Notes to Consolidated Financial Statements
June 30, 2017
and
2016
|
|
1.
|
Description of Our Business
|
Our accompanying consolidated financial statements include the accounts of Atlanticus Holdings Corporation (the “Company”) and those entities we control. We are primarily focused on providing financial technology and related services. Through our subsidiaries, we provide technology and other support services to lenders who offer an array of financial products and services to consumers who may have been declined under traditional financing options. In most cases, we invest in the receivables originated by lenders who utilize our technology platform and other related services. As discussed further below, we reflect our business lines within
two
reportable segments: Credit and Other Investments; and Auto Finance. See also Note 3, “Segment Reporting,” for further details.
Within our Credit and Other Investments segment, we facilitate consumer finance programs offered by our bank partners to originate consumer loans through multiple channels, including retail point-of-sale, direct mail solicitation, on-line and partnerships. In the retail credit (the “point-of-sale” operations) channel, we partner with retailers and service providers in various industries across the United States (“U.S.”) to enable them to provide credit to their customers for the purchase of goods and services. These services of our lending partners, are often extended to consumers who may have been declined under traditional financing options. We specialize in supporting this “second look” credit service in various industries across the U.S. Additionally, we support lenders who market general purpose personal loans and credit cards directly to consumers (collectively, the “direct-to-consumer” operations) through additional channels enabling them to reach consumers through a diverse origination platform which includes direct mail, Internet-based marketing and through partnerships. Using our infrastructure and technology platform, we also provide loan servicing activities, including risk management and customer service outsourcing for third parties.
Beyond these activities within our Credit and Other Investments segment, we continue to service portfolios of credit card receivables. One of our portfolios of credit card receivables is encumbered by non-recourse structured financing, and for this portfolio our principal remaining economic interest is the servicing compensation we receive as an offset against our servicing costs given that the likely future collections on the portfolio are insufficient to allow for full repayment of the financing.
Additionally, we report within our Credit and Other Investments segment the income earned from an investment in an equity-method investee that holds credit card receivables for which we are the servicer.
Lastly, we report within our Credit and Other Investments segment gains 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 as of
June 30, 2017
. Some of these investees have in the past raised capital at valuations substantially in excess of our associated book value. However, none of these companies are publicly-traded, there are no material pending liquidity events, and ascribing value to these investments at this time would be speculative.
Within our Auto Finance segment, our CAR subsidiary operations principally purchase and service loans secured by automobiles from or for, and also provide floor plan financing for, a pre-qualified network of independent automotive dealers and automotive finance companies in the buy-here, pay-here, used car business. We purchase auto loans at a discount and with dealer retentions or holdbacks that provide risk protection. Also within our Auto Finance segment, we are providing certain installment lending products in addition to our traditional loans secured by automobiles.
|
|
2.
|
Significant Accounting Policies and Consolidated Financial Statement Components
|
The following is a summary of significant accounting policies we follow in preparing our consolidated financial statements, as well as a description of significant components of our consolidated financial statements.
Basis of Presentation and Use of Estimates
We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the U.S. (“GAAP”). The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our consolidated financial statements, as well as the reported amounts of revenues and expenses during each reporting
period. We base these estimates on information available to us as of the date of the financial statements. Actual results could differ materially from these estimates. Certain estimates, such as credit losses, payment rates, costs of funds, discount rates and the yields earned on credit card receivables, significantly affect the reported amount of credit card receivables that we report at fair value and our notes payable associated with structured financings, at fair value; these estimates likewise affect the changes in these amounts reflected within our fees and related income on earning assets line item on our consolidated statements of operations. Additionally, estimates of future credit losses have a significant effect on loans and fees receivable, net, as shown on our consolidated balance sheets, as well as on the provision for losses on loans and fees receivable within our consolidated statements of operations.
We have eliminated all significant intercompany balances and transactions for financial reporting purposes.
Loans and Fees Receivable
Our loans and fees receivable include loans and fees receivable, at fair value and loans and fees receivable, gross.
As of
June 30, 2017
and
December 31, 2016
, the weighted average remaining accretion period for the
$31.4 million
and
$23.6 million
of deferred revenue reflected in the consolidated balance sheets was
12 months
and
11 months
, respectively.
A roll-forward (in millions) of our allowance for uncollectible loans and fees receivable by class of receivable is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2017
|
|
Credit Cards
|
|
Auto Finance
|
|
Other Unsecured Lending Products
|
|
Total
|
Allowance for uncollectible loans and fees receivable:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(1.8
|
)
|
|
$
|
(2.0
|
)
|
|
$
|
(35.7
|
)
|
|
$
|
(39.5
|
)
|
Provision for loan losses
|
|
(1.5
|
)
|
|
(0.4
|
)
|
|
(13.8
|
)
|
|
(15.7
|
)
|
Charge offs
|
|
0.8
|
|
|
0.8
|
|
|
14.4
|
|
|
16.0
|
|
Recoveries
|
|
(0.7
|
)
|
|
(0.4
|
)
|
|
(0.9
|
)
|
|
(2.0
|
)
|
Balance at end of period
|
|
$
|
(3.2
|
)
|
|
$
|
(2.0
|
)
|
|
$
|
(36.0
|
)
|
|
$
|
(41.2
|
)
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2017
|
|
Credit Cards
|
|
Auto Finance
|
|
Other Unsecured Lending Products
|
|
Total
|
Allowance for uncollectible loans and fees receivable:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(1.4
|
)
|
|
$
|
(2.1
|
)
|
|
$
|
(39.8
|
)
|
|
$
|
(43.3
|
)
|
Provision for loan losses
|
|
(1.9
|
)
|
|
(0.8
|
)
|
|
(23.7
|
)
|
|
(26.4
|
)
|
Charge offs
|
|
1.2
|
|
|
1.6
|
|
|
29.0
|
|
|
31.8
|
|
Recoveries
|
|
(1.1
|
)
|
|
(0.7
|
)
|
|
(1.5
|
)
|
|
(3.3
|
)
|
Balance at end of period
|
|
$
|
(3.2
|
)
|
|
$
|
(2.0
|
)
|
|
$
|
(36.0
|
)
|
|
$
|
(41.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017
|
|
Credit Cards
|
|
Auto Finance
|
|
Other Unsecured Lending Products
|
|
Total
|
Allowance for uncollectible loans and fees receivable:
|
|
|
|
|
|
|
|
|
Balance at end of period individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
(0.1
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(0.3
|
)
|
Balance at end of period collectively evaluated for impairment
|
|
$
|
(3.2
|
)
|
|
$
|
(1.9
|
)
|
|
$
|
(35.8
|
)
|
|
$
|
(40.9
|
)
|
Loans and fees receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and fees receivable, gross
|
|
$
|
28.1
|
|
|
$
|
76.9
|
|
|
$
|
218.9
|
|
|
$
|
323.9
|
|
Loans and fees receivable individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
0.4
|
|
Loans and fees receivable collectively evaluated for impairment
|
|
$
|
28.1
|
|
|
$
|
76.7
|
|
|
$
|
218.7
|
|
|
$
|
323.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2016
|
|
Credit Cards
|
|
Auto Finance
|
|
Other Unsecured Lending Products
|
|
Total
|
Allowance for uncollectible loans and fees receivable:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(1.3
|
)
|
|
$
|
(1.8
|
)
|
|
$
|
(16.8
|
)
|
|
$
|
(19.9
|
)
|
Provision for loan losses
|
|
0.4
|
|
|
(0.8
|
)
|
|
(10.4
|
)
|
|
(10.8
|
)
|
Charge offs
|
|
0.6
|
|
|
0.9
|
|
|
6.6
|
|
|
8.1
|
|
Recoveries
|
|
(0.8
|
)
|
|
(0.3
|
)
|
|
(0.5
|
)
|
|
(1.6
|
)
|
Balance at end of period
|
|
$
|
(1.1
|
)
|
|
$
|
(2.0
|
)
|
|
$
|
(21.1
|
)
|
|
$
|
(24.2
|
)
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2016
|
|
Credit Cards
|
|
Auto Finance
|
|
Other Unsecured Lending Products
|
|
Total
|
Allowance for uncollectible loans and fees receivable:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(1.2
|
)
|
|
$
|
(1.7
|
)
|
|
$
|
(18.6
|
)
|
|
$
|
(21.5
|
)
|
Provision for loan losses
|
|
0.6
|
|
|
(1.4
|
)
|
|
(14.7
|
)
|
|
(15.5
|
)
|
Charge offs
|
|
1.0
|
|
|
1.7
|
|
|
13.2
|
|
|
15.9
|
|
Recoveries
|
|
(1.5
|
)
|
|
(0.6
|
)
|
|
(1.0
|
)
|
|
(3.1
|
)
|
Balance at end of period
|
|
$
|
(1.1
|
)
|
|
$
|
(2.0
|
)
|
|
$
|
(21.1
|
)
|
|
$
|
(24.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
Credit Cards
|
|
Auto Finance
|
|
Other Unsecured Lending Products
|
|
Total
|
Allowance for uncollectible loans and fees receivable:
|
|
|
|
|
|
|
|
|
Balance at end of period individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
(0.3
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(0.6
|
)
|
Balance at end of period collectively evaluated for impairment
|
|
$
|
(1.4
|
)
|
|
$
|
(1.8
|
)
|
|
$
|
(39.5
|
)
|
|
$
|
(42.7
|
)
|
Loans and fees receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and fees receivable, gross
|
|
$
|
11.0
|
|
|
$
|
77.1
|
|
|
$
|
202.6
|
|
|
$
|
290.7
|
|
Loans and fees receivable individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
0.7
|
|
|
$
|
0.3
|
|
|
$
|
1.0
|
|
Loans and fees receivable collectively evaluated for impairment
|
|
$
|
11.0
|
|
|
$
|
76.4
|
|
|
$
|
202.3
|
|
|
$
|
289.7
|
|
An aging of our delinquent loans and fees receivable, gross (in millions) by class of receivable as of
June 30, 2017
and
December 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2017
|
|
Credit Cards
|
|
Auto Finance
|
|
Other Unsecured Lending Products
|
|
Total
|
30-59 days past due
|
|
$
|
0.5
|
|
|
$
|
6.1
|
|
|
$
|
8.6
|
|
|
$
|
15.2
|
|
60-89 days past due
|
|
0.4
|
|
|
2.1
|
|
|
6.5
|
|
|
9.0
|
|
90 or more days past due
|
|
0.8
|
|
|
1.1
|
|
|
11.6
|
|
|
13.5
|
|
Delinquent loans and fees receivable, gross
|
|
1.7
|
|
|
9.3
|
|
|
26.7
|
|
|
37.7
|
|
Current loans and fees receivable, gross
|
|
26.4
|
|
|
67.6
|
|
|
192.2
|
|
|
286.2
|
|
Total loans and fees receivable, gross
|
|
$
|
28.1
|
|
|
$
|
76.9
|
|
|
$
|
218.9
|
|
|
$
|
323.9
|
|
Balance of loans 90 or more days past due and still accruing interest and fees
|
|
$
|
—
|
|
|
$
|
0.8
|
|
|
$
|
—
|
|
|
$
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses reflect both the billed and unbilled amounts owed at the end of a period for services rendered. Also included within accounts payable and accrued expenses are amounts which may be owed in respect of one of our portfolios.
Income Taxes
We experienced effective income tax benefit rates of
33.6%
and
32.2%
for the
three and six months ended
June 30, 2017
, respectively, compared to effective income tax expense rates of
70.6%
and
15.1%
for the
three and six months ended
June 30, 2016
, respectively. Our effective income tax benefit rates for the
three and six months ended
June 30, 2017
are below the statutory rate principally due to interest that we accrued on unpaid federal tax liabilities and our establishment of a valuation allowance in the three months ended June 30, 2017 against the net federal deferred tax asset that arose during that period associated with our net loss incurred during that period. Our effective income tax expense rate for the three months ended
June 30, 2016
was significantly in excess of the statutory rate principally due to the significance of our accruals of interest and penalties on unpaid tax liabilities relative to our
$0.9 million
of pre-tax income during that period. Our effective income tax expense rate for the six months ended June 30, 2016 was below the statutory rate principally due to income during that period of our U.K. subsidiary that was not subject to tax in the U.S. and the U.K. tax on which was fully offset by the release of U.K. valuation allowances in that period. Both of these factors also served to mute somewhat the reduction of our effective income tax benefit rate in the three months ended June 30, 2017 versus the statutory rate in that period.
We report potential accrued interest and penalties related to both our accrued liabilities for uncertain tax positions and unpaid tax liabilities, as well as any net payments of income tax-related interest and penalties, within our income tax benefit or expense line item on our consolidated statements of operations. We likewise report the reversal of such accrued interest and penalties within the income tax benefit or expense line item to the extent that we resolve our liabilities for uncertain tax positions or unpaid tax liabilities in a manner favorable to our accruals therefor. During the
three and six months ended
June 30, 2017
, our income tax benefits were offset by
$0.2 million
and
$0.4 million
of net income tax-related interest and penalties charges. During the
three and six months ended
June 30, 2016
we included
$0.2 million
and
$0.4 million
of net income tax-related interest and penalties within those periods’ respective income tax expense line items.
In December 2014, we reached a settlement with the IRS concerning the tax treatment of net operating losses that we incurred in 2007 and 2008 and carried back to obtain refunds of federal income taxes paid in earlier years dating back to 2003. Our net unpaid income tax assessment associated with that settlement was
$7.3 million
at
June 30, 2017
; this amount excludes unpaid interest and penalties on the tax assessment, the accruals for which aggregated
$3.8 million
at
June 30, 2017
. Prior to our filing amended return claims that would have eliminated the
$7.3 million
assessment (and corresponding interest and penalties) under a negotiated provision of the IRS settlement, the IRS filed a lien (as is customarily the case) associated with the assessment. Subsequently, an IRS examination team has denied our amended return claims, and we have filed a protest with IRS Appeals. During the three months ended June 30, 2017, we were notified that the claims have been assigned to an IRS Appeals officer and an IRS Appeals conference has been scheduled for October 2017. To the extent we are unsuccessful in resolving this matter with IRS Appeals to our satisfaction, we plan to litigate this matter.
Fees and Related Income on Earning Assets
The components (in thousands) of our fees and related income on earning assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Fees on credit products
|
$
|
2,007
|
|
|
$
|
856
|
|
|
$
|
3,103
|
|
|
$
|
1,655
|
|
Changes in fair value of loans and fees receivable recorded at fair value
|
1,002
|
|
|
527
|
|
|
1,565
|
|
|
2,425
|
|
Changes in fair value of notes payable associated with structured financings recorded at fair value
|
821
|
|
|
939
|
|
|
1,527
|
|
|
2,104
|
|
Rental revenue
|
—
|
|
|
3,119
|
|
|
148
|
|
|
7,333
|
|
Other
|
141
|
|
|
437
|
|
|
429
|
|
|
248
|
|
Total fees and related income on earning assets
|
$
|
3,971
|
|
|
$
|
5,878
|
|
|
$
|
6,772
|
|
|
$
|
13,765
|
|
The above changes in the fair value of loans and fees receivable recorded at fair value category exclude the impact of charge offs associated with these receivables which are separately stated in Net recovery of charge off of loans and fees receivable recorded at fair value on our consolidated statements of operations. See Note 6, “Fair Values of Assets and Liabilities,” for further discussion of these receivables and their effects on our consolidated statements of operations.
Recent Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update (“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. This generally will result in the recognition of allowances for losses earlier than under current accounting guidance for trade and other receivables, held to maturity debt securities and other instruments. The standard will be adopted on a prospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. While we are continuing to evaluate the effect that ASU 2016-13 will have on our consolidated financial statements and related disclosures, this standard is expected to result in an increase to our allowance for loan losses given the change to expected losses for the estimated life of the financial asset. The extent of the increase will depend on the asset quality of the portfolio, and economic conditions and forecasts at adoption.
In March 2016, the FASB issued ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting. The ASU eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively, as if the equity method had been in effect during all previous periods that the investment had been held. The ASU requires that the cost of acquiring the additional interest in the investee should be combined with the current basis of the investor’s previously held interest and the equity method of accounting should be adopted as of the date the investment becomes qualified for equity method accounting. No retroactive adjustment of the investment is required. The ASU also requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings, the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The ASU was effective January 1, 2017. The impact of adoption of this authoritative guidance did not result in a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which would require lessees to recognize assets and liabilities for most leases, changing certain aspects of current lessor accounting, among other things. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The adoption of ASU 2016-02 will result in the Company recognizing a right-of-use asset and lease liability on the consolidated balance sheet based on the present value of remaining operating lease payments. We do not expect the adoption of ASU 2016-02 to have a material impact on our consolidated financial statements due to the limited lease activity we are involved in.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 establishes a principles-based model under which revenue from a contract is allocated to the distinct performance obligations within the contract and recognized in income as each performance obligation is satisfied. Additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract is also required. In August 2015, the FASB delayed the effective date by one year and the guidance will now be effective for annual and interim periods beginning January 1, 2018 and early adoption is permitted. We do not plan to early adopt the guidance. The scope of ASU 2014-09 excludes interest and fee income on loans and as a result, the majority of our revenue will not be affected; however, our review is ongoing. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
Subsequent Events
We evaluate subsequent events that occur after our consolidated balance sheet date but before our consolidated financial statements are issued. There are two types of subsequent events: (1) recognized, or those that provide additional evidence with respect to conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements; and (2) nonrecognized, or those that provide evidence with respect to conditions that did not exist at the date of the balance sheet but arose subsequent to that date. We have evaluated subsequent events occurring after
June 30, 2017
, 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.
We operate primarily within
one
industry consisting of
two
reportable segments by which we manage our business. Our two reportable segments are: Credit and Other Investments, and Auto Finance.
As of both
June 30, 2017
and
December 31, 2016
, we did not have a material amount of long-lived assets located outside of the U.S., and only a negligible portion of our revenues for the
six months ended June 30,
2017
and
2016
were generated outside of the U.S.
We measure the profitability of our reportable segments based on their income after allocation of specific costs and corporate overhead; however, our segment results do not reflect any charges for internal capital allocations among our segments. Overhead costs are allocated based on headcounts and other applicable measures to better align costs with the associated revenues.
Summary operating segment information (in thousands) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2017
|
|
Credit and Other Investments
|
|
Auto Finance
|
|
Total
|
Interest income:
|
|
|
|
|
|
|
Consumer loans, including past due fees
|
|
$
|
19,589
|
|
|
$
|
7,024
|
|
|
$
|
26,613
|
|
Other
|
|
43
|
|
|
—
|
|
|
43
|
|
Total interest income
|
|
19,632
|
|
|
7,024
|
|
|
26,656
|
|
Interest expense
|
|
(6,166
|
)
|
|
(253
|
)
|
|
(6,419
|
)
|
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
|
|
$
|
13,466
|
|
|
$
|
6,771
|
|
|
$
|
20,237
|
|
Fees and related income on earning assets
|
|
$
|
3,943
|
|
|
$
|
28
|
|
|
$
|
3,971
|
|
Servicing income
|
|
$
|
644
|
|
|
$
|
217
|
|
|
$
|
861
|
|
Depreciation of rental merchandise
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity in income of equity-method investee
|
|
$
|
404
|
|
|
$
|
—
|
|
|
$
|
404
|
|
(Loss) income before income taxes
|
|
$
|
(15,137
|
)
|
|
$
|
1,913
|
|
|
$
|
(13,224
|
)
|
Income tax benefit (expense)
|
|
$
|
5,055
|
|
|
$
|
(612
|
)
|
|
$
|
4,443
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2017
|
|
Credit and Other Investments
|
|
Auto Finance
|
|
Total
|
Interest income:
|
|
|
|
|
|
|
Consumer loans, including past due fees
|
|
$
|
38,419
|
|
|
$
|
14,053
|
|
|
$
|
52,472
|
|
Other
|
|
144
|
|
|
—
|
|
|
144
|
|
Total interest income
|
|
38,563
|
|
|
14,053
|
|
|
52,616
|
|
Interest expense
|
|
(11,760
|
)
|
|
(476
|
)
|
|
(12,236
|
)
|
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
|
|
$
|
26,803
|
|
|
$
|
13,577
|
|
|
$
|
40,380
|
|
Fees and related income on earning assets
|
|
$
|
6,722
|
|
|
$
|
50
|
|
|
$
|
6,772
|
|
Servicing income
|
|
$
|
1,501
|
|
|
$
|
449
|
|
|
$
|
1,950
|
|
Depreciation of rental merchandise
|
|
$
|
(27
|
)
|
|
$
|
—
|
|
|
$
|
(27
|
)
|
Equity in income of equity-method investee
|
|
$
|
738
|
|
|
$
|
—
|
|
|
$
|
738
|
|
(Loss) income before income taxes
|
|
$
|
(15,524
|
)
|
|
$
|
3,645
|
|
|
$
|
(11,879
|
)
|
Income tax benefit (expense)
|
|
$
|
5,022
|
|
|
$
|
(1,197
|
)
|
|
$
|
3,825
|
|
Total assets
|
|
$
|
332,001
|
|
|
$
|
67,646
|
|
|
$
|
399,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2016
|
|
Credit and Other Investments
|
|
Auto Finance
|
|
Total
|
Interest income:
|
|
|
|
|
|
|
Consumer loans, including past due fees
|
|
$
|
14,132
|
|
|
$
|
7,330
|
|
|
$
|
21,462
|
|
Other
|
|
60
|
|
|
—
|
|
|
60
|
|
Total interest income
|
|
14,192
|
|
|
7,330
|
|
|
21,522
|
|
Interest expense
|
|
(4,454
|
)
|
|
(338
|
)
|
|
(4,792
|
)
|
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
|
|
$
|
9,738
|
|
|
$
|
6,992
|
|
|
$
|
16,730
|
|
Fees and related income on earning assets
|
|
$
|
5,840
|
|
|
$
|
38
|
|
|
$
|
5,878
|
|
Servicing income
|
|
$
|
732
|
|
|
$
|
249
|
|
|
$
|
981
|
|
Gain on repurchase of convertible senior notes
|
|
$
|
1,037
|
|
|
$
|
—
|
|
|
$
|
1,037
|
|
Depreciation of rental merchandise
|
|
$
|
(1,335
|
)
|
|
$
|
—
|
|
|
$
|
(1,335
|
)
|
Equity in income of equity-method investee
|
|
$
|
325
|
|
|
$
|
—
|
|
|
$
|
325
|
|
(Loss) income before income taxes
|
|
$
|
(664
|
)
|
|
$
|
1,594
|
|
|
$
|
930
|
|
Income tax expense
|
|
$
|
(113
|
)
|
|
$
|
(544
|
)
|
|
$
|
(657
|
)
|
|
|
|
|
|
|
|
Six months ended June 30, 2016
|
|
Credit and Other Investments
|
|
Auto Finance
|
|
Total
|
Interest income:
|
|
|
|
|
|
|
Consumer loans, including past due fees
|
|
$
|
25,317
|
|
|
$
|
14,293
|
|
|
$
|
39,610
|
|
Other
|
|
152
|
|
|
—
|
|
|
152
|
|
Total interest income
|
|
25,469
|
|
|
14,293
|
|
|
39,762
|
|
Interest expense
|
|
(8,791
|
)
|
|
(645
|
)
|
|
(9,436
|
)
|
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
|
|
$
|
16,678
|
|
|
$
|
13,648
|
|
|
$
|
30,326
|
|
Fees and related income on earning assets
|
|
$
|
13,669
|
|
|
$
|
96
|
|
|
$
|
13,765
|
|
Servicing income
|
|
$
|
1,924
|
|
|
$
|
504
|
|
|
$
|
2,428
|
|
Gain on repurchase of convertible senior notes
|
|
$
|
1,037
|
|
|
$
|
—
|
|
|
$
|
1,037
|
|
Depreciation of rental merchandise
|
|
$
|
(4,714
|
)
|
|
$
|
—
|
|
|
$
|
(4,714
|
)
|
Equity in income of equity-method investee
|
|
$
|
1,327
|
|
|
$
|
—
|
|
|
$
|
1,327
|
|
Income before income taxes
|
|
$
|
2,662
|
|
|
$
|
3,018
|
|
|
$
|
5,680
|
|
Income tax benefit (expense)
|
|
$
|
204
|
|
|
$
|
(1,059
|
)
|
|
$
|
(855
|
)
|
Total assets
|
|
$
|
228,729
|
|
|
$
|
71,579
|
|
|
$
|
300,308
|
|
During the
six months ended
June 30, 2017
, we repurchased and contemporaneously retired
6,702
shares of our common stock at an aggregate cost of
$18,000
pursuant to both open market and private purchases and the return of stock by holders of equity incentive awards to pay tax withholding obligations.
No
shares were repurchased during the three months ended June 30, 2017. During the
three and six months ended
June 30, 2016
, we repurchased and contemporaneously retired
123,662
and
246,643
shares of our common stock at an aggregate cost of
$374,000
and
$745,000
, 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
June 30, 2017
and
December 31, 2016
, which were originally lent in connection with our November 2005 issuance of convertible senior notes. We retire lent shares as they are returned to us.
|
|
5.
|
Investment in Equity-Method Investee
|
Our equity-method investment outstanding at
June 30, 2017
consists of our
66.7%
interest in a joint venture formed to purchase a credit card receivable portfolio.
In the following tables, we summarize (in thousands) balance sheet and results of operations data for our equity-method investee:
|
|
|
|
|
|
|
|
|
|
As of
|
|
June 30, 2017
|
|
December 31, 2016
|
Loans and fees receivable, at fair value
|
$
|
7,775
|
|
|
$
|
9,650
|
|
Total assets
|
$
|
8,136
|
|
|
$
|
10,291
|
|
Total liabilities
|
$
|
31
|
|
|
$
|
204
|
|
Members’ capital
|
$
|
8,105
|
|
|
$
|
10,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net interest income, fees and related income on earning assets
|
$
|
607
|
|
|
$
|
496
|
|
|
$
|
1,111
|
|
|
$
|
2,008
|
|
Net income
|
$
|
511
|
|
|
$
|
355
|
|
|
$
|
908
|
|
|
$
|
1,715
|
|
Net income attributable to our equity investment in investee
|
$
|
404
|
|
|
$
|
325
|
|
|
$
|
738
|
|
|
$
|
1,327
|
|
|
|
6.
|
Fair Values of Assets and Liabilities
|
Valuations and Techniques for Assets
Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The table below summarizes (in thousands) by fair value hierarchy the
June 30, 2017
and
December 31, 2016
fair values and carrying amounts of (1) our assets that are required to be carried at fair value in our consolidated financial statements and (2) our assets not carried at fair value, but for which fair value disclosures are required:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets – As of June 30, 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
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
280,365
|
|
|
$
|
251,395
|
|
Loans and fees receivable, at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,770
|
|
|
$
|
12,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets – As of December 31, 2016 (1)
|
|
Quoted Prices in Active
Markets for Identical Assets (Level 1)
|
|
Significant Other
Observable Inputs (Level 2)
|
|
Significant
Unobservable Inputs (Level 3)
|
|
Carrying Amount of Assets
|
Loans and fees receivable, net for which it is practicable to estimate fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
248,171
|
|
|
$
|
223,783
|
|
Loans and fees receivable, at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,648
|
|
|
$
|
15,648
|
|
|
|
(1)
|
For cash, deposits and other short-term investments, the carrying amount is a reasonable estimate of fair value.
|
For those asset classes above that are required to be carried at fair value in our consolidated financial statements, gains and losses associated with fair value changes are detailed on our fees and related income on earning assets table within Note 2, “Significant Accounting Policies and Consolidated Financial Statement Components.”
For Level 3 assets carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) a reconciliation of the beginning and ending balances for the
six months ended
June 30, 2017
and 2016:
|
|
|
|
|
|
|
|
|
|
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
|
1,565
|
|
|
2,425
|
|
Settlements
|
(4,475
|
)
|
|
(8,422
|
)
|
Impact of foreign currency translation
|
32
|
|
|
(189
|
)
|
Balance at June 30,
|
$
|
12,770
|
|
|
$
|
20,520
|
|
The unrealized gains and losses for assets within the Level 3 category presented in the tables above include changes in fair value that are attributable to both observable and unobservable inputs. Impacts related to foreign currency translation are included as a component of other operating expense on the consolidated statements of operations.
Net Revaluation of Loans and Fees Receivable.
We record the net revaluation of loans and fees receivable (including those pledged as collateral) in the fees and related income on earning assets category in our consolidated statements of operations, specifically as changes in fair value of loans and fees receivable recorded at fair value.
For Level 3 assets carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) quantitative information about the valuation techniques and the inputs used in the fair value measurement as of
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
Fair Value Measurements
|
|
Fair Value at June 30, 2017
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range (Weighted Average)
|
Loans and fees receivable, at fair value
|
|
$
|
12,770
|
|
|
Discounted cash flows
|
|
Gross yield
|
|
15.5% to 29.2% (24.9%)
|
|
|
|
|
|
|
|
Principal payment rate
|
|
1.7% to 3.8% (2.5%)
|
|
|
|
|
|
|
|
Expected credit loss rate
|
|
6.3% to 14.0% (12.8%)
|
|
|
|
|
|
|
|
Servicing rate
|
|
9.3% to 10.7% (9.5%)
|
|
|
|
|
|
|
|
Discount rate
|
|
5.8% to 13.9% (12.7%)
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
Fair Value Measurements
|
|
Fair Value at December 31, 2016
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range (Weighted Average)
|
Loans and fees receivable, at fair value
|
|
$
|
15,648
|
|
|
Discounted cash flows
|
|
Gross yield
|
|
24.2% to 35.8% (26.1%)
|
|
|
|
|
|
|
|
Principal payment rate
|
|
2.2% to 3.5% (2.4%)
|
|
|
|
|
|
|
|
Expected credit loss rate
|
|
11.8% to 18.0% (12.9%)
|
|
|
|
|
|
|
|
Servicing rate
|
|
8.6% to 9.6% (8.8%)
|
|
|
|
|
|
|
|
Discount rate
|
|
5.8% to 13.6% (12.5%)
|
Valuations and Techniques for Liabilities
Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the liability. The table below summarizes (in thousands) by fair value hierarchy the
June 30, 2017
and
December 31, 2016
fair values and carrying amounts of (1) our liabilities that are required to be carried at fair value in our consolidated financial statements and (2) our liabilities not carried at fair value, but for which fair value disclosures are required:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities – As of June 30, 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
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
109,322
|
|
|
$
|
109,322
|
|
Amortizing debt facilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
57,223
|
|
|
$
|
57,223
|
|
Senior secured term loan
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
40,000
|
|
|
$
|
40,000
|
|
5.875% convertible senior notes
|
|
$
|
—
|
|
|
$
|
39,064
|
|
|
$
|
—
|
|
|
$
|
61,085
|
|
Liabilities carried at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable associated with structured financings, at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,031
|
|
|
$
|
10,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities - As of December 31, 2016
|
|
Quoted Prices in Active
Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
Carrying Amount of Liabilities
|
Liabilities not carried at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
83,399
|
|
|
$
|
83,399
|
|
Amortizing debt facilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
58,190
|
|
|
$
|
58,190
|
|
Senior secured term loan
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
40,000
|
|
|
$
|
40,000
|
|
5.875% convertible senior notes
|
|
$
|
—
|
|
|
$
|
40,609
|
|
|
$
|
—
|
|
|
$
|
60,791
|
|
Liabilities carried at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable associated with structured financings, at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,276
|
|
|
$
|
12,276
|
|
For our material Level 3 liabilities carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) a reconciliation of the beginning and ending balances for the
six months ended
June 30, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
Notes Payable Associated with
Structured Financings, at Fair Value
|
|
2017
|
|
2016
|
Beginning balance, January 1
|
$
|
12,276
|
|
|
$
|
20,970
|
|
Total (gains) losses—realized/unrealized:
|
|
|
|
|
|
Net revaluations of notes payable associated with structured financings, at fair value
|
(1,527
|
)
|
|
(2,104
|
)
|
Repayments on outstanding notes payable, net
|
(718
|
)
|
|
(3,240
|
)
|
Ending balance, June 30
|
$
|
10,031
|
|
|
$
|
15,626
|
|
The unrealized gains and losses for liabilities within the Level 3 category presented in the table above include changes in fair value that are attributable to both observable and unobservable inputs. We provide below a brief description of the valuation techniques used for Level 3 liabilities.
Net Revaluation of Notes Payable Associated with Structured Financings, at Fair Value.
We record the net revaluations of notes payable associated with structured financings, at fair value, in the changes in fair value of notes payable associated with structured financings line item within the fees and related income on earning assets category of our consolidated statements of operations.
For material Level 3 liabilities carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) quantitative information about the valuation techniques and the inputs used in the fair value measurement as of
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
Fair Value Measurements
|
|
Fair Value at June 30, 2017
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Weighted Average
|
Notes payable associated with structured financings, at fair value
|
|
$
|
10,031
|
|
|
Discounted cash flows
|
|
Gross yield
|
|
26.1
|
%
|
|
|
|
|
|
|
|
Principal payment rate
|
|
2.5
|
%
|
|
|
|
|
|
|
|
Expected credit loss rate
|
|
14.0
|
%
|
|
|
|
|
|
|
|
Discount rate
|
|
13.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
June 30, 2017
and
December 31, 2016
concerning certain assets and liabilities we carry at fair value are as follows:
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017
|
|
Loans and Fees
Receivable at
Fair Value
|
|
Loans and Fees Receivable Pledged as Collateral under Structured Financings at Fair Value
|
Aggregate unpaid principal balance within loans and fees receivable that are reported at fair value
|
|
$
|
5,225
|
|
|
$
|
13,753
|
|
Aggregate fair value of loans and fees receivable that are reported at fair value
|
|
$
|
2,742
|
|
|
$
|
10,028
|
|
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)
|
|
$
|
8
|
|
|
$
|
30
|
|
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
|
|
$
|
164
|
|
|
$
|
384
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2017
|
|
Notes Payable Associated with Structured Financings, at Fair Value as of December 31, 2016
|
Aggregate unpaid principal balance of notes payable
|
|
$
|
101,317
|
|
|
$
|
102,035
|
|
Aggregate fair value of notes payable
|
|
$
|
10,031
|
|
|
$
|
12,276
|
|
Notes Payable Associated with Structured Financings, at Fair Value
Scheduled (in millions) in the table below are (1) the carrying amount of our structured financing note secured by certain credit card receivables and reported at fair value as of
June 30, 2017
and
December 31, 2016
, (2) the outstanding face amount of our structured financing note secured by certain credit card receivables and reported at fair value as of
June 30, 2017
, and (3) the carrying amount of the credit card receivables and restricted cash that provide the exclusive means of repayment for the note (i.e., lenders have recourse only to the specific credit card receivables and restricted cash underlying each respective facility and cannot look to our general credit for repayment) as of
June 30, 2017
and
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
Carrying Amounts at Fair Value as of
|
|
June 30, 2017
|
|
December 31, 2016
|
Amortizing securitization facility (stated maturity of December 2021), outstanding face amount of $101.3 million as of June 30, 2017 ($102.0 million as of December 31, 2016) bearing interest at a weighted average 6.5% interest rate at June 30, 2017 (6.1% at December 31, 2016), which is secured by credit card receivables and restricted cash aggregating $10.0 million as of June 30, 2017 ($12.3 million as of December 31, 2016) in carrying amount
|
$
|
10.0
|
|
|
$
|
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 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
$10.0 million
in fair value of the structured financing note in the above table is
$10.0 million
, which means that we have
no
aggregate exposure to pre-tax equity loss associated with the above structured financing arrangement at
June 30, 2017
.
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 structures, and we have no explicit or implicit arrangements that could require us to provide financial support to the structures.
Notes Payable, at Face Value and Notes Payable to Related Parties
Other notes payable outstanding as of
June 30, 2017
and
December 31, 2016
that are secured by the financial and operating assets of either the borrower, another of our subsidiaries or both, include the following, scheduled (in millions); except as otherwise noted, the assets of our holding company (Atlanticus Holdings Corporation) are subject to creditor claims under these scheduled facilities:
|
|
|
|
|
|
|
|
|
|
As of
|
|
June 30, 2017
|
|
December 31, 2016
|
Revolving credit facilities at a weighted average interest rate equal to 6.4% at June 30, 2017 (4.8% at December 31, 2016) secured by the financial and operating assets of CAR and/or certain receivables and restricted cash with a combined aggregate carrying amount of $157.3 million as of June 30, 2017 ($127.9 million at December 31, 2016)
|
|
|
|
Revolving credit facility, not to exceed $20.0 million (expiring December 31, 2019) (1) (2)
|
19.8
|
|
|
19.5
|
|
Revolving credit facility, not to exceed $40.0 million (expiring November 1, 2018) (3)
|
30.4
|
|
|
29.2
|
|
Revolving credit facility, not to exceed $35.0 million (expiring October 29, 2017) (1) (2)
|
34.6
|
|
|
34.7
|
|
Revolving credit facility, not to exceed $90.0 million (expiring February 8, 2022) (1) (4)
|
26.0
|
|
|
—
|
|
Amortizing facilities at a weighted average interest rate equal to 5.8% at June 30, 2017 (5.4% at December 31, 2016) secured by certain receivables and restricted cash with a combined aggregate carrying amount of $78.4 million as of June 30, 2017 ($69.9 million as of December 31, 2016)
|
|
|
|
Amortizing debt facility (expiring March 31, 2018) (1) (2) (5)
|
11.0
|
|
|
14.6
|
|
Amortizing debt facility (repaid in June 2017) (1) (2) (5)
|
—
|
|
|
20.4
|
|
Amortizing debt facility (expiring June 30, 2018) (1) (2) (5)
|
36.7
|
|
|
—
|
|
Amortizing debt facility (expiring May 31, 2018) (1) (2)
|
4.5
|
|
|
6.0
|
|
Amortizing debt facility (expiring August 24, 2018) (1) (2)
|
2.5
|
|
|
9.7
|
|
Amortizing debt facility (expiring September 1, 2017) (1) (2)
|
2.5
|
|
|
7.5
|
|
Other facilities
|
|
|
|
Senior secured term loan from related parties (expiring November 22, 2017) that is secured by certain assets of the Company with an annual interest rate equal to 9.0% (4)
|
40.0
|
|
|
40.0
|
|
Total notes payable before unamortized debt issuance costs and discounts
|
208.0
|
|
|
181.6
|
|
Unamortized debt issuance costs and discounts
|
2.3
|
|
|
0.4
|
|
Total notes payable outstanding, net
|
$
|
205.7
|
|
|
$
|
181.2
|
|
|
|
(1)
|
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.
|
|
|
(2)
|
These notes reflect modifications to either extend the maturity date, increase the loaned amount or both.
|
|
|
(3)
|
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.
|
|
|
(4)
|
See below for additional information.
|
|
|
(5)
|
Loans are comprised of three tranches with the same lender. Terms and conditions are substantially identical with the exception of maturity date as indicated in the table above.
|
On November 26, 2014, we and certain of our subsidiaries entered into a Loan and Security Agreement with Dove Ventures, LLC, a Nevada limited liability company (“Dove”). The agreement provides for a senior secured term loan facility in an amount of up to
$40.0 million
at any time outstanding. The Loan and Security Agreement is fully drawn with
$40.0 million
outstanding as of
June 30, 2017
. In November 2016, the agreement was amended to extend the maturity date of the term loan to
November 22, 2017
. All other terms remain unchanged.
Our obligations under the agreement are guaranteed by certain subsidiary guarantors and secured by a pledge of certain assets of ours and the subsidiary guarantors. The loans bear interest at the rate of
9.0%
per annum, payable monthly in arrears. The principal amount of these loans is payable in a single installment on
November 22, 2017
(as amended). The agreement includes customary affirmative and negative covenants, as well as customary representations, warranties and events of default. Subject to certain conditions, we can prepay the principal amounts of these loans without premium or penalty.
Dove is a limited liability company owned by three trusts. David G. Hanna is the sole shareholder and the President of the corporation that serves as the sole trustee of one of the trusts, and David G. Hanna and members of his immediate family are the beneficiaries of this trust. Frank J. Hanna, III is the sole shareholder and the President of the corporation that serves as the sole trustee of the other two trusts, and Frank J. Hanna, III and members of his immediate family are the beneficiaries of these other two trusts.
In February 2017, we (through a wholly owned subsidiary) established a program under which we sell certain receivables to a consolidated trust in exchange for notes issued by the trust. The notes are secured by the receivables and other assets of the trust. Simultaneously with the establishment of the program, the trust issued a series of variable funding notes and sold an aggregate amount of up to
$90.0 million
(of which
$26.0 million
was outstanding as of
June 30, 2017
) to an unaffiliated third party pursuant to a facility that can be drawn upon to the extent of outstanding eligible receivables.
The facility matures on
February 8, 2022
and is 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 facility also may be prepaid subject to payment of a prepayment fee.
|
|
8.
|
Convertible Senior Notes
|
In November 2005, we issued
$300.0 million
aggregate principal amount of
5.875%
convertible senior notes due
November 30, 2035
(“
5.875%
convertible senior notes”). 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.
In 2016 we repurchased
$5.0 million
aggregate principal amount of outstanding
5.875%
convertible senior notes for
$2.3 million
plus accrued interest from unrelated third parties. The purchase resulted in a gain of
$1.2 million
(net of the notes’ applicable share of deferred costs, which were written off in connection with the repurchases). 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
|
|
June 30, 2017
|
|
December 31, 2016
|
Face amount of 5.875% convertible senior notes
|
$
|
88,280
|
|
|
$
|
88,280
|
|
Discount
|
(27,195
|
)
|
|
(27,489
|
)
|
Net carrying value
|
$
|
61,085
|
|
|
$
|
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
|
$
|
—
|
|
|
$
|
—
|
|
|
|
9.
|
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
$346.7 million
at
June 30, 2017
. We have never experienced a situation in which all borrowers have exercised their entire available lines of credit at any given point in time, nor do we anticipate this will ever occur in the future. Moreover, there would be a concurrent increase in assets should there be any exercise of these lines of credit. We also have the effective right to reduce or cancel these available lines of credit at any time.
Additionally our CAR operations provide floor-plan financing for a pre-qualified network of independent automotive dealers and automotive finance companies in the buy-here, pay-here used car business. The financings allow dealers and finance companies to borrow up to the maximum pre-approved credit limit allowed in order to finance ongoing inventory needs. These loans are secured by the underlying auto inventory and, in certain cases where we have other lending products outstanding with the dealer, are secured by the collateral under those lending arrangements as well, including any outstanding dealer reserves. As of
June 30, 2017
, CAR had unfunded outstanding floor-plan financing commitments totaling
$8.5 million
. Each draw against unused commitments is reviewed for conformity to pre-established guidelines.
Under agreements with third-party originating and other financial institutions we have pledged security (collateral) related to their issuance of consumer credit and purchases thereunder, of which
$9.7 million
remains pledged as of
June 30, 2017
to support various ongoing contractual obligations.
Under agreements with third-party originating and other financial institutions, we have agreed to indemnify the financial institutions for certain liabilities associated with the services we provide on behalf of the financial institutions—such indemnification obligations generally being limited to instances in which we either (a) have been afforded the opportunity to defend against any potentially indemnifiable claims or (b) have reached agreement with the financial institutions regarding settlement of potentially indemnifiable claims. As of
June 30, 2017
, we have assessed the likelihood of any potential payments related to the aforementioned contingencies as remote. We will accrue liabilities related to these contingencies in any future period if and in which we assess the likelihood of an estimable payment as probable.
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” to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.
Litigation
We are involved in various legal proceedings that are incidental to the conduct of our business, none of which are expected to be material to us.
|
|
10.
|
Net (Loss) Income Attributable to Controlling Interests Per Common Share
|
The following table sets forth the computations of net (loss) income per common share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
Net (loss) income attributable to controlling interests
|
$
|
(8,784
|
)
|
|
$
|
277
|
|
|
$
|
(8,056
|
)
|
|
$
|
4,830
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
Basic (including unvested share-based payment awards) (1)
|
13,984
|
|
|
13,806
|
|
|
13,964
|
|
|
13,852
|
|
Effect of dilutive stock compensation arrangements (2)
|
13
|
|
|
66
|
|
|
23
|
|
|
71
|
|
Diluted (including unvested share-based payment awards) (1)
|
13,997
|
|
|
13,872
|
|
|
13,987
|
|
|
13,923
|
|
Net (loss) income attributable to controlling interests per common share—basic
|
$
|
(0.63
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.58
|
)
|
|
$
|
0.35
|
|
Net (loss) income attributable to controlling interests per common share—diluted
|
$
|
(0.63
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.58
|
)
|
|
$
|
0.35
|
|
|
|
(1)
|
Shares related to unvested share-based payment awards included in our basic and diluted share counts were
371,576
and
358,553
for the
three and six months ended
June 30, 2017
, compared to
249,665
and
236,107
for the
three and six months ended
June 30, 2016
.
|
|
|
(2)
|
The effect of dilutive stock compensation arrangements is shown only for informational purposes where we are in a net loss position. In such situations, the effect of including outstanding options and restricted stock would be anti-dilutive, and they are thus excluded from all loss period calculations.
|
For the
three and six months ended
June 30, 2017
and
2016
, there were
no
shares potentially issuable and thus includible in the diluted net income attributable to controlling interests per common share calculations pursuant to our
5.875%
convertible senior notes. However, in future reporting periods during which our closing stock price is above the
$24.61
conversion price for the
5.875%
convertible senior notes, and depending on the closing stock price at conversion, the maximum potential dilution under the conversion provisions of such notes is
3.6 million
shares, which could be included in diluted share counts in net income per common share calculations. See Note 8, “Convertible Senior Notes,” for a further discussion of these convertible securities.
|
|
11.
|
Stock-Based Compensation
|
We currently have
two
stock-based compensation plans, the Employee Stock Purchase Plan (the “ESPP”) and the Second Amended and Restated 2014 Equity Incentive Plan (the “2014 Plan”). As of
June 30, 2017
,
19,076
shares remained available for issuance under the ESPP and
1,210,635
shares remained available for issuance under the 2014 Plan.
Exercises and vestings under our stock-based compensation plans resulted in
$0
in income tax-related charges to additional paid-in capital during both the
three and six months ended
June 30, 2017
with
$0
and
$37,000
in such charges for the
three and six months ended
June 30, 2016
, respectively.
Restricted Stock and Restricted Stock Unit Awards
During the
six months ended June 30, 2017
and
2016
, we granted
102,000
and
122,134
shares of restricted stock (net of any forfeitures), respectively, with aggregate grant date fair values of
$0.3 million
and
$0.4 million
, respectively. We incurred expenses of
$0.4 million
and
$0.2 million
during the
six months ended June 30, 2017
and
2016
, respectively, related to restricted stock and restricted stock unit awards. When we grant restricted stock, we defer the grant date value of the restricted stock and amortize that value (net of the value of anticipated forfeitures) as compensation expense with an offsetting entry to the additional paid-in capital component of our consolidated shareholders’ equity. Our restricted stock awards typically vest over a range of
12
to
60 months
(or other term as specified in the grant) and are amortized to salaries and benefits expense ratably over applicable vesting periods. As of
June 30, 2017
, our unamortized deferred compensation costs associated with non-vested restricted stock awards were
$0.3 million
with a weighted-average remaining amortization period of
0.5 years
.
Stock Options
We had expense of
$0.5 million
and
$0.3 million
related to stock option-related compensation costs during the
six months ended June 30, 2017
and
2016
, 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 options outstanding is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-
Average of Remaining
Contractual Life (in years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 31, 2016
|
1,411,667
|
|
|
$
|
3.09
|
|
|
|
|
|
|
Issued
|
1,015,000
|
|
|
$
|
2.78
|
|
|
|
|
|
Exercised
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Cancelled/Forfeited
|
(2,000
|
)
|
|
$
|
3.04
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
2,424,667
|
|
|
$
|
2.96
|
|
|
3.8
|
|
$
|
59,135
|
|
Exercisable at June 30, 2017
|
758,706
|
|
|
$
|
2.87
|
|
|
2.6
|
|
$
|
57,935
|
|
We had
$1.1 million
and
$1.2 million
of unamortized deferred compensation costs associated with non-vested stock options as of
June 30, 2017
and
2016
, respectively.
CONSOLIDATED RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
For the Three Months Ended June 30,
|
|
Increases (Decreases)
|
(In Thousands)
|
2017
|
|
2016
|
|
from 2016 to 2017
|
Total interest income
|
$
|
26,656
|
|
|
$
|
21,522
|
|
|
$
|
5,134
|
|
Interest expense
|
(6,419
|
)
|
|
(4,792
|
)
|
|
(1,627
|
)
|
Fees and related income on earning assets:
|
|
|
|
|
|
Fees on credit products
|
2,007
|
|
|
856
|
|
|
1,151
|
|
Changes in fair value of loans and fees receivable recorded at fair value
|
1,002
|
|
|
527
|
|
|
475
|
|
Changes in fair value of notes payable associated with structured financings recorded at fair value
|
821
|
|
|
939
|
|
|
(118
|
)
|
Rental revenue
|
—
|
|
|
3,119
|
|
|
(3,119
|
)
|
Other
|
141
|
|
|
437
|
|
|
(296
|
)
|
Other operating income:
|
|
|
|
|
|
Servicing income
|
861
|
|
|
981
|
|
|
(120
|
)
|
Other income
|
240
|
|
|
75
|
|
|
165
|
|
Gain on repurchase of convertible senior notes
|
—
|
|
|
1,037
|
|
|
(1,037
|
)
|
Equity in income equity-method investee
|
404
|
|
|
325
|
|
|
79
|
|
Total
|
$
|
25,713
|
|
|
$
|
25,026
|
|
|
$
|
687
|
|
Net recovery of losses upon charge off of loans and fees receivable recorded at fair value
|
(519
|
)
|
|
(6,140
|
)
|
|
(5,621
|
)
|
Provision for losses on loans and fees receivable recorded at net realizable value
|
15,744
|
|
|
10,811
|
|
|
(4,933
|
)
|
Other operating expenses:
|
|
|
|
|
|
Salaries and benefits
|
5,486
|
|
|
6,181
|
|
|
695
|
|
Card and loan servicing
|
7,794
|
|
|
7,285
|
|
|
(509
|
)
|
Marketing and solicitation
|
3,127
|
|
|
932
|
|
|
(2,195
|
)
|
Depreciation, primarily related to rental merchandise
|
243
|
|
|
2,099
|
|
|
1,856
|
|
Other
|
7,062
|
|
|
2,928
|
|
|
(4,134
|
)
|
Net (loss) income
|
(8,781
|
)
|
|
273
|
|
|
(9,054
|
)
|
Net (income) loss attributable to noncontrolling interests
|
(3
|
)
|
|
4
|
|
|
(7
|
)
|
Net (loss) income attributable to controlling interests
|
(8,784
|
)
|
|
277
|
|
|
(9,061
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
For the Six Months Ended June 30,
|
|
Increases (Decreases)
|
(In Thousands)
|
2017
|
|
2016
|
|
from 2016 to 2017
|
Total interest income
|
$
|
52,616
|
|
|
$
|
39,762
|
|
|
$
|
12,854
|
|
Interest expense
|
(12,236
|
)
|
|
(9,436
|
)
|
|
(2,800
|
)
|
Fees and related income on earning assets:
|
|
|
|
|
|
Fees on credit products
|
3,103
|
|
|
1,655
|
|
|
1,448
|
|
Changes in fair value of loans and fees receivable recorded at fair value
|
1,565
|
|
|
2,425
|
|
|
(860
|
)
|
Changes in fair value of notes payable associated with structured financings recorded at fair value
|
1,527
|
|
|
2,104
|
|
|
(577
|
)
|
Rental revenue
|
148
|
|
|
7,333
|
|
|
(7,185
|
)
|
Other
|
429
|
|
|
248
|
|
|
181
|
|
Other operating income:
|
|
|
|
|
|
Servicing income
|
1,950
|
|
|
2,428
|
|
|
(478
|
)
|
Other income
|
349
|
|
|
145
|
|
|
204
|
|
Gain on repurchase of convertible senior notes
|
—
|
|
|
1,037
|
|
|
(1,037
|
)
|
Equity in income equity-method investee
|
738
|
|
|
1,327
|
|
|
(589
|
)
|
Total
|
$
|
50,189
|
|
|
$
|
49,028
|
|
|
$
|
1,161
|
|
Net recovery of losses upon charge off of loans and fees receivable recorded at fair value
|
(8,370
|
)
|
|
(11,051
|
)
|
|
(2,681
|
)
|
Provision for losses on loans and fees receivable recorded at net realizable value
|
26,397
|
|
|
15,542
|
|
|
(10,855
|
)
|
Other operating expenses:
|
|
|
|
|
|
Salaries and benefits
|
11,018
|
|
|
11,913
|
|
|
895
|
|
Card and loan servicing
|
15,179
|
|
|
16,273
|
|
|
1,094
|
|
Marketing and solicitation
|
4,659
|
|
|
1,787
|
|
|
(2,872
|
)
|
Depreciation, primarily related to rental merchandise
|
553
|
|
|
6,255
|
|
|
5,702
|
|
Other
|
12,632
|
|
|
2,629
|
|
|
(10,003
|
)
|
Net (loss) income
|
(8,054
|
)
|
|
4,825
|
|
|
(12,879
|
)
|
Net (income) loss attributable to noncontrolling interests
|
(2
|
)
|
|
5
|
|
|
(7
|
)
|
Net (loss) income attributable to controlling interests
|
(8,056
|
)
|
|
4,830
|
|
|
(12,886
|
)
|
Three and Six Months Ended
June 30, 2017
, Compared to
Three and Six Months Ended
June 30, 2016
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 from
$167.0 million
as of
June 30, 2016
to
$247.0 million
as of
June 30, 2017
. These increases were offset, however, by continued net liquidations of our historical credit card receivable portfolios over the past year. We are currently experiencing continued growth in point-of-sale and direct-to-consumer receivables and our CAR receivables—growth which we expect to result in net period over period growth in our total interest income for these operations throughout 2017. Future periods’ growth is also dependent on the addition of new retail partners to expand the reach of point-of-sale operations as well as growth within existing partnerships and continued growth within the direct-to-consumer receivables. Despite anticipated increases in point-of-sale and direct-to-consumer receivables, continued net liquidations of our historical credit card receivables will continue to offset some of the expected increases and could result in overall net declines in interest income period over period if our investments in new receivable originations decline.
Interest expense.
Variations in interest expense are due to 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 7, “Notes Payable,” to our consolidated financial statements. 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:
|
|
•
|
declines in rental revenue as we significantly reduced rent-to-own operations in the fourth quarter of 2015 and for which we discontinued new acquisitions in 2016. We do not expect future revenues associated with this product offering as existing rent-to-own contracts have effectively concluded with no new acquisitions expected;
|
|
|
•
|
reductions in fees on receivables, associated with general net declines in historical credit card receivables, offset by new acquisitions of credit card receivables under our direct-to-consumer product offerings; and
|
|
|
•
|
the effects of changes in the fair values of credit card receivables recorded at fair value and notes payable associated with structured financings recorded at fair value as described below.
|
We expect increasing levels of credit card fee income for 2017 as we continue to invest in new credit card receivables as part of our direct-to-consumer operations, offset somewhat by diminishing fee income associated with our existing portfolios of liquidating credit card receivables. Additionally, for credit card accounts for which we use fair value accounting, we expect our change in fair value of credit card receivables recorded at fair value and our change in fair value of notes payable associated with structured financings recorded at fair value amounts to gradually diminish (absent significant changes in the assumptions used to determine these fair values) in the future. These amounts, however, are subject to potentially high levels of volatility if we experience changes in the quality of our credit card receivables or if there are significant changes in market valuation factors (e.g., interest rates and spreads) in the future. Such volatility will be muted somewhat, however, by the offsetting nature of the receivables and underlying debt being recorded at fair value and with the expected reductions in the face amounts of such outstanding receivables and debt as we experience further credit card receivables liquidations and associated debt amortizing repayments. Further, as discussed above, we do not expect meaningful levels of rental revenue in 2017 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). Unless and/or until we grow the number of contractual servicing relationships we have with third parties or our current relationships grow their loan portfolios, we will not experience significant growth and income within this category, and we currently expect to experience limited growth in this category of revenue relative to revenue earned in prior periods.
Other income
. Historically included within our other income category are ancillary and interchange revenues, which are now relatively insignificant for us due to credit card account closures and net credit card receivables portfolio liquidations. Given recent growth associated with new credit card offerings and related receivables, we expect ancillary and interchange revenues to grow modestly throughout the year. Also included within our other income category are certain reimbursements we receive in respect of one of our portfolios.
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 off of loans and fees receivable recorded at fair value.
This account reflects charge offs (net of recoveries) of the face amount of credit card receivables we record at fair value on our consolidated balance sheet. We have experienced a general trending decline in, and we expect future trending declines in, these charge offs as we continue to liquidate our historical credit card receivables. Additionally, net recovery in both periods reflects the effects of reimbursements received in respect of one of our portfolios. In the
three and six months ended
June 30, 2017
and 2016, these reimbursements exceeded the charge-offs experienced within the portfolio during the periods presented as the reimbursements are not directly associated with the timing of actual charge offs. The timing of these reimbursements cannot be reliably determined and as such we may not continue to experience similar positive impacts in future quarters.
Provision for losses on loans and fees receivable recorded at net realizable value.
Our provision for losses on loans 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 three months ended June 30, 2017 and 2016 and the six months ended
June 30, 2017
and 2016 primarily reflecting the effects of volume associated with point-of-sale, direct-to-consumer and credit card finance receivables (i.e., growth of new product receivables and their subsequent maturation), rather than specific credit quality changes or deterioration which also impacted our provision for losses on loans and fees receivable recorded at net realizable value to a lesser degree. See Note 2, “Significant Accounting Policies and Consolidated Financial Statement Components,” to our consolidated financial statements and the discussions of our Credit and Other Investments and Auto Finance segments for further credit quality statistics and analysis.
Total other operating expense.
Total other operating expense variances for the
three and six months ended
June 30, 2017
, relative to the
three and six months ended
June 30, 2016
, reflect the following:
|
|
•
|
slight decrease in card and loan servicing expenses in the six months ended
June 30, 2017
when compared to the six months ended
June 30, 2016
based on discontinuation of acquisitions of our rent-to-own products as well as continued net liquidations in our historical credit card portfolios, the receivables of which declined from
$38.9 million
outstanding to
$26.1 million
outstanding at
June 30, 2016
and
June 30, 2017
, respectively. Further, as our relative level and mix of receivables have changed we have been better able to negotiate certain third party fixed costs as existing contracts expired. These declines have been offset as noted by the slight increase in expenses for the three months ended
June 30, 2017
when compared to the three months ended
June 30, 2016
by expenses related to growth in point-of-sale and direct-to-consumer products, the receivables of which grew from
$167.0 million
outstanding to
$247.0 million
outstanding at
June 30, 2016
and
June 30, 2017
, respectively; and
|
|
|
•
|
decreases in depreciation primarily associated with discontinuation of acquisitions under our rent-to-own program which had no meaningful depreciation in 2017 compared to
$1.3 million
and
$4.7 million
for the
three and six months ended
2016, respectively;
|
Offsetting these declines are:
|
|
•
|
increases in other expenses due to the reversal of a
£3.4 million
(
$5.0 million
) reserve in the
six months ended June 30, 2016
. This reserve related to a review in the U.K. by HM Revenue and Customs (“HMRC”) associated with filings by one of our U.K. subsidiaries to reclaim value-added-tax. Additionally impacting the higher expenses noted during the
three and six months ended
June 30, 2017
are increased occupancy costs, legal costs associated with new product offerings and increased costs associated with translation impacts for U.K. liabilities.
|
|
|
•
|
increases in marketing and solicitation costs for the
three and six months ended
June 30, 2017
primarily due to volume related increases in costs attributable to the growth in our retail point-of-sale and direct-to-consumer portfolios. We expect that increased origination and brand marketing support will result in overall increases in year over year costs during 2017 although the frequency and timing of marketing efforts could result in reductions in quarter over quarter marketing costs; and
|
|
|
•
|
general increases in other expenses related to receivables acquisition, risk management costs and third party costs associated with ongoing information technology upgrades.
|
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 historical credit card receivables. This trend is gradually reversing, however, as we continue to grow our earning assets (including loans and fees receivable) based principally on growth of point-of-sale and direct-to-consumer receivables and to a lesser extent, growth within our CAR operations. This is evidenced by the growth we experienced in our managed receivables levels with minimal growth in the fixed portion of our card and loan servicing expenses as well as our salaries and benefits costs as we were able to better utilize our fixed costs to grow our asset base. We continue to perform extensive reviews of all areas of our businesses for cost savings opportunities to better align our costs with our portfolio of managed receivables.
Notwithstanding our cost-control efforts and focus, we expect increased levels of expenditures associated with anticipated growth in point-of-sale and direct-to-consumer personal loan and credit card related operations. These expenses will primarily relate to the variable costs of marketing efforts and card and loan servicing expenses associated with new receivable acquisitions. While we have greater control over our variable expenses, it is difficult (as explained above) for us to appreciably reduce our fixed and other costs associated with an infrastructure (particularly within our Credit and Other Investments segment) that was built to support levels of managed receivables that are significantly higher than both our current
levels and the levels that we expect to see in the near future. At this point, our Credit and Other Investments segment cash inflows are sufficient to cover its direct variable costs and a portion, but not all, of its share of overhead costs (including, for example, corporate-level executive and administrative costs and our convertible senior notes interest costs). As such, if we are 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.
Income Taxes.
We experienced effective income tax benefit rates of
33.6%
and
32.2%
for the
three and six months ended
June 30, 2017
, respectively, compared to effective income tax expense rates of
70.6%
and
15.1%
for the
three and six months ended
June 30, 2016
, respectively. Our effective income tax benefit rates for the
three and six months ended
June 30, 2017
are below the statutory rate principally due to interest that we accrued on unpaid federal tax liabilities and our establishment of a valuation allowance in the three months ended June 30, 2017 against the net federal deferred tax asset that arose during that period associated with our net loss incurred during that period. Our effective income tax expense rate for the three months ended
June 30, 2016
was significantly in excess of the statutory rate principally due to the significance of our accruals of interest and penalties on unpaid tax liabilities relative to our $0.9 million of pre-tax income during that period. Our effective income tax expense rate for the six months ended June 30, 2016 was below the statutory rate principally due to income during that period of our U.K. subsidiary that was not subject to tax in the U.S. and the U.K. tax on which was fully offset by the release of U.K. valuation allowances in that period. Both of these factors also served to mute somewhat the reduction of our effective income tax benefit rate in the three months ended June 30, 2017 versus the statutory rate in that period.
We report potential accrued interest and penalties related to both our accrued liabilities for uncertain tax positions and unpaid tax liabilities, as well as any net payments of income tax-related interest and penalties, within our income tax benefit or expense line item on our consolidated statements of operations. We likewise report the reversal of such accrued interest and penalties within the income tax benefit or expense line item to the extent that we resolve our liabilities for uncertain tax positions or unpaid tax liabilities in a manner favorable to our accruals therefor. During the
three and six months ended
June 30, 2017
, our income tax benefits were offset by
$0.2 million
and
$0.4 million
of net income tax-related interest and penalties charges. During the
three and six months ended
June 30, 2016
we included
$0.2 million
and
$0.4 million
of net income tax-related interest and penalties within those periods’ respective income tax expense line items.
In December 2014, we reached a settlement with the IRS concerning the tax treatment of net operating losses that we incurred in 2007 and 2008 and carried back to obtain refunds of federal income taxes paid in earlier years dating back to 2003. Our net unpaid income tax assessment associated with that settlement was
$7.3 million
at
June 30, 2017
; this amount excludes unpaid interest and penalties on the tax assessment, the accruals for which aggregated
$3.8 million
at
June 30, 2017
. Prior to our filing amended return claims that would have eliminated the
$7.3 million
assessment (and corresponding interest and penalties) under a negotiated provision of the IRS settlement, the IRS filed a lien (as is customarily the case) associated with the assessment. Subsequently, an IRS examination team has denied our amended return claims, and we have filed a protest with IRS Appeals. During the three months ended June 30, 2017, we were notified that the claims have been assigned to an IRS Appeals officer and an IRS Appeals conference has been scheduled for October 2017. To the extent we are unsuccessful in resolving this matter with IRS Appeals to our satisfaction, we plan to litigate this matter.
Credit and Other Investments Segment
Our Credit and Other Investments segment includes our activities relating to our servicing of and our investments in the point-of-sale, direct-to-consumer personal finance and credit card operations, our various credit card receivables portfolios, as well as other product testing and investments that generally utilize much of the same infrastructure. The types of revenues we earn from our investments in receivables portfolios and services primarily include finance charges, fees and the accretion of discounts associated with the point-of-sale receivables.
We record (i) the finance charges, discount accretion and late fees assessed on our Credit and Other Investments segment receivables in the interest income - consumer loans, including past due fees category on our consolidated statements of operations, (ii) the rental revenue, over-limit, annual, activation, monthly maintenance, returned-check, cash advance and other fees in the fees and related income on earning assets category on our consolidated statements of operations, and (iii) the charge offs (and recoveries thereof) within our provision for losses on loans and fees receivable 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 losses upon charge off of loans 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. In calculating managed receivables data, we include within managed receivables those receivables we manage for our consolidated subsidiaries, but we exclude from managed receivables any noncontrolling interest holders’ shares of the receivables. Additionally, we include within managed receivables only our economic share of the receivables that we manage for our equity-method investee.
Financial, operating and statistical data based on aggregate managed receivables are important to any evaluation of the performance of our credit portfolios, including our risk management, servicing and collection activities and our valuing of purchased receivables. In allocating our resources and managing our business, management relies heavily upon financial data and results prepared on this “managed basis.” Analysts, investors and others also consider it important that we provide selected financial, operating and statistical data on a managed basis because this allows a comparison of us to others within the specialty finance industry. Moreover, our management, analysts, investors and others believe it is critical that they understand the credit performance of the entire portfolio of our managed receivables because it reveals information concerning the quality of loan originations and the related credit risks inherent within the portfolios.
Reconciliation of the managed receivables data to our GAAP financial statements requires: (1) 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 and fees receivable or any changes in the fair value of loans and fees receivable and their associated structured financing notes; (2) inclusion of our economic share of (or equity interest in) the receivables we manage for our equity-method investee; (3) removal of any noncontrolling interest holders’ shares of the managed receivables underlying our GAAP consolidated results; (4) treatment of the transaction in which our 50%-owned equity-method investee acquired our structured financing trust notes (a) as a deemed sale of the trust receivables at their face amount, (b) followed by the 50%-owned equity-method investee’s deemed repurchase of such receivables for consideration equal to the discounted purchase price that it paid for the notes, and (c) as though the difference between the deemed face amount and the deemed discounted repurchase price of the receivables is to be treated as credit quality discount to be accreted into managed earnings as a reduction of net charge offs over the remaining life of the receivables; and (5) the exclusion from our managed receivables data of certain reimbursements received in respect of one of our portfolios which resulted in pre-tax income benefits within our total interest income, fees and related income on earning assets, losses upon charge off of loans and fees receivable recorded at fair value, net of recoveries, other income, servicing income, and equity in income of equity-method investee line items on our consolidated statements of operations totaling approximately $1.1 million for the three months ended June 30, 2017, $8.6 million for the three months ended March 31, 2017, $10.3 million for the three months ended December 31, 2016, $2.4 million for the three months ended September 30, 2016, $7.1 million for the three months ended June 30, 2016, $5.9 million for the three months ended March 31, 2016, $10.7 million for the three months ended December 31, 2015, and $11.4 million for the three months ended September 30, 2015. 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 difficult to determine the future effects of any such reimbursements that may be received.
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 determination of the fair value of our credit card receivables underlying formerly off-balance-sheet securitization structures, as well as our allowance for uncollectible loans and fees receivable in the case of 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” of our Annual Report on Form 10-K for the year ended December 31, 2016.
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
|
|
2015
|
|
Jun. 30
|
|
Mar. 31
|
|
Dec. 31
|
|
Sept. 30
|
|
Jun. 30
|
|
Mar. 31
|
|
Dec. 31
|
|
Sept. 30
|
Period-end managed receivables
|
$272,727
|
|
$253,308
|
|
$245,007
|
|
$221,683
|
|
$201,406
|
|
$155,425
|
|
$152,528
|
|
$151,055
|
Percent 30 or more days past due
|
10.9
|
%
|
|
10.9
|
%
|
|
11.8
|
%
|
|
10.9
|
%
|
|
8.2
|
%
|
|
9.7
|
%
|
|
11.5
|
%
|
|
10.5
|
%
|
Percent 60 or more days past due
|
7.4
|
%
|
|
7.8
|
%
|
|
8.1
|
%
|
|
7.3
|
%
|
|
5.3
|
%
|
|
7.1
|
%
|
|
7.9
|
%
|
|
7.2
|
%
|
Percent 90 or more days past due
|
4.8
|
%
|
|
5.2
|
%
|
|
5.2
|
%
|
|
4.7
|
%
|
|
3.4
|
%
|
|
5.1
|
%
|
|
5.4
|
%
|
|
5.0
|
%
|
Average managed receivables
|
$265,175
|
|
$250,862
|
|
$236,103
|
|
$216,951
|
|
$188,128
|
|
$152,831
|
|
$152,983
|
|
$143,946
|
Total yield ratio
|
34.7
|
%
|
|
34.4
|
%
|
|
32.6
|
%
|
|
33.5
|
%
|
|
36.8
|
%
|
|
35.4
|
%
|
|
35.2
|
%
|
|
41.3
|
%
|
Combined gross charge-off ratio
|
21.6
|
%
|
|
23.6
|
%
|
|
21.1
|
%
|
|
13.3
|
%
|
|
14.9
|
%
|
|
18.2
|
%
|
|
16.8
|
%
|
|
21.5
|
%
|
Adjusted charge-off ratio
|
18.4
|
%
|
|
20.1
|
%
|
|
17.8
|
%
|
|
10.7
|
%
|
|
11.7
|
%
|
|
14.1
|
%
|
|
12.9
|
%
|
|
16.5
|
%
|
Managed receivables levels.
We have experienced overall quarterly growth throughout the periods presented related to our current product offerings with over
$80.0 million
in net receivables growth associated with our point-of-sale and direct-to-consumer products from
June 30, 2016
to
June 30, 2017
. Our historical credit card receivables continue to decline given the closure of substantially all credit card accounts underlying the portfolios. While we expect continued quarterly growth in our managed receivables balances for all of our products throughout 2017, this growth in future periods largely is dependent on the addition of new retail partners to the point-of-sale operations as well as the timing of solicitations within the direct-to-consumer operations. Further, the loss of existing retail partner relationships could adversely affect new loan acquisition levels.
Delinquencies.
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 in the more mature portion of our managed portfolio. These account management strategies include conservative credit line management, purging of inactive accounts and collection strategies intended to optimize the effective account-to-collector ratio across delinquency categories. We measure the success of these efforts by measuring delinquency rates. These rates exclude receivables that have been charged off.
Given that the vast majority of credit card accounts related to our historical credit card receivables have been closed and there has been no significant new activity for these accounts, we generally have noted declines in delinquency statistics of our managed credit card receivables (when compared to the same quarters in the prior year).
As our investments in point-of-sale and direct-to-consumer receivables have become a larger component of our managed receivables base, our delinquency rates have increased (when compared to periods during which seasoned credit cards made up a larger portion of our managed receivables). This is largely a result of the risk profiles (and corresponding expected returns) for these receivables being higher than that experienced under our mature credit card receivables underlying closed
credit card accounts as discussed above. 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. 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, seasonal payment patterns on these receivables are similar to those experienced with our historical credit card receivables and we expect those patterns to continue. 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 in our newer, higher yielding receivables, including point-of-sale receivables and direct-to-consumer loans. While this growth has contributed to increases in our total yield ratio, we expect this growth will continue to reverse the trend of our declining charge-off rates as noted in the fourth quarter of 2016, because we expect these receivables to season, mature, and charge off at higher rates than we currently experience on our liquidating pool of credit card receivables associated with closed credit card accounts. We anticipate continued growth in our higher yielding point-of-sale and direct-to-consumer receivables over the next few quarters which should continue to stabilize our yield (with some modest increases) consistent with what we experienced in the past several quarters. However, the timing of receivable acquisitions as well as the relative mix of receivables acquired within a given quarter may contribute to some continued minor variability in our total yield ratio.
Although we have seen generally improving total yield ratio trend-lines, our third quarter 2015 total yield ratio was positively impacted by the recovery of approximately $2.0 million associated with a receivable that was fully reserved in a prior period. Absent this item, our total yield ratio would have been 35.8% in the third quarter of 2015.
Combined gross charge-off ratio and Adjusted charge-off ratio.
We charge off our Credit and Other Investments segment receivables when they become contractually more than 180 days past due or 120 days past due for the direct-to-consumer personal loan receivables. We charge off rent-to-own receivables and impair associated rental merchandise if a payment has not been made within the previous 90 days. However, if a payment is made 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. Typically, we charge off receivables within 30 days of notification and confirmation of a consumer’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.
Given that our historical credit card portfolios now account for less than 15% of our total managed receivables, the impacts of these historical portfolios are no longer key drivers in the performance of our managed receivables. Instead, growth within point-of-sale finance and direct-to-consumer receivables that have higher charge-off rates than the liquidating credit card portfolios that have historically comprised a larger portion of our managed receivables has resulted in increases in our charge-off rates over time. Our recent combined gross charge-off and adjusted 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 which reached peak charge off periods in the fourth quarter of 2016 but continued to negatively impact the first and second quarters of 2017. 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 and adjusted gross charge-off ratios and negatively impacting the same ratios in the fourth quarter of 2016 and the first and second quarters of 2017.
The continued growth in the point-of-sale and direct-to-consumer receivables continues to result in higher charge-offs than those experienced historically. In the next few quarters, we expect increasing charge off rates on a period-over-period comparison basis. This expectation is based on (1) higher expected charge off rates on the point-of-sale and direct-to-consumer receivables, offset slightly by lower charge offs associated with historical credit card receivables due to the continued liquidation of these receivables, (2) continued testing of receivables that may lead to higher charge-offs, (3) the low charge-off ratios experienced in the second and third quarters of 2016 as discussed above and (4) 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.
Auto Finance Segment
Our Auto Finance segment historically included a variety of auto sales and lending activities.
Our original platform, CAR, 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
include certain installment lending products in addition to our traditional loans secured by automobiles both in the U.S. and U.S. territories.
Collectively, as of
June 30, 2017
, we served more than
570
dealers through our Auto Finance segment in
33
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 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
|
|
2015
|
|
Jun. 30
|
|
Mar. 31
|
|
Dec. 31
|
|
Sept. 30
|
|
Jun. 30
|
|
Mar. 31
|
|
Dec. 31
|
|
Sept. 30
|
Period-end managed receivables
|
$
|
80,014
|
|
|
$
|
75,311
|
|
|
$
|
79,683
|
|
|
$
|
76,615
|
|
|
$
|
80,903
|
|
|
$
|
78,415
|
|
|
$
|
77,833
|
|
|
$
|
75,428
|
|
Percent 30 or more days past due
|
11.7
|
%
|
|
10.0
|
%
|
|
14.2
|
%
|
|
12.7
|
%
|
|
12.3
|
%
|
|
10.2
|
%
|
|
14.0
|
%
|
|
13.3
|
%
|
Percent 60 or more days past due
|
4.0
|
%
|
|
4.2
|
%
|
|
5.4
|
%
|
|
4.5
|
%
|
|
3.9
|
%
|
|
4.2
|
%
|
|
5.5
|
%
|
|
5.3
|
%
|
Percent 90 or more days past due
|
1.4
|
%
|
|
2.1
|
%
|
|
2.4
|
%
|
|
1.8
|
%
|
|
1.5
|
%
|
|
2.2
|
%
|
|
2.5
|
%
|
|
2.6
|
%
|
Average managed receivables
|
$
|
78,258
|
|
|
$
|
75,986
|
|
|
$
|
78,209
|
|
|
$
|
78,089
|
|
|
$
|
80,213
|
|
|
$
|
78,122
|
|
|
$
|
76,413
|
|
|
$
|
75,987
|
|
Total yield ratio
|
37.2
|
%
|
|
38.4
|
%
|
|
37.8
|
%
|
|
39.1
|
%
|
|
38.0
|
%
|
|
37.3
|
%
|
|
38.3
|
%
|
|
38.2
|
%
|
Combined gross charge-off ratio
|
2.4
|
%
|
|
2.4
|
%
|
|
2.6
|
%
|
|
2.8
|
%
|
|
3.1
|
%
|
|
2.7
|
%
|
|
3.3
|
%
|
|
3.0
|
%
|
Recovery ratio
|
1.9
|
%
|
|
1.6
|
%
|
|
1.6
|
%
|
|
1.0
|
%
|
|
1.5
|
%
|
|
1.3
|
%
|
|
1.6
|
%
|
|
1.3
|
%
|
Managed receivables.
We expect modest growth in the level of our managed receivables. Although we are expanding our CAR operations, the Auto Finance segment faces strong competition from other specialty finance lenders, as well as the indirect effects on us of our buy-here, pay-here dealership customers’ competition with more traditional franchise dealerships for consumers interested in purchasing automobiles. We expect managed receivable levels to continue to grow slightly from current levels during 2017 in both the U.S. and U.S. territories.
Delinquencies.
Current delinquency levels are consistent with our expectations for levels in the near term with some marginal increases noted within the overall buy-here pay-here market. Delinquency rates tend to fluctuate based on seasonal trends and historically are lower in the first quarter of each year as seen above due to the benefits of strong payment patterns associated with year-end tax refunds for most consumers. Second quarter 2016 delinquency rates were positively impacted by higher than anticipated customer payments experienced in the first quarter of 2016. We are not concerned with modest fluctuations in delinquency rates and do not believe they will have a significantly positive or adverse impact on our results of operations; even at slightly elevated rates, we earn significant yields on CAR’s receivables and have significant dealer reserves (i.e., retainages or holdbacks on the amount of funding CAR provides to its dealer customers) to protect against meaningful credit losses.
Total yield ratio.
We have experienced modest fluctuations in our total yield ratio largely impacted by the relative mix of receivables in our various products offered by CAR as some shorter term product offerings tend to have higher yields. Slightly depressing the overall total yield ratio in the second quarter of 2016 is the growth we experienced in the average managed receivables levels which negatively impacted the ratio ahead of the positive impacts of associated billed yield on this
growth. As we experienced slight declines in our managed receivables levels in the third quarter of 2016 we realized this delayed impact. Yields on our CAR products over the last few quarters are consistent with our expectations and we expect our total yield ratio to remain in line with current experience with moderate fluctuations based on relative growth or declines in average managed receivables for a given quarter as noted above. Excluded from our total yield ratio in the third quarter of 2015 is the resolution of an outstanding dispute that resulted in the recovery of approximately $2.0 million associated with a receivable that was fully reserved in a prior period.
Combined gross charge-off ratio and recovery ratio.
We charge off auto finance receivables when they are between 120 and 180 days past due, unless the collateral is repossessed and sold before that point, in which case we will record a charge off when the proceeds are received. Combined gross charge-off ratios in 2016 and 2017 reflect the lower delinquency rates we have recently experienced. While we anticipate our charge-offs to be incurred ratably across our portfolio of dealers, specific dealer related losses are difficult to predict and can negatively influence our combined gross charge-off ratio. We continually re-assess our dealers and will take appropriate action if we believe a particular dealer’s risk characteristics adversely change. While we have appropriate dealer reserves to mitigate losses across the majority of our pool of receivables, the timing of recognition of these reserves as an offset to charge offs is largely dependent on various factors specific to each of our dealer partners including ongoing purchase volumes, outstanding balances of receivables and current performance of outstanding loans. As such, the timing of charge off offsets is difficult to predict, however we believe that these reserves are adequate to offset any loss exposure we may incur. Additionally, the products we issue in the U.S. territories do not have dealer reserves with which we can offset losses. As our investments in these loans grow, we expect that gross charge-off rates will climb slightly over existing rates. We also expect our recovery rate to fluctuate modestly from quarter to quarter due to the timing of the sale of repossessed autos.
Definitions of Financial, Operating and Statistical Measures
Total yield ratio.
Represents an annualized fraction, the numerator of which includes all finance charge and late fee income billed on all outstanding receivables, plus credit card fees (including over-limit fees, cash advance fees, returned check fees and interchange income), plus earned, amortized amounts of annual membership fees and activation fees with respect to certain credit card receivables, plus ancillary income, plus amortization of the accretable yield component of our acquisition discounts for portfolio purchases, plus gains (or less losses) on debt repurchases and other activities within our Credit and Other Investments segment less any adjustments to finance and fee billings, and the denominator of which is average managed receivables.
Combined gross charge-off ratio.
Represents an annualized fraction the numerator of which is the aggregate 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 denominator of which is average managed receivables. Recoveries on managed receivables represent all amounts received related to managed receivables that previously have been charged off, including payments received directly from consumers and proceeds received from the sale of those charged-off receivables. Recoveries typically have represented less than 2% of average managed receivables.
Adjusted charge-off ratio.
Represents an annualized fraction the numerator of which is the principal amount of losses, net of recoveries as adjusted to apply discount accretion related to the credit quality of acquired portfolios to offset a portion of the actual face amount of net charge offs, and the denominator of which is average managed receivables. (Historically, upon our acquisitions of credit card receivables, a portion of the discount reflected within our acquisition prices has related to the credit quality of the acquired receivables—that portion representing the excess of the face amount of the receivables acquired over the future cash flows expected to be collected from the receivables. Because we treat the credit quality discount component of our acquisition discount as related exclusively to acquired principal balances, the difference between our net charge offs and our adjusted charge offs for each respective reporting period represents the total dollar amount of our charge offs that were charged against our credit quality discount during each respective reporting period.)
LIQUIDITY, 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) obtaining new retail partners to continue growth of the point-of-sale receivables (iii) continuing growth in direct-to-consumer and 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
June 30, 2017
are those associated with the following notes payable in the amounts indicated (in millions):
|
|
|
|
|
Revolving credit facility (expiring October 29, 2017) that is secured by certain receivables and restricted cash
|
$
|
34.6
|
|
Revolving credit facility (expiring November 1, 2018) that is secured by the financial and operating assets of our CAR operations
|
30.4
|
|
Revolving credit facility (expiring December 31, 2019) that is secured by certain receivables and restricted cash
|
19.8
|
|
Senior secured term loan from related parties (expiring November 22, 2017) that is secured by certain assets of the Company with an annual interest rate equal to 9.0%
|
40.0
|
|
Total
|
$
|
124.8
|
|
Further details concerning the above debt facilities are provided in Note 7, “Notes Payable,” and Note 8, “Convertible Senior Notes,” to our consolidated financial statements included herein. Based on the state of the debt capital markets, the performance of our assets that serve as security for the above facilities, and our relationships with lenders, we view imminent refunding or refinancing risks with respect to the above facilities as low in the current environment, and we believe that the quality of our new receivables should allow us to raise more capital through increasing the size of our facilities with our existing lenders and attracting new lending relationships.
In February 2017, we (through a wholly owned subsidiary) established a program under which we sell certain receivables to a consolidated trust in exchange for notes issued by the trust. The notes are secured by the receivables and other assets of the trust. Simultaneously with the establishment of the program, the trust issued a series of variable funding notes and sold an aggregate amount of up to $90.0 million (of which
$26.0 million
was outstanding as of June 30, 2017) to an unaffiliated third party pursuant to a facility that can be drawn upon to the extent of outstanding eligible receivables.
The facility matures on February 8, 2022 and is 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 facility also may be prepaid subject to payment of a prepayment fee.
In December 2014, we reached a settlement with the IRS concerning the tax treatment of net operating losses that we incurred in 2007 and 2008 and carried back to obtain refunds of federal income taxes paid in earlier years dating back to 2003. Our net unpaid income tax assessment associated with that settlement was
$7.3 million
at
June 30, 2017
; this amount excludes unpaid interest and penalties on the tax assessment, the accruals for which aggregated
$3.8 million
at
June 30, 2017
. An IRS examination team denied amended return claims we filed that would have eliminated the
$7.3 million
assessment (and corresponding interest and penalties), and we filed a protest with IRS Appeals. During the three months ended June 30, 2017, the Company was notified that the claim had been assigned to an IRS Appeals officer and an IRS Appeals conference has been scheduled for October, 2017. Pending the resolution of this matter, and as is customary in such cases, the IRS filed a lien in respect of the
$7.3 million
assessment. To the extent we are unsuccessful in resolving this matter with IRS Appeals to our satisfaction, we plan to litigate this matter.
At
June 30, 2017
, we had
$74.5 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
six months
ended
June 30, 2017
are as follows:
|
|
•
|
During the
six months
ended
June 30, 2017
, we
generated
$10.4 million
of cash flows from operations compared to the
generation of
$12.7 million
of cash flows from operations during the
six months
ended
June 30, 2016
. The decrease in cash provided by operating activities was principally related to decreases in 1) collections associated rental payments in the
six months
ended
June 30, 2017
relative to the same period in 2016, given the cessation of our rent-to-own program; and 2) reductions in collections received in respect of one of our portfolios . These decreases were offset by the timing of payments associated with accrued liabilities including those in respect of one of our portfolios which may be owed.
|
|
|
•
|
During the
six months
ended
June 30, 2017
, we
used
$36.4 million
of cash from our investing activities, compared to
use of
$40.0 million
of cash from investing activities during the
six months
ended
June 30, 2016
. This decrease is primarily due to the shrinking size of our historical credit card receivables resulting in corresponding payments from consumers and as well as cash returns on our increasing investments in point-of-sale and direct-to-consumer receivables which contributed positively to our cash generated from investing activities. Offsetting these declines are the increasing levels of investments in the point-of-sale and direct-to-consumer receivables relative to the same period in 2016 and which we expect to continue to make throughout 2017.
|
|
|
•
|
During the
six months
ended
June 30, 2017
, we
generated
$24.1 million
of cash in financing activities, compared to our
generating
$7.6 million
of cash in financing activities during the
six months
ended
June 30, 2016
. 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.
|
Beyond our immediate financing efforts discussed throughout this report, we will continue to evaluate debt and equity issuances as a means to fund our investment opportunities. We expect to take advantage of any opportunities to raise additional capital if terms and pricing are attractive to us. Any proceeds raised under these efforts or additional liquidity available to us could be used to fund (1) the acquisition of additional financial assets associated with the point-of-sale and direct-to-consumer finance operations as well as the acquisition of credit card receivables portfolios, (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. Pursuant to a share repurchase plan authorized by our Board of Directors on May 12, 2016, we are authorized as of
June 30, 2017
to repurchase an additional
4,912,401
shares of our common stock through June 30, 2018.
CONTRACTUAL OBLIGATIONS, COMMITMENTS AND OFF-BALANCE-SHEET ARRANGEMENTS
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2016.
Commitments and Contingencies
We do not currently have any off-balance-sheet arrangements; however, we do have certain contractual arrangements that would require us to make payments or provide funding if certain circumstances occur, which we refer to as contingent commitments. We do not currently expect that these contingent commitments will result in any material amounts being paid by us. See Note 9, “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.
Measurements for Loans and Fees Receivable at Fair Value and Notes Payable Associated with Structured Financings at Fair Value
Our valuation of loans 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 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 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 statement of operations.
Allowance for Uncollectible Loans 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 and fees receivable as an estimate of the probable losses inherent within those loans and fees receivable that we do not report at fair value. Our loans and fees receivable consist of smaller-balance, homogeneous loans, divided into two portfolio segments: Credit and Other Investments; and Auto Finance. Each of these portfolio segments is further divided into pools based on common characteristics such as contract or acquisition channel. For each pool, we determine the necessary allowance for uncollectible loans and fees receivable by analyzing some or all of the following unique 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. To the extent that actual results differ from our estimates of uncollectible loans and fees receivable, our results of operations and liquidity could be materially affected.
RELATED PARTY TRANSACTIONS
Under a shareholders’ agreement into which we entered with 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 of excess office space at our Atlanta headquarters with HBR Capital, Ltd. (“HBR”), a company co-owned by David G. Hanna and his brother Frank J. Hanna, III. The sublease rate per square foot is the same as the rate that we pay under the prime lease. Under the sublease, HBR paid us $26,103 and $25,588 for 2016 and 2015, respectively. The aggregate amount of payments required under the sublease from January 1, 2017 to the expiration of the sublease in May 2022 is $150,717.
In January 2013, HBR began leasing four employees from us. HBR reimburses us for the full cost of the employees, based on the amount of time devoted to HBR. In the
six months ended June 30, 2017
and 2016, we received
$132,077
and $130,372, respectively, of reimbursed costs from HBR associated with these leased employees.
On November 26, 2014, we and certain of our subsidiaries entered into a Loan and Security Agreement with Dove Ventures, LLC, a Nevada limited liability company (“Dove”). The agreement provides for a senior secured term loan facility in
an amount of up to
$40.0 million
at any time outstanding. The Loan and Security Agreement is fully drawn with
$40.0 million
outstanding as of
June 30, 2017
.
Our obligations under the agreement are guaranteed by certain subsidiary guarantors and secured by a pledge of certain assets of ours and the subsidiary guarantors. The loans bear interest at the rate of
9.0%
per annum, payable monthly in arrears. The principal amount of these loans is payable in a single installment on
November 22, 2017
(as amended). The agreement includes customary affirmative and negative covenants, as well as customary representations, warranties and events of default. Subject to certain conditions, we can prepay the principal amounts of these loans without premium or penalty.
Dove is a limited liability company owned by three trusts. David G. Hanna is the sole shareholder and the President of the corporation that serves as the sole trustee of one of the trusts, and David G. Hanna and members of his immediate family are the beneficiaries of this trust. Frank J. Hanna, III is the sole shareholder and the President of the corporation that serves as the sole trustee of the other two trusts, and Frank J. Hanna, III and members of his immediate family are the beneficiaries of these other two trusts.
FORWARD-LOOKING INFORMATION
We make forward-looking statements in this report and in other materials we file with the Securities and Exchange Commission (“SEC”) or otherwise make public. This Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements. In addition, our senior management might make forward-looking statements to analysts, investors, the media and others. Statements with respect to expected revenue; income; receivables; income ratios; net interest margins; long-term shareholder returns; acquisitions of financial assets and other growth opportunities; divestitures and discontinuations of businesses; loss exposure and loss provisions; delinquency and charge-off rates; the effects of account actions we may take or have taken; changes in collection programs and practices; changes in the credit quality and fair value of our credit card loans and fees receivable and the fair value of their underlying structured financing facilities; the impact of actions by the Federal Deposit Insurance Corporation (“FDIC”), Federal Reserve Board, Federal Trade Commission (“FTC”), Consumer Financial Protection Bureau (“CFPB”) and other regulators on both us, banks that issue credit cards and other credit products on our behalf, and merchants that participate in our point-of-sale finance operations; account growth; the performance of investments that we have made; operating expenses; the impact of bankruptcy law changes; marketing plans and expenses; the performance of our Auto Finance segment; our plans in the U.K.; the impact of our credit card receivables on our financial performance; the sufficiency of available capital; the prospect for improvements in the capital and finance markets; future interest costs; sources of funding operations and acquisitions; growth and profitability of our point-of-sale finance operations; our entry into international markets; our ability to raise funds or renew financing facilities; share repurchases or issuances; debt retirement; the results associated with our equity-method investee; our servicing income levels; gains and losses from investments in securities; experimentation with new products and other statements of our plans, beliefs or expectations are forward-looking statements. These and other statements using words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and similar expressions also are forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement. The forward-looking statements we make are not guarantees of future performance, and we have based these statements on our assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or historical earnings levels.
Although it is not possible to identify all factors, we continue to face many risks and uncertainties. Among the factors that could cause actual future results to differ materially from our expectations are the risks and uncertainties described under “Risk Factors” set forth in Part II, Item 1A, and the risk factors and other cautionary statements in other documents we file with the SEC, including the following:
|
|
•
|
the availability of adequate financing to support growth;
|
|
|
•
|
the extent to which federal, state, local and foreign governmental regulation of our various business lines and the products we service for others limits or prohibits the operation of our businesses;
|
|
|
•
|
current and future litigation and regulatory proceedings against us;
|
|
|
•
|
the effect of adverse economic conditions on our revenues, loss rates and cash flows;
|
|
|
•
|
competition from various sources providing similar financial products, or other alternative sources of credit, to consumers;
|
|
|
•
|
the adequacy of our allowances for uncollectible loans and fees receivable and estimates of loan losses used within our risk management and analyses;
|
|
|
•
|
the possible impairment of assets;
|
|
|
•
|
our ability to manage costs in line with the expansion or contraction of our various business lines;
|
|
|
•
|
our relationship with (i) the merchants that participate in point-of-sale finance operations and (ii) the banks that issue credit cards and provide certain other credit products utilizing our technology platform and related services; and
|
|
|
•
|
theft and employee errors.
|
Most of these factors are beyond our ability to predict or control. Any of these factors, or a combination of these factors, could materially affect our future financial condition or results of operations and the ultimate accuracy of our forward-looking statements. There also are other factors that we may not describe (because we currently do not perceive them to be material) that could cause actual results to differ materially from our expectations.
We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.