value of $10,000. The amounts deducted and accumulated by each participant are used to purchase shares of common stock on or as promptly as practicable after the last business day of each month. The price of stock purchased under the ESPP is approximately 85% of the fair market value per share of our common stock on the purchase date. Employees contributed $35,593$108,466 to purchase 16,95419,641 shares of common stock in 20172019 and $28,541$51,593 to purchase 11,05323,681 shares of common stock in 20162018 under the ESPP. The ESPP covers up to 150,000100,000 shares of common stock. Our charge to expense associated with the ESPP was $22,590$31,954 and $16,930$28,629 in 20172019 and 2016,2018, respectively.
16. | |
Related Party Transactions |
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 adjusted to 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 $26,629$16,627 and $26,103$18,089 for 20172019 and 2016,2018, respectively. The aggregate amount of payments required under the sublease from January 1, 20182020 to the expiration of the sublease in May 2022 is $124,087.
In January 2013, HBR began leasing the services of 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 years ended December 31, 20172019 and 2016,2018, we received $263,453$269,072 and $260,586,$270,932, 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”).Dove. The agreement providesprovided for a senior secured term loan facility in an amount of up to $40.0 million at any time outstanding. TheOn December 27, 2019, the Company issued 400,000 shares (aggregate initial liquidation preference of $40 million) of its Series A Preferred Stock in exchange for full satisfaction of the $40.0 million that the Company owed Dove under the Loan and Security Agreement was fully drawn with