Atlanticus’ common stock, no par value per share, is registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the “Act”) and is listed on the NASDAQ Global Select Market.
Atlanticus is not a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.
Atlanticus (1) is required to file reports pursuant to Section 13 of the Act, (2) has filed all reports required to be filed by Section 13 of the Act during the preceding 12 months and (3) has been subject to such filing requirements for the past 90 days.
Atlanticus has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.
Atlanticus believes that its executive officers, directors and 10% beneficial owners subject to Section 16(a) of the Act complied with all applicable filing requirements during 2018, except as set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in Atlanticus' Proxy Statement for the 2019 Annual Meeting of Shareholders.
Atlanticus is a smaller reporting company and is not a shell company or an emerging growth company.
The aggregate market value of Atlanticus’ common stock (based upon the closing sales price quoted on the NASDAQ Global Select Market) held by non-affiliates as of June 30, 2018 was $13.9 million. (For this purpose, directors, officers and 10% shareholders have been assumed to be affiliates, and we also have included 1,459,233 loaned shares at June 30, 2018.)
As of March 13, 2019, 15,956,074 shares of common stock, no par value, of Atlanticus were outstanding, including 1,459,233 loaned shares to be returned.
Portions of Atlanticus' Proxy Statement for its 2019 Annual Meeting of Shareholders are incorporated by reference into Part III.
In this Report, except as the context suggests otherwise, the words “Company,” “Atlanticus Holdings Corporation,” “Atlanticus,” “we,” “our,” “ours” and “us” refer to Atlanticus Holdings Corporation and its subsidiaries and predecessors. Atlanticus owns Aspire
®
, Emerge
®
, Fortiva
®
, Imagine
®
, Salute
®
, Tribute
®
and other trademarks and service marks in the United States (“U.S.”) and the United Kingdom (“U.K.”).
We make forward-looking statements in this Report and in other materials we file with the Securities and Exchange Commission (“SEC”) or otherwise make public. In this Report, both Item 1, “Business,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contain forward-looking statements. In addition, our senior management might make forward-looking statements to analysts, investors, the media and others. Statements with respect to expected revenue; income; receivables; income ratios; net interest margins; long-term shareholder returns; acquisitions of financial assets and other growth opportunities; divestitures and discontinuations of businesses; loss exposure and loss provisions; delinquency and charge-off rates; changes in collection programs and practices; changes in the credit quality and fair value of our credit card loans, interest and fees receivable and the fair value of their underlying structured financing facilities; the impact of actions by the Federal Deposit Insurance Corporation (“FDIC”), Federal Reserve Board, Federal Trade Commission (“FTC”), Consumer Financial Protection Bureau (“CFPB”) and other regulators on both us, banks that issue credit cards and other credit products on our behalf, and merchants that participate in our point-of-sale finance operations; account growth; the performance of investments that we have made; operating expenses; the impact of bankruptcy law changes; marketing plans and expenses; the performance of our Auto Finance segment; 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 ability to raise funds or renew financing facilities; share repurchases or issuances; debt retirement; the results associated with our equity-method investee; our servicing income levels; gains and losses from investments in securities; experimentation with new products and other statements of our plans, beliefs or expectations are forward-looking statements. These and other statements using words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and similar expressions also are forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement. The forward-looking statements we make are not guarantees of future performance, and we have based these statements on our assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or historical earnings levels.
Although it is not possible to identify all factors, we continue to face many risks and uncertainties. Among the factors that could cause actual future results to differ materially from our expectations are the risks and uncertainties described under “Risk Factors” set forth in Part I, Item 1A, and the risk factors and other cautionary statements in other documents we file with the SEC, including the following:
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.
PART I
This Report contains information that we obtained from industry and general publications and research, surveys and studies conducted by third parties. This information involves many assumptions and limitations, and you are cautioned not to give undue weight to any of this data. We have obtained this information from sources that we believe are reliable. However, we have not independently verified market or industry data from third party sources.
General
A general discussion of our business follows. For additional information about our business, please visit our website at
www.Atlanticus.com
. Information contained on or available through our website is not incorporated by reference in this Report.
We are a Georgia corporation formed in 2009, as successor to an entity that commenced operations in 1996. We provide various credit and related financial services and products primarily to or associated with the financially underserved consumer credit market.
We utilize proprietary analytics and a flexible technology platform to enable financial institutions to provide various credit and related financial services and products to or associated with the financially underserved consumer credit market. According to data published by FICO (NYSE: FICO), 41.7% of consumers had FICO® scores of 700 or less as of April 2018 which represents a population in excess of 90 million consumers. The “Report on Economic Well-Being of U.S. Households in 2017” published by the Board of Governors of the Federal Reserve System further states that 40% of adults do not have ready access to $400 to cover an unexpected expense or would cover the expense by selling something or borrowing money, with CareerBuilder noting that 75% of Americans live “paycheck to paycheck”. These consumers often have short-term, immediate credit needs that are often not effectively met by traditional financial institutions. By facilitating fairly priced consumer credit alternatives with value added features and benefits specifically curated for the unique needs of this financially underserved consumer, we endeavor to empower consumers on a path to improved financial well-being.
Currently, within our Credit and Other Investments segment, we are applying the experiences gained and infrastructure built from servicing over $25 billion in consumer loans over our 22-year operating history to support lenders who originate a range of consumer loan products. These products include retail credit and credit cards marketed through multiple channels, including retail point-of-sale, direct mail solicitation, and partnerships with third parties. In the point-of-sale channel, we partner with retailers and service providers in various industries across the U.S. to allow them to provide credit to their customers for the purchase of a variety of goods and services including consumer electronics, furniture, elective medical procedures, healthcare, educational services and home-improvements. These services of our lending partners are often extended to consumers who may not have access to traditional financing options. We specialize in supporting this “second-look” credit service. Our flexible technology platform allows our lending partners to integrate our paperless process and instant decision-making platform with the technology infrastructure of participating retailers and service providers. Additionally, we support lenders who market general purpose credit cards directly to consumers through additional channels, which enables them to reach consumers through a diverse origination platform that includes retail point-of-sale, direct mail and digital marketing solicitation and partnerships with third parties. Our technology platform and proprietary analytics enable lenders to make instant credit decisions utilizing hundreds of inputs from multiple sources and thereby offer credit to consumers overlooked by traditional providers of financing. By offering a range of products through a multitude of channels, we enable lenders to provide the right type of credit, whenever and wherever the consumer has a need.
In most cases, we invest in the receivables originated by lenders who utilize our technology platform and other related services. From time to time, we also purchase receivables portfolios from third parties. In this Report, "receivables" refer to receivables we have purchased from our lending partners or from third parties.
Using our infrastructure and technology platform, we also provide loan servicing, including risk management and customer service outsourcing, for third parties. Also through our Credit and Other Investments segment, we engage in testing and limited investment in consumer finance technology platforms as we seek to capitalize on our expertise and infrastructure.
Additionally, we report within our Credit and Other Investments segment: (1) the income earned from an investment in an equity-method investee that holds credit card receivables for which we are the servicer; and (2) gains or losses associated with investments previously made in consumer finance technology platforms.
The recurring cash flows we receive within our Credit and Other Investments segment principally include those associated with (1) point-of-sale and direct-to-consumer receivables, (2) servicing compensation and (3) credit card receivables portfolios that are unencumbered or where we own a portion of the underlying structured financing facility.
We believe that our point-of-sale and direct-to-consumer receivables are generating, and will continue to generate, attractive returns on assets, thereby facilitating debt financing under terms and conditions (including advance rates and pricing) that will support attractive returns on equity, and we continue to pursue growth in this area.
Beyond these activities within our Credit and Other Investments segment, we invest in and service portfolios of credit card receivables. One of our portfolios of credit card receivables is encumbered by non-recourse structured financing, and for this portfolio our principal remaining economic interest is the servicing compensation we receive as an offset against our servicing costs given that the likely future collections on the portfolio are insufficient to allow for full repayment of the financing.
Within our Auto Finance segment, our CAR subsidiary operations principally purchase and/or service loans secured by automobiles from or for, and also provide floor plan financing for, a pre-qualified network of independent automotive dealers and automotive finance companies in the buy-here, pay-here, used car business. We purchase auto loans at a discount and with dealer retentions or holdbacks that provide risk protection. Also within our Auto Finance segment, we are providing certain installment lending products in addition to our traditional loans secured by automobiles.
We closely monitor and manage our expenses based on current product offerings. At this time, we are maintaining our infrastructure and incurring increased overhead and other costs in order to expand point-of-sale and direct-to-consumer finance and credit solutions and new product offerings that we believe have the potential to grow into our existing infrastructure and allow for long-term shareholder returns.
Subject to the availability of capital at attractive terms and pricing, we plan to continue to evaluate and pursue a variety of activities, including: (1) investments in additional financial assets associated with point-of-sale and direct-to-consumer finance and credit activities as well as the acquisition of interests in receivables portfolios; (2) investments in other assets or businesses that are not necessarily financial services assets or businesses; and (3) the repurchase of our convertible senior notes and other debt or our outstanding common stock.
Credit and Other Investments Segment.
Our Credit and Other Investments segment includes our activities relating to our servicing of and our investments in receivables from point-of-sale and credit card operations, our various credit card receivables portfolios, as well as other product testing and investments that generally utilize much of the same infrastructure. The types of revenues we earn from our investments in receivables portfolios and services primarily include finance charges, fees and the accretion of discounts associated with the point-of-sale receivables or annual fees on our direct-to-consumer receivables.
As previously discussed, we support lenders who originate a range of consumer loan products over multiple channels. Through our point-of-sale operations, we leverage our flexible technology platform that allows retail partners and service providers to offer loan options to their customers who may have been declined by a primary lender. The same proprietary analytics and infrastructure also allows lenders to offer general purpose loan products directly to consumers with our direct-to-consumer products. We reach these consumers through a diverse origination platform that includes direct mail, digital marketing and partnerships.
We are currently expanding our acquisitions of new receivables associated with credit card accounts. With respect to the credit card accounts underlying our legacy credit card receivables and portfolios, substantially all of the related credit card accounts have been closed to new cardholder purchases since 2009. We continue to service these credit card portfolios as they liquidate and they no longer constitute a meaningful part of our ongoing operations.
Our credit and other operations are heavily regulated, which may cause us to change how we conduct our operations either in response to regulation or in keeping with our goal of leading the industry in adherence to consumer-friendly practices. We have made meaningful changes to our practices over the past several years, and because our account management practices are evolutionary and dynamic, it is possible that we may make further changes to these practices, some of which may produce positive, and others of which may produce adverse, effects on our operating results and financial position. Customers at the lower end of the credit score range intrinsically have higher loss rates than do customers at the higher end of the credit score range. As a result, we price our products to reflect this higher loss rate. As such, our products are subject to greater regulatory scrutiny than the products of prime only lenders who are able to price their credit products at much lower levels than we can. See “Consumer and Debtor Protection Laws and Regulations—Credit and Other Investments Segment” and Item 1A, “Risk Factors.”
Auto Finance Segment.
The operations of our Auto Finance segment are conducted through our CAR platform, which we acquired in April 2005. CAR primarily purchases and/or services loans secured by automobiles from or for, and also provides floor-plan financing for, a pre-qualified network of independent automotive dealers and automotive finance companies in the buy-here, pay-here used car business. 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.
Through our CAR operations, we generate revenues on purchased loans through interest earned on the face value of the installment agreements combined with the accretion of discounts on loans purchased. We generally earn discount income over the life of the applicable loan. Additionally, we generate revenues from servicing loans on behalf of dealers for a portion of actual collections and by providing back-up servicing for similar quality assets owned by unrelated third parties. We offer a number of other products to our network of buy-here, pay-here dealers (including our floor-plan financing offering), but the majority of our activities are represented by our purchases of auto loans at discounts and our servicing of auto loans for a fee. As of December 31, 2018, our CAR operations served more than 580 dealers in 33 states, the District of Columbia and two U.S. territories. These operations continue to perform well (achieving consistent profitability and generating positive cash flows and growth).
How Do We Manage the Receivables and Mitigate Our Risks?
Credit and Other Investments Segment.
We manage our investments in receivables using credit scoring, credit file data and our proprietary risk evaluation systems developed and refined over our 22-year operating history. These strategies include the management of transaction authorizations, account renewals, credit line modifications and collection programs. We use an adaptive control system to translate our strategies into account management processes. The system enables us to develop and test multiple strategies simultaneously, which allows us to continually refine our account management activities. We have incorporated our proprietary risk scores into the control system, in addition to standard credit behavior scores used widely in the industry, in order to segment, evaluate and manage the receivables. We believe that by combining external credit file data along with historical and current customer activity, we are able to better predict the true risk associated with current and delinquent receivables.
For our point-of-sale and direct-to-consumer finance activities as well as the accounts that are open to purchases, we generally assist our lending partners with managing credit lines to reward financially underserved customers who are performing well and to mitigate losses from delinquent customer segments. We also assist our lending partners with employing strategies to reduce otherwise open credit lines for customers demonstrating indicators of increased credit or bankruptcy risk. Data relating to account performance are captured and loaded into our proprietary database for ongoing analysis. We adjust account management strategies as necessary, based on the results of such analyses. Additionally, we use industry-standard fraud detection software to manage the portfolio. We route accounts to manual work queues and suspend charging privileges if the transaction-based fraud models indicate a probability of fraudulent use.
Auto Finance Segment.
Our CAR operations manage credit quality and loss mitigation at the dealer portfolio level through the implementation of dealer-specific loss reserve accounts. In most instances, the reserve accounts are cross-collateralized across all accounts presented by any single dealer. CAR monitors performance at the dealer portfolio level (by product type) to adjust pricing or the reserve account or to determine whether to terminate future account purchases from such dealer.
CAR provides dealers with specific purchase guidelines based upon each product offering and delegates approval authority to assist in the monitoring of transactions during the loan acquisition process. Dealers are subject to specific approval criteria, and individual accounts typically are verified for accuracy before, during and after the acquisition process. Dealer portfolios across the business segment are monitored and compared against expected collections and peer dealer performance. Monitoring of dealer pool vintages, delinquencies and loss ratios helps determine past performance and expected future results, which are used to adjust pricing and reserve requirements. Our CAR operations also manage risk through diversifying their receivables among multiple dealers.
How Do We Collect?
Credit and Other Investments Segment.
The goal of the collections process is to collect as much of the money that is owed to us in the most cost-effective and customer-friendly manner possible. To this end, we employ the traditional cross-section of letters and telephone calls to encourage payment. We also sometimes offer flexibility with respect to the application of payments in order to encourage larger or prompter payments. For instance, in certain cases we may vary from our general payment application priority (i.e., of applying payments first to finance charges, then to fees, and then to principal) by agreeing to apply payments first to principal and then to finance charges and fees or by agreeing to provide payments or credits of finance charges and principal to induce or in exchange for an appropriate payment. Application of payments in this manner also permits our collectors to assess real time the degree to which payments over the life of an account have covered the principal credit extensions on that account. This allows our collectors to readily identify our potential economic loss associated with the charge off of a particular receivable (i.e., the excess of principal loaned over payments received throughout the life of the account). Our selection of collection techniques, including, for example, the order in which we apply payments or the provision of payments or credits to induce or in exchange for a payment, impacts the statistical performance of the portfolios that we present under “Credit and Other Investments Segment” within Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Our collectors employ various and evolving tools when collecting receivables, and they routinely test and evaluate new tools in their effort toward improving our collections with a greater degree of efficiency and service. These tools include programs under which the contractual interest associated with a receivable may be reduced or eliminated, or a certain amount of accrued fees is waived, provided a minimum number or amount of payments have been made. In some instances, we may agree to match the payment on a receivable, for example, with commensurate payments or reductions of finance charges or waivers of fees. In other situations, we may actually settle and adjust finance charges and fees on a receivable, for example, based on a commitment and follow through on a commitment to pay certain portions of the balances owed. Our collectors may also decrease minimum payments owed under certain collection programs. Additionally, we employ re-aging techniques as discussed below. We also may occasionally use our marketing group to assist in determining various programs to assist in the collection process. Moreover, we voluntarily participate in the Consumer Credit Counseling Service (“CCCS”) program by waiving a certain percentage of a receivable that is considered our “fair share” under the CCCS program. All of our programs are utilized based on the degree of economic success and customer service they achieve.
We regularly monitor and adapt our collection strategies, techniques, technology and training to optimize our efforts to reduce delinquencies and charge offs. We use our operations systems to develop these proprietary collection strategies and techniques, and we analyze the output from these systems to identify the strategies and techniques that we believe are most likely to result in curing a delinquent account in the most cost-effective manner, rather than treating all accounts the same based on the mere passage of time.
As in all aspects of our risk management strategies, we compare the results of each of the above strategies with other collection strategies and devote resources to those strategies that yield the best results. Results are measured based on, among other things, delinquency rates, expected losses and costs to collect. Existing strategies are then adjusted based on these results. We believe that routinely testing, measuring and adjusting collection strategies results in lower bad debt losses and operating expenses.
Interest and fees for most credit products we service are discontinued when loans, interest and fees receivable become contractually 90 or more days past due and we charge off loans, interest and fees receivable when they become contractually more than 180 days past due. For all of our products, we charge off receivables within 30 days of notification and confirmation of bankruptcy or death of the obligor. However, in some cases of death, we do not charge off receivables if there is a surviving, contractually liable individual or an estate large enough to pay the debt in full.
Our determination of whether an account is contractually past due is relevant to our delinquency and charge-off data provided under the “Credit and Other Investments Segment” caption within Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Various factors are relevant in analyzing whether an account is contractually past due (e.g., whether an account has not satisfied its minimum payment due requirement), which for us is the trigger for moving receivables through our various delinquency stages and ultimately to charge-off status. For our point-of-sale and direct-to-consumer finance accounts, we consider an account to be delinquent if the customer has not made any required payment as of the payment due date. For credit card accounts, we consider a cardholder’s receivable to be delinquent if the cardholder has failed to pay a minimum amount, computed as the greater of a stated minimum payment or a fixed percentage of the statement balance (for example 3% to 10% of the outstanding balance in some cases or in other cases 1% of the outstanding balance plus any finance charges and late fees billed in the current cycle).
Additionally, we may re-age customer accounts that meet our qualifications for re-aging. Re-aging involves changing the delinquency status of an account. It is our policy to work cooperatively with customers demonstrating a willingness and ability to repay their indebtedness and who satisfy other criteria, but are unable to pay the entire past due amount. Generally, to qualify for re-aging, an account must have been opened for at least nine months and may not be re-aged more than once in a twelve-month period or twice in a five-year period. In addition, an account on a workout program may qualify for one additional re-age in a five-year period. The customer also must have made three consecutive minimum monthly payments or the equivalent cumulative amount in the last three billing cycles. If a re-aged account subsequently experiences payment defaults, it will again become contractually delinquent and will be charged off according to our regular charge-off policy. The practice of re-aging an account may affect delinquencies and charge offs, potentially delaying or reducing such delinquencies and charge offs; however, this impact generally changes such delinquencies and charge offs by less than 10% and 5%, respectively.
As discussed above, typically, once an account is 90 days or more past due, the account is placed on a non-accrual status. Placement on a non-accrual status results in the use of programs under which the contractual interest associated with a receivable may be reduced or eliminated, or a certain amount of accrued fees is waived, provided a minimum number or amount of payments have been made. Following this adjustment, if a customer demonstrates a willingness and ability to resume making monthly payments and meets the additional criteria discussed above, we will re-age the customer’s account. When we re-age an account, we adjust the status of the account to bring a delinquent account current, but generally do not make any further modifications to the payment terms or amount owed. Thus we do not recognize an impairment or write-down solely due to the re-aging process. Once an account is placed on a non-accrual status, it is closed for further purchases. We believe that re-ages help our customers to manage difficult repayment periods, return to good standing and avoid further deterioration to their credit scores. Accounts that are placed on a non-accrual status and thereafter make at least one payment qualify as troubled debt restructurings (“TDRs”). See Note 2, “Significant Accounting Policies and Consolidated Financial Statement Components-Loans, Interest and Fees Receivable-Troubled Debt Restructurings” to our consolidated financial statements included herein for further discussion of TDRs.
Auto Finance Segment.
Accounts that CAR purchases from approved dealers initially are collected by the originating branch or service center location using a combination of traditional collection practices. The collection process includes contacting the customer by phone or mail, skip tracing and using starter interrupt devices to minimize delinquencies. Uncollectible accounts in our CAR operation generally are returned to the dealer under an agreement with the dealer to charge the balance on the account against the dealer’s reserve account. We generally do not repossess autos in our CAR operation as a result of the agreements that we have with the dealers unless there are insufficient dealer reserves to offset the loss or if a dealer instructs us to do so.
Consumer and Debtor Protection Laws and Regulations
Credit and Other Investments Segment.
Our U.S. business is regulated directly and indirectly under various federal and state consumer protection, collection and other laws, rules and regulations, including the federal Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “CARD Act”), the federal Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), the federal Truth In Lending Act (“TILA”), the federal Equal Credit Opportunity Act, the federal Fair Credit Reporting Act, the federal Fair Debt Collection Practices Act, the Federal Trade Commission (“FTC”) Act, the federal Gramm-Leach-Bliley Act and the federal Telemarketing and Consumer Fraud and Abuse Prevention Act. These laws, rules and regulations, among other things, impose disclosure requirements when consumer products are advertised, when an account is opened, when monthly billing statements are sent and when consumer obligations are collected. In addition, various statutes limit the liability of consumers for unauthorized use, prohibit discriminatory practices in consumer transactions, impose limitations on the types of charges that may be assessed and restrict the use of consumer credit reports and other account-related information. Many of our lending partners' products are designed for customers at the lower end of the credit score range. These products are priced to reflect the higher credit risk of these customers. Because of the inherently greater credit risks of these customers and the resulting higher interest and fees, we and our finance partners are subject to significant regulatory scrutiny. If regulators, including the FDIC (which regulates bank lenders), the CFPB and the FTC, object to the terms of these products, or to our marketing or collection practices, we could be required to modify or discontinue certain products or practices.
In the U.K., our operations are subject to U.K. regulations that provide similar consumer protections to those provided under the U.S. regulatory framework. We are licensed and regulated by the Financial Conduct Authority (“FCA”), and we are governed by an extensive legislative and regulatory framework that includes the Consumer Credit Act, the Data Protection Act, Privacy and Electronic Communications Regulations, Consumer Protection and Unfair Trading regulations, Financial Services (Distance Marketing) Regulations, the Enterprise Act, Money Laundering Regulations, Financial Ombudsman Service and Advertising Standards Authority adjudications. The aforementioned legislation and regulations impose strict rules on the form and content of consumer contracts, the calculation and presentation of annual percentage rates (“APRs”), advertising in all forms, parties who can be contacted and disclosures to consumers, among others. The regulators, such as the FCA, provide guidance on consumer credit practices including collections. The FCA requires a comprehensive licensing process.
Auto Finance Segment.
This segment is regulated directly and indirectly under various federal and state consumer protection and other laws, rules and regulations, including the federal TILA, the federal Equal Credit Opportunity Act, the federal Fair Credit Reporting Act, the federal Fair Debt Collection Practices Act, Dodd-Frank, the federal Gramm-Leach-Bliley Act and the federal Telemarketing and Consumer Fraud and Abuse Prevention Act. In addition, various state statutes limit the interest rates and fees that may be charged, limit the types of interest computations (e.g., interest bearing or pre-computed) and refunding processes, prohibit discriminatory practices in extending credit, impose limitations on fees and other ancillary products and restrict the use of consumer credit reports and other account-related information. Many of the states in which this segment operates have various licensing requirements and impose certain financial or other conditions in connection with these licensing requirements.
Privacy and Data Security Laws and Regulations
.
We are required to manage, use, and store large amounts of personally identifiable information, principally the confidential personal and financial data of our lending partners’ customers, in the course of our business. We depend on our IT networks and systems, and those of third parties, to process, store, and transmit that information. In the past, financial service companies have been targeted for sophisticated cyber attacks. A security breach involving our files and infrastructure could lead to unauthorized disclosure of confidential information. We take numerous measures to ensure the security of our hardware and software systems as well as customer information.
We are subject to various U.S. federal and state laws and regulations designed to protect confidential personal and financial data. For example, we must comply with guidelines under the Gramm-Leach-Bliley Act that require each financial institution to develop, implement and maintain a written, comprehensive information security program containing safeguards that are appropriate to the financial institution’s size and complexity, the nature and scope of the financial institution’s activities and the sensitivity of any customer information at issue. Additionally, various federal banking regulatory agencies, and all 50 states, the District of Columbia, Puerto Rico and the Virgin Islands, have enacted data security regulations and laws requiring customer notification in the event of a security breach.
Competition
Credit and Other Investments Segment.
We face substantial competition from financial service companies, the intensity of which varies depending upon economic and liquidity cycles. Our point-of-sale and direct-to-consumer finance activities compete with national, regional and local bankcard and consumer credit issuers, other general-purpose credit card issuers and retail credit card and merchant credit issuers. Many of these competitors are substantially larger than we are, have significantly greater financial resources than we do and have significantly lower costs of funds than we have.
Auto Finance Segment.
Competition within the auto finance sector is widespread and fragmented. Our auto finance operations target automobile dealers that oftentimes are not capable of accessing indirect lending from major financial institutions or captive finance companies. We compete mainly with a handful of national and regional companies focused on this credit segment (e.g., Credit Acceptance Corporation, Westlake Financial, Mid-Atlantic Finance, Santander Consumer USA, Western Funding Inc., U.S. Auto Credit, and United Acceptance) and a large number of smaller, regional private companies with a narrow geographic focus. Individual dealers with access to capital may also compete in this segment through the purchase of receivables from peer dealers in their markets.
Employees
As of December 31, 2018, we had 310 employees, including 6 part-time employees, most of whom are principally employed within the U.S. We consider our relations with our employees to be good. None of our employees are covered by a collective-bargaining agreement, and we have never experienced any organized work stoppage, strike or labor dispute.
Trademarks, Trade Names and Service Marks
We have registered and continue to register, when appropriate, various trademarks, trade names and service marks used in connection with our businesses and for private-label marketing of certain of our products. We consider these trademarks, trade names and service marks to be readily identifiable with, and valuable to, our business. This Annual Report on Form 10-K also contains trade names and trademarks of other companies that are the property of their respective owners.
Additional Information
We are headquartered in Atlanta, Georgia, and our principal executive offices are located at Five Concourse Parkway, Suite 300, Atlanta, Georgia 30328. Our headquarters telephone number is (770) 828-2000, and our website is
www.Atlanticus.com
. We make available free of charge on our website certain of our recent SEC filings, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those filings as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. These reports are also available on the SEC's website at
http://www.sec.gov
.
Certain corporate governance materials, including our Board of Directors committee charters and our Code of Business Conduct and Ethics, are posted on our website under the heading “For Investors.” From time to time, the corporate governance materials on our website may be updated as necessary to comply with rules issued by the SEC or NASDAQ, or as desirable to further the continued effective and efficient governance of our company.
An investment in our common stock or other securities involves a number of risks. You should carefully consider each of the risks described below before deciding to invest in our common stock or other securities. If any of the following risks develops into actual events, our business, financial condition or results of operations could be negatively affected, the market price of our common stock or other securities could decline and you may lose all or part of your investment.
Investors should be particularly cautious regarding investments in our common stock or other securities at the present time in light of uncertainties as to the profitability of our business model going forward and our inability to achieve consistent earnings from our operations in recent years.
Our Cash Flows and Net Income Are Dependent Upon Payments from Our Investments in Receivables
The collectibility of our investments in receivables is a function of many factors including the criteria used to select who is issued credit, the pricing of the credit products, the lengths of the relationships, general economic conditions, the rate at which consumers repay their accounts or become delinquent, and the rate at which consumers borrow funds. Deterioration in these factors would adversely impact our business. In addition, to the extent we have over-estimated collectibility, in all likelihood we have over-estimated our financial performance. Some of these concerns are discussed more fully below.
Our portfolio of receivables is not diversified and primarily originates from consumers whose creditworthiness is considered sub-prime.
Historically, we have invested in receivables in one of two ways—we have either (i) invested in receivables originated by lenders who utilize our services or (ii) invested in or purchased pools of receivables from other issuers. In either case, substantially all of our receivables are from financially underserved borrowers—borrowers represented by credit risks that regulators classify as “sub-prime.” Our reliance on sub-prime receivables has negatively impacted and may in the future negatively impact, our performance. Our various past and current losses might have been mitigated had our portfolios consisted of higher-grade receivables in addition to our sub-prime receivables.
Economic slowdowns increase our credit losses.
During periods of economic slowdown or recession, we experience an increase in rates of delinquencies and frequency and severity of credit losses. Our actual rates of delinquencies and frequency and severity of credit losses may be comparatively higher during periods of economic slowdown or recession than those experienced by more traditional providers of consumer credit because of our focus on the financially underserved consumer market, which may be disproportionately impacted.
We are subject to foreign economic and exchange risks.
Because of our operations in the U.K.,
we have exposure to fluctuations in the U.K. economy. We also have exposure to fluctuations in the relative values of the U.S. dollar and the British pound. Because the British pound has experienced a net decline in value relative to the U.S. dollar since we commenced our most significant operations in the U.K., we have experienced significant transaction and translation losses within our financial statements.
Because a significant portion of our reported income is based on management’s estimates of the future performance of receivables, differences between actual and expected performance of the receivables may cause fluctuations in net income.
Significant portions of our reported income (or losses) are based on management’s estimates of cash flows we expect to receive on receivables, particularly for such assets that we report based on fair value. The expected cash flows are based on management’s estimates of interest rates, default rates, payment rates, cardholder purchases, servicing costs, and discount rates. These estimates are based on a variety of factors, many of which are not within our control. Substantial differences between actual and expected performance of the receivables will occur and cause fluctuations in our net income. For instance, higher than expected rates of delinquencies and losses could cause our net income to be lower than expected. Similarly, levels of loss and delinquency can result in our being required to repay lenders earlier than expected, thereby reducing funds available to us for future growth. Because all of the credit card receivables structured financing facilities are now in amortization status—which for us generally means that the only meaningful cash flows that we are receiving with respect to the credit card receivables that are encumbered by such structured financing facilities are those associated with our contractually specified fee for servicing the receivables—recent payment and default trends have substantially reduced the cash flows that we receive from these receivables.
Due to our relative lack of historical experience with Internet consumers, we may not be able to evaluate their creditworthiness.
We have less historical experience with respect to the credit risk and performance of receivables owed by consumers acquired over the Internet and other digital channels. As a result, we may not be able to target and evaluate successfully the creditworthiness of these potential consumers. Therefore, we may encounter difficulties managing the expected delinquencies and losses and appropriately pricing products.
We Are Substantially Dependent Upon Borrowed Funds to Fund Receivables We Purchase
We finance receivables that we acquire in large part through financing facilities. All of our financing facilities are of finite duration (and ultimately will need to be extended or replaced) and contain financial covenants and other conditions that must be fulfilled in order for funding to be available. Moreover, some of our facilities currently are in amortization stages (and are not allowing for the funding of any new loans) based on their original terms. The cost and availability of equity and borrowed funds is dependent upon our financial performance, the performance of our industry generally and general economic and market conditions, and at times equity and borrowed funds have been both expensive and difficult to obtain.
If additional financing facilities are not available in the future on terms we consider acceptable—an issue that has been made even more acute in the U.S. given regulatory changes that reduced asset-level returns on credit card lending—we will not be able to purchase additional receivables and those receivables may contract in size.
Our Financial Performance Is, in Part, a Function of the Aggregate Amount of Receivables That Are Outstanding
The aggregate amount of outstanding receivables is a function of many factors including purchase rates, payment rates, interest rates, seasonality, general economic conditions, competition from credit card issuers and other sources of consumer financing, access to funding, and the timing and extent of our receivable purchases.
Despite our recent purchases of credit card receivables, our aggregate credit card receivable balances may fluctuate.
The amount of our credit card receivables is a product of a combination of factors, many of which are not in our control. Factors include:
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the availability of funding on favorable terms;
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our relationships with the banks that issue credit cards;
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the degree to which we lose business to competitors;
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the level of usage of our credit card products by consumers;
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the availability of portfolios for purchase on attractive terms;
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levels of delinquencies and charge offs;
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the level of costs of acquiring new receivables;
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our ability to employ and train new personnel;
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our ability to maintain adequate management systems, collection procedures, internal controls and automated systems; and
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general economic and other factors beyond our control.
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Reliance upon relationships with a few large retailers in the point-of-sale finance operations may adversely affect our revenues and operating results from these operations.
Our five largest retail partners accounted for over 50% of our outstanding point-of-sale receivables as of December 31, 2018. Although we are adding new retail partners on a regular basis, it is likely that we will continue to derive a significant portion of this operations’ receivables base and corresponding revenue from a relatively small number of partners in the future. If a significant partner reduces or terminates its relationship with us, these operations’ revenue could decline significantly and our operating results and financial condition could be harmed.
We Operate in a Heavily Regulated Industry
Changes in bankruptcy, privacy or other consumer protection laws, or to the prevailing interpretation thereof, may expose us to litigation, adversely affect our ability to collect receivables, or otherwise adversely affect our operations. Similarly, regulatory changes could adversely affect the ability or willingness of lenders who utilize our technology platform and related services to market credit products and services to consumers. While the Presidential Administration supports reducing regulatory burdens, the prospects for significant modifications are uncertain. Also, the accounting rules that apply to our business are exceedingly complex, difficult to apply and in a state of flux. As a result, how we value our receivables and otherwise account for our business is subject to change depending upon the changes in, and, interpretation of, those rules. Some of these issues are discussed more fully below.
Reviews and enforcement actions by regulatory authorities under banking and consumer protection laws and regulations may result in changes to our business practices, may make collection of receivables more difficult or may expose
us to the risk of fines, restitution and litigation.
Our operations and the operations of the issuing banks through which the credit products we service are originated are subject to the jurisdiction of federal, state and local government authorities, including the CFPB, the SEC, the FDIC, the Office of the Comptroller of the Currency, the FTC, U.K. banking and licensing authorities, state regulators having jurisdiction over financial institutions and debt origination and collection and state attorneys general. Our business practices and the practices of issuing banks, including the terms of products, servicing and collection practices, are subject to both periodic and special reviews by these regulatory and enforcement authorities. These reviews can range from investigations of specific consumer complaints or concerns to broader inquiries. If as part of these reviews the regulatory authorities conclude that we or issuing banks are not complying with applicable law, they could request or impose a wide range of remedies including requiring changes in advertising and collection practices, changes in the terms of products (such as decreases in interest rates or fees), the imposition of fines or penalties, or the paying of restitution or the taking of other remedial action with respect to affected consumers. They also could require us or issuing banks to stop offering some credit products or obtain licenses to do so, either nationally or in selected states. To the extent that these remedies are imposed on the issuing banks that originate credit products using our platform, under certain circumstances we are responsible for the remedies as a result of our indemnification obligations with those banks. We or our issuing banks also may elect to change practices that we believe are compliant with law in order to respond to regulatory concerns. Furthermore, negative publicity relating to any specific inquiry or investigation could hurt our ability to conduct business with various industry participants or to generate new receivables and could negatively affect our stock price, which would adversely affect our ability to raise additional capital and would raise our costs of doing business.
If any deficiencies or violations of law or regulations are identified by us or asserted by any regulator, or if the CFPB, the FDIC, the FTC or any other regulator requires us or issuing banks to change any practices, the correction of such deficiencies or violations, or the making of such changes, could have a material adverse effect on our financial condition, results of operations or business. In addition, whether or not these practices are modified when a regulatory or enforcement authority requests or requires, there is a risk that we or other industry participants may be named as defendants in litigation involving alleged violations of federal and state laws and regulations, including consumer protection laws. Any failure to comply with legal requirements by us or the banks that originate credit products utilizing our platform in connection with the issuance of those products, or by us or our agents as the servicer of our accounts, could significantly impair our ability to collect the full amount of the account balances. The institution of any litigation of this nature, or any judgment against us or any other industry participant in any litigation of this nature, could adversely affect our business and financial condition in a variety of ways.
We are dependent upon banks to issue credit cards and provide certain other credit products utilizing our technology platform and related services.
We acquire receivables generated by banks from credit cards that they have issued and other products, and their regulators could at any time limit their ability to issue some or all of these products that we service, or to modify those products significantly. Any significant interruption of those relationships would result in our being unable to acquire new receivables or help develop other credit products. It is possible that a regulatory position or action taken with respect to any of the issuing banks might result in the bank’s inability or unwillingness to originate future credit products in collaboration with us. In the current state, such a disruption of our issuing bank relationships principally would adversely affect our ability to grow our investments in point-of-sale and direct-to-consumer receivables.
Changes to consumer protection laws or changes in their interpretation may impede collection efforts or otherwise adversely impact our business practices.
Federal and state consumer protection laws regulate the creation and enforcement of consumer credit card receivables and other loans. Many of these laws (and the related regulations) are focused on sub-prime lenders and are intended to prohibit or curtail industry-standard practices as well as non-standard practices. For instance, Congress enacted legislation that regulates loans to military personnel through imposing interest rate and other limitations and requiring new disclosures, all as regulated by the Department of Defense. Similarly, in 2009 Congress enacted legislation that required changes to a variety of marketing, billing and collection practices, and the Federal Reserve adopted significant changes to a number of practices through its issuance of regulations. While our practices are in compliance with these changes, some of the changes (e.g., limitations on the ability to assess up-front fees) have significantly affected the viability of certain credit products within the U.S. Changes in the consumer protection laws could result in the following:
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receivables not originated in compliance with law (or revised interpretations) could become unenforceable and uncollectible under their terms against the obligors;
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we may be required to credit or refund previously collected amounts;
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certain fees and finance charges could be limited, prohibited or restricted, which would reduce the profitability of certain investments in receivables;
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certain collection methods could be prohibited, forcing us to revise our practices or adopt more costly or less effective practices;
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limitations on our ability to recover on charged-off receivables regardless of any act or omission on our part;
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some credit products and services could be banned in certain states or at the federal level;
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federal or state bankruptcy or debtor relief laws could offer additional protections to consumers seeking bankruptcy protection, providing a court greater leeway to reduce or discharge amounts owed to us; and
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a reduction in our ability or willingness to invest in receivables arising under loans to certain consumers, such as military personnel.
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Material regulatory developments may adversely impact our business and results from operations.
Our Automobile Lending Activities Involve Risks in Addition to Others Described Herein
Automobile lending exposes us not only to most of the risks described above but also to additional risks, including the regulatory scheme that governs installment loans and those attendant to relying upon automobiles and their repossession and liquidation value as collateral. In addition, our Auto Finance segment operation acquires loans on a wholesale basis from used car dealers, for which we rely upon the legal compliance and credit determinations by those dealers.
Funding for automobile lending may become difficult to obtain and expensive.
In the event we are unable to renew or replace any Auto Finance segment facilities that bear refunding or refinancing risks when they become due, our Auto Finance segment could experience significant constraints and diminution in reported asset values as lenders retain significant cash flows within underlying structured financings or otherwise under security arrangements for repayment of their loans. If we cannot renew or replace future facilities or otherwise are unduly constrained from a liquidity perspective, we may choose to sell part or all of our auto loan portfolios, possibly at less than favorable prices.
Our automobile lending business is dependent upon referrals from dealers.
Currently we provide substantially all of our automobile loans only to or through used car dealers. Providers of automobile financing have traditionally competed based on the interest rate charged, the quality of credit accepted and the flexibility of loan terms offered. In order to be successful, we not only need to be competitive in these areas, but also need to establish and maintain good relations with dealers and provide them with a level of service greater than what they can obtain from our competitors.
The financial performance of our automobile loan portfolio is in part dependent upon the liquidation of repossessed automobiles.
In the event of certain defaults, we may repossess automobiles and sell repossessed automobiles at wholesale auction markets located throughout the U.S. Auction proceeds from these types of sales and other recoveries rarely are sufficient to cover the outstanding balances of the contracts; where we experience these shortfalls, we will experience credit losses. Decreased auction proceeds resulting from depressed prices at which used automobiles may be sold would result in higher credit losses for us.
Repossession of automobiles entails the risk of litigation and other claims.
Although we have contracted with reputable repossession firms to repossess automobiles on defaulted loans, it is not uncommon for consumers to assert that we were not entitled to repossess an automobile or that the repossession was not conducted in accordance with applicable law. These claims increase the cost of our collection efforts and, if correct, can result in awards against us.
We Routinely Explore Various Opportunities to Grow Our Business, to Make Investments and to Purchase and Sell Assets
We routinely consider acquisitions of, or investments in, portfolios and other assets as well as the sale of portfolios and portions of our business. There are a number of risks attendant to any acquisition, including the possibility that we will overvalue the assets to be purchased and that we will not be able to produce the expected level of profitability from the acquired business or assets. Similarly, there are a number of risks attendant to sales, including the possibility that we will undervalue the assets to be sold. As a result, the impact of any acquisition or sale on our future performance may not be as favorable as expected and actually may be adverse.
Portfolio purchases may cause fluctuations in our reported Credit and Other Investments segment’s managed receivables data, which may reduce the usefulness of this data in evaluating our business. Our reported Credit and Other Investments segment managed receivables data may fluctuate substantially from quarter to quarter as a result of recent and future credit card portfolio acquisitions.
Receivables included in purchased portfolios are likely to have been originated using credit criteria different from the criteria of issuing bank partners that have originated accounts utilizing our technology platform. Receivables included in any particular purchased portfolio may have significantly different delinquency rates and charge-off rates than the receivables previously originated and purchased by us. These receivables also may earn different interest rates and fees as compared to other similar receivables in our receivables portfolio. These variables could cause our reported managed receivables data to fluctuate substantially in future periods making the evaluation of our business more difficult.
Any acquisition or investment that we make will involve risks different from and in addition to the risks to which our business is currently exposed. These include the risks that we will not be able to integrate and operate successfully new businesses, that we will have to incur substantial indebtedness and increase our leverage in order to pay for the acquisitions, that we will be exposed to, and have to comply with, different regulatory regimes and that we will not be able to apply our traditional analytical framework (which is what we expect to be able to do) in a successful and value-enhancing manner.
Other Risks of Our Business
We are a holding company with no operations of our own
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As a result, our cash flow and ability to service our debt is dependent upon distributions from our subsidiaries. The distribution of subsidiary earnings, or advances or other distributions of funds by subsidiaries to us, all of which are subject to statutory and could be subject to contractual restrictions, are contingent upon the subsidiaries’ cash flows and earnings and are subject to various business and debt covenant considerations.
Unless we obtain a bank charter, we cannot issue credit cards.
Because we do not have a bank charter, we currently cannot issue credit cards ourselves. Unless we obtain a bank or credit card bank charter, we will continue to provide servicing for banking relationships that provide for the issuance of credit cards to consumers, and acquire interests in receivables originated through such banking relationships. Even if we obtain a bank charter, there may be restrictions on the types of credit that the bank may extend. Our various issuing bank agreements have scheduled expiration dates. If we are unable to extend or execute new agreements with our issuing banks at the expirations of our current agreements with them, or if our existing or new agreements with our issuing banks were terminated or otherwise disrupted, there is a risk that we would not be able to enter into agreements with an alternate issuer on terms that we consider favorable or in a timely manner without disruption of our business.
We are party to litigation.
We are party to certain legal proceedings which include litigation customary for a business of our nature. In each case we believe that we have meritorious defenses or that the positions we are asserting otherwise are correct. However, adverse outcomes are possible in these matters, and we could decide to settle one or more of our litigation matters in order to avoid the ongoing cost of litigation or to obtain certainty of outcome. Adverse outcomes or settlements of these matters could require us to pay damages, make restitution, change our business practices or take other actions at a level, or in a manner, that would adversely impact our business.
We face heightened levels of economic risk associated with new investment activities.
We have made a number of investments in businesses that are not directly related to our traditional servicing and receivables financing activities to, or associated with, the underserved consumer credit market. In addition, some of these investments that we have made and may make in the future are or will be in debt or equity securities of businesses over which we exert little or no control, which likely exposes us to greater risks of loss than investments in activities and operations that we control. We make only those investments we believe have the potential to provide a favorable return. However, because some of the investments are outside of our core areas of expertise, they entail risks beyond those described elsewhere in this Report.
Because we outsource account-processing functions that are integral to our business, any disruption or termination of that outsourcing relationship could harm our business.
We generally outsource account and payment processing. If these outsourcing relationships were not renewed or were terminated or the services provided to us were otherwise disrupted, we would have to obtain these services from an alternative provider. There is a risk that we would not be able to enter into a similar outsourcing arrangement with an alternate provider on terms that we consider favorable or in a timely manner without disruption of our business.
If we are unable to protect our information systems against service interruption, our operations could be disrupted and our reputation may be damaged.
We rely heavily on networks and information systems and other technology, that are largely hosted by third-parties to support our business processes and activities, including processes integral to the origination and collection of loans and other financial products, and information systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting and legal and tax requirements. Because information systems are critical to many of our operating activities, our business may be impacted by hosted system shutdowns, service disruptions or security breaches. These incidents may be caused by failures during routine operations such as system upgrades or user errors, as well as network or hardware failures, malicious or disruptive software, computer hackers, rogue employees or contractors, cyber-attacks by criminal groups, geopolitical events, natural disasters, failures or impairments of telecommunications networks, or other catastrophic events. If our information systems suffer severe damage, disruption or shutdown and our business continuity plans do not effectively resolve the issues in a timely manner, we could experience delays in reporting our financial results, and we may lose revenue and profits as a result of our inability to collect payments in a timely manner. We also could be required to spend significant financial and other resources to repair or replace networks and information systems.
Unauthorized or unintentional disclosure of sensitive or confidential customer data could expose us to protracted and costly litigation, and civil and criminal penalties.
To conduct our business, we are required to manage, use, and store large amounts of personally identifiable information, consisting primarily of confidential personal and financial data regarding consumers across all operations areas. We also depend on our IT networks and systems, and those of third parties, to process, store, and transmit this information. As a result, we are subject to numerous U.S. federal and state laws designed to protect this information. Security breaches involving our files and infrastructure could lead to unauthorized disclosure of confidential information.
We take a number of measures to ensure the security of our hardware and software systems and customer information. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in the technology used by us to protect data being breached or compromised. In the past, banks and other financial service providers have been the subject of sophisticated and highly targeted attacks on their information technology. An increasing number of websites have reported breaches of their security.
If any person, including our employees or those of third-party vendors, negligently disregards or intentionally breaches our established controls with respect to such data or otherwise mismanages or misappropriates that data, we could be subject to costly litigation, monetary damages, fines, and/or criminal prosecution. Any unauthorized disclosure of personally identifiable information could subject us to liability under data privacy laws. Further, under credit card rules and our contracts with our card processors, if there is a breach of credit card information that we store, we could be liable to the credit card issuing banks for their cost of issuing new cards and related expenses. In addition, if we fail to follow credit card industry security standards, even if there is no compromise of customer information, we could incur significant fines. Security breaches also could harm our reputation, which could potentially cause decreased revenues, the loss of existing merchant credit partners, or difficulty in adding new merchant credit partners.
Internet and data security breaches also could impede our bank partners from originating loans over the Internet, cause us to lose consumers or otherwise damage our reputation or business.
Consumers generally are concerned with security and privacy, particularly on the Internet. As part of our growth strategy, we have enabled lenders to originate loans over the Internet. The secure transmission of confidential information over the Internet is essential to maintaining customer confidence in such products and services offered online.
Advances in computer capabilities, new discoveries or other developments could result in a compromise or breach of the technology used by us to protect our client or consumer application and transaction data transmitted over the Internet. In addition to the potential for litigation and civil penalties described above, security breaches could damage our reputation and cause consumers to become unwilling to do business with our clients or us, particularly over the Internet. Any publicized security problems could inhibit the growth of the Internet as a means of conducting commercial transactions. Our ability to service our clients’ needs over the Internet would be severely impeded if consumers become unwilling to transmit confidential information online.
Also, a party that is able to circumvent our security measures could misappropriate proprietary information, cause interruption in our operations, damage our computers or those of our users, or otherwise damage our reputation and business.
Regulation in the areas of privacy and data security could increase our costs.
We are subject to various regulations related to privacy and data security/breach, and we could be negatively impacted by these regulations. For example, we are subject to the Safeguards guidelines under the Gramm-Leach-Bliley Act. The Safeguards guidelines require that each financial institution develop, implement and maintain a written, comprehensive information security program containing safeguards that are appropriate to the financial institution’s size and complexity, the nature and scope of the financial institution’s activities and the sensitivity of any customer information at issue. Broad-ranging data security laws that affect our business also have been adopted by various states. Compliance with these laws regarding the protection of consumer and employee data could result in higher compliance and technology costs for us, as well as potentially significant fines and penalties for non-compliance. Further, there are various other statutes and regulations relevant to the direct email marketing, debt collection and text-messaging industries including the Telephone Consumer Protection Act. The interpretation of many of these statutes and regulations is evolving in the courts and administrative agencies and an inability to comply with them may have an adverse impact on our business.
In addition to the foregoing enhanced data security requirements, various federal banking regulatory agencies, and all 50 states, the District of Columbia, Puerto Rico and the Virgin Islands, have enacted data security regulations and laws requiring varying levels of consumer notification in the event of a security breach.
Also, federal legislators and regulators are increasingly pursuing new guidelines, laws and regulations that, if adopted, could further restrict how we collect, use, share and secure consumer information, which could impact some of our current or planned business initiatives.
Unplanned system interruptions or system failures could harm our business and reputation.
Any interruption in the availability of our transactional processing services due to hardware and operating system failures will reduce our revenues and profits. Any unscheduled interruption in our services results in an immediate, and possibly substantial, loss of revenues. Frequent or persistent interruptions in our services could cause current or potential consumers to believe that our systems are unreliable, leading them to switch to our competitors or to avoid our websites or services, and could permanently harm our reputation.
Although our systems have been designed around industry-standard architectures to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, computer viruses, computer denial-of-service attacks, and similar events or disruptions. Some of our systems are not fully redundant, and our disaster recovery planning may not be sufficient for all eventualities. Our systems also are subject to break-ins, sabotage, and intentional acts of vandalism. Despite any precautions we may take, the occurrence of a natural disaster, a decision by any of our third-party hosting providers to close a facility we use without adequate notice for financial or other reasons, or other unanticipated problems at our hosting facilities could cause system interruptions, delays, and loss of critical data, and result in lengthy interruptions in our services. Our business interruption insurance may not be sufficient to compensate us for losses that may result from interruptions in our service as a result of system failures.
Climate change and related regulatory responses may impact our business
. Climate change as a result of emissions of greenhouse gases is a significant topic of discussion and may generate federal and other regulatory responses. It is impracticable to predict with any certainty the impact on our business of climate change or the regulatory responses to it, although we recognize that they could be significant. The most direct impact is likely to be an increase in energy costs, which would adversely impact consumers and their ability to incur and repay indebtedness. However, we are uncertain of the ultimate impact, either directionally or quantitatively, of climate change and related regulatory responses on our business.
Risks Relating to an Investment in Our Securities
The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell your shares of our common stock when you want or at prices you find attractive.
The price of our common stock on the NASDAQ Global Select Market constantly changes. We expect that the market price of our common stock will continue to fluctuate. The market price of our common stock may fluctuate in response to numerous factors, many of which are beyond our control. These factors include the following:
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actual or anticipated fluctuations in our operating results;
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changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;
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the overall financing environment, which is critical to our value;
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the operating and stock performance of our competitors;
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announcements by us or our competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
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changes in interest rates;
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the announcement of enforcement actions or investigations against us or our competitors or other negative publicity relating to us or our industry;
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changes in GAAP, laws, regulations or the interpretations thereof that affect our various business activities and segments;
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general domestic or international economic, market and political conditions;
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changes in ownership by executive officers, directors and parties related to them who control a majority of our common stock;
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additions or departures of key personnel; and
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future sales of our common stock and the transfer or cancellation of shares of common stock pursuant to a share lending agreement.
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In addition, the stock markets from time to time experience extreme price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies. These broad fluctuations may adversely affect the trading price of our common stock, regardless of our actual operating performance.
Future sales of our common stock or equity-related securities in the public market, including sales of our common stock pursuant to share lending agreements or short sale transactions by purchasers of convertible senior notes, could adversely affect the trading price of our common stock and our ability to raise funds in new stock offerings.
Sales of significant amounts of our common stock or equity-related securities in the public market, including sales pursuant to share lending agreements, or the perception that such sales will occur, could adversely affect prevailing trading prices of our common stock and could impair our ability to raise capital through future offerings of equity or equity-related securities. Future sales of shares of common stock or the availability of shares of common stock for future sale, including sales of our common stock in short sale transactions by purchasers of our convertible senior notes, may have a material adverse effect on the trading price of our common stock.
We have the ability to issue preferred stock, warrants, convertible debt and other securities without shareholder approval.
Our common stock may be subordinate to classes of preferred stock issued in the future in the payment of dividends and other distributions made with respect to common stock, including distributions upon liquidation or dissolution. Our articles of incorporation permit our Board of Directors to issue preferred stock without first obtaining shareholder approval. If we issue preferred stock, these additional securities may have dividend or liquidation preferences senior to the common stock. If we issue convertible preferred stock, a subsequent conversion may dilute the current common shareholders’ interest. We have similar abilities to issue convertible debt, warrants and other equity securities.
Our executive officers, directors and parties related to them, in the aggregate, control a majority of our common stock and may have the ability to control matters requiring shareholder approval.
Our executive officers, directors and parties related to them own a large enough share of our common stock to have an influence on, if not control of, the matters presented to shareholders. As a result, these shareholders may have the ability to control matters requiring shareholder approval, including the election and removal of directors, the approval of significant corporate transactions, such as any reclassification, reorganization, merger, consolidation or sale of all or substantially all of our assets and the control of our management and affairs. Accordingly, this concentration of ownership may have the effect of delaying, deferring or preventing a change of control of us, impede a merger, consolidation, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could have an adverse effect on the market price of our common stock.
The right to receive payments on our convertible senior notes is subordinate to the rights of our existing and future secured creditors.
Our convertible senior notes are unsecured and are subordinate to existing and future secured obligations to the extent of the value of the assets securing such obligations. As a result, in the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding of our company, our assets generally would be available to satisfy obligations of our secured debt before any payment may be made on the convertible senior notes. To the extent that such assets cannot satisfy in full our secured debt, the holders of such debt would have a claim for any shortfall that would rank equally in right of payment (or effectively senior if the debt were issued by a subsidiary) with the convertible senior notes. In such an event, we may not have sufficient assets remaining to pay amounts on any or all of the convertible senior notes.
As of December 31, 2018, Atlanticus Holdings Corporation had outstanding: $406.7 million of secured indebtedness, which would rank senior in right of payment to the convertible senior notes; $93.3 million of senior unsecured indebtedness in addition to the convertible senior notes that would rank equal in right of payment to the convertible senior notes; and no subordinated indebtedness. Included in senior secured indebtedness are certain guarantees we have executed in favor of our subsidiaries. For more information on our outstanding indebtedness, See Note 9, “Notes Payable,” to our consolidated financial statements included herein.
Our convertible senior notes are junior to the indebtedness of our subsidiaries.
Our convertible senior notes are structurally subordinated to the existing and future claims of our subsidiaries’ creditors. Holders of the convertible senior notes are not creditors of our subsidiaries. Any claims of holders of the convertible senior notes to the assets of our subsidiaries derive from our own equity interests in those subsidiaries. Claims of our subsidiaries’ creditors will generally have priority as to the assets of our subsidiaries over our own equity interest claims and will therefore have priority over the holders of the convertible senior notes. Consequently, the convertible senior notes are effectively subordinate to all liabilities, whether or not secured, of any of our subsidiaries and any subsidiaries that we may in the future acquire or establish. Our subsidiaries’ creditors also may include general creditors and taxing authorities. As of December 31, 2018, our subsidiaries had total liabilities of approximately $487.3 million (including the $406.7 million of senior secured indebtedness mentioned above), excluding intercompany indebtedness. In addition, in the future, we may decide to increase the portion of our activities that we conduct through subsidiaries.
Note Regarding Risk Factors
The risk factors presented above are all of the ones that we currently consider material. However, they are not the only ones facing our company. Additional risks not presently known to us, or which we currently consider immaterial, also may adversely affect us. There may be risks that a particular investor views differently from us, and our analysis might be wrong. If any of the risks that we face actually occurs, our business, financial condition and operating results could be materially adversely affected and could differ materially from any possible results suggested by any forward-looking statements that we have made or might make. In such case, the trading price of our common stock or other securities could decline, and you could lose part or all of your investment.
We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
None.
We lease 335,372 square feet of office space in Atlanta, Georgia for our executive offices and the primary operations of our Credit and Other Investments segment. We have sub-leased 254,710 square feet of this office space. Our Auto Finance segment principally operates from 12,807 square feet of leased office space in Lake Mary, Florida, with additional offices and branch locations in various states and territories. We believe that our facilities are suitable to our business and that we will be able to lease or purchase additional facilities as our needs, if any, require.
On April 4, 2007, we purchased a portfolio of credit card accounts from Barclays Bank PLC (“Barclays”) pursuant to a Sale and Purchase Agreement (the “SPA”). On May 4, 2017, we sued Barclays in the High Court of Justice Business and Property Courts of England and Wales, Claim No. FL-2017-000003. The claims related to Barclays’ obligation to reimburse us for certain consumer claims and other damages incurred as a result of the SPA and Barclays’ actions and inactions. In conjunction with the lawsuit, Barclays asserted a counterclaim alleging that past reimbursement claims paid to us were not in accordance with its policies. On December 19, 2018, the Company received £34 million (approximately $42.9 million) from Barclays Bank UK PLC in full and final settlement of this matter.
We are involved in various other legal proceedings that are incidental to the conduct of our business. There are currently no other pending legal proceedings that are expected to be material to us.
None.
Notes to Consolidated Financial Statements
December 31, 2018
and
2017
1.
|
Description of Our Business
|
Our accompanying consolidated financial statements include the accounts of Atlanticus Holdings Corporation (the “Company”) and those entities we control. We are primarily focused on providing financial technology and related services. Through our subsidiaries, we provide technology and other support services to lenders who offer an array of financial products and services to consumers who may have been declined under traditional financing options.
In most cases, we invest in the receivables originated by lenders who utilize our technology platform and other related services. From time to time, we also purchase receivables portfolios from third parties. References to "receivables" include receivables purchased from our lending partners and from third parties. As discussed further below, we reflect our business lines within two reportable segments: Credit and Other Investments; and Auto Finance. See also Note 3, “Segment Reporting,” for further details.
Within our Credit and Other Investments segment, we facilitate consumer finance programs offered by our bank partners to originate consumer loans through multiple channels, including retail point-of-sale, direct mail solicitation, digital marketing and through partner relationships. In the retail credit (the “point-of-sale” operations) channel, we partner with retailers and service providers in various industries across the United States (“U.S.”) to enable them to provide credit to their customers for the purchase of goods and services. These services of our lending partners are often extended to consumers who
may
have been declined under traditional financing options. We specialize in supporting this “second look” credit service in various industries across the U.S. Additionally, we support lenders who market general purpose credit cards directly to consumers (collectively, the “direct-to-consumer” operations) through additional channels enabling them to reach consumers through a diverse origination platform that includes retail point-of-sale, direct mail solicitation, digital marketing and partnerships with third parties. Using our infrastructure and technology platform, we also provide loan servicing, including risk management and customer service outsourcing, for
third
parties.
Beyond these activities within our Credit and Other Investments segment, we continue to service portfolios of legacy credit card receivables. One of our portfolios of legacy credit card receivables is encumbered by non-recourse structured financing, and for this portfolio our principal remaining economic interest is the servicing compensation we receive as an offset against our servicing costs given that the likely future collections on the portfolio are insufficient to allow for full repayment of the financing.
Additionally, we report within our Credit and Other Investments segment: 1) the income earned from an investment in an equity-method investee that holds credit card receivables for which we are the servicer; and 2) gains or losses associated with investments previously made in consumer finance technology platforms. These include investments in companies engaged in mobile technologies, marketplace lending and other financial technologies. These investments are carried at the lower of cost or market valuation. None of these companies are publicly-traded and there are no material pending liquidity events.
Within our Auto Finance segment, our CAR subsidiary operations principally purchase and/or service loans secured by automobiles from or for, and also provide floor plan financing for, a pre-qualified network of independent automotive dealers and automotive finance companies in the buy-here, pay-here, used car business. We purchase auto loans at a discount and with dealer retentions or holdbacks that provide risk protection. Also within our Auto Finance segment, we are providing certain installment lending products in addition to our traditional loans secured by automobiles.
2.
|
Significant Accounting Policies and Consolidated Financial Statement Components
|
The following is a summary of significant accounting policies we follow in preparing our consolidated financial statements, as well as a description of significant components of our consolidated financial statements.
Basis of Presentation and Use of Estimates
We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the U.S. (“GAAP”). The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our consolidated financial statements, as well as the reported amounts of revenues and expenses during each reporting period. We base these estimates on information available to us as of the date of the financial statements. Actual results could differ materially from these estimates. Certain estimates, such as credit losses, payment rates, costs of funds, discount rates and the yields earned on credit card receivables, significantly affect the reported amount of credit card receivables that we report at fair value and our notes payable associated with structured financings, at fair value; these estimates likewise affect the changes in these amounts reflected within our fees and related income on earning assets line item on our consolidated statements of operations. Additionally, estimates of future credit losses have a significant effect on loans, interest and fees receivable, net, as shown on our consolidated balance sheets, as well as on the provision for losses on loans, interest and fees receivable within our consolidated statements of operations.
We have eliminated all significant intercompany balances and transactions for financial reporting purposes.
Unrestricted Cash and Cash Equivalents
Unrestricted cash and cash equivalents consist of cash, money market investments and overnight deposits. We consider all highly liquid cash investments with low interest rate risk and original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates market. We maintain unrestricted cash and cash equivalents for general operating purposes and to meet our longer term debt obligations. The majority of these cash balances are not insured.
Restricted Cash
Restricted cash as of December 31, 2018 and 2017 includes certain collections on loans, interest and fees receivable, the cash balances of which are required to be distributed to noteholders under our debt facilities. Our restricted cash balances also include minimum cash balances held in accounts at the request of certain of our business partners.
Loans, Interest and Fees Receivable
Loans, Interest and Fees Receivable, at Fair Value.
Loans, interest and fees receivable held at fair value represent receivables underlying credit card securitization trusts, and which qualify as a variable interest entity ("VIE"), that are consolidated onto our consolidated balance sheet, some portfolios of which are unencumbered and some of which are still encumbered under structured financing facilities. Further details concerning our loans, interest and fees receivable held at fair value are presented within Note 6, “Fair Values of Assets and Liabilities.”
Loans, Interest and Fees Receivable.
Our loans, interest and fees receivable, gross, currently consist of receivables associated with (a) our U.S. point-of-sale and direct-to-consumer financing and other credit products currently being marketed within our Credit and Other Investments segment and (b) our Auto Finance segment’s operations. Our Credit and Other Investments segment loans, interest and fees receivable generally are unsecured, while our Auto Finance segment loans, interest and fees receivable generally are secured by the underlying automobiles in which we hold the vehicle title. We purchased loans with outstanding principal of $179.4 million and $167.1 million for the years ended December 31, 2018 and 2017, respectively, through our pre-qualified network of independent automotive dealers and automotive finance companies.
We show both an allowance for uncollectible loans, interest and fees receivable and unearned fees (or “deferred revenue”) for our loans, interest and fees receivable (i.e., as opposed to those carried at fair value). Our loans, interest and fees receivable consist of smaller-balance, homogeneous loans, divided into two portfolio segments: Credit and Other Investments; and Auto Finance. While each of these categories has unique features, they share many of the same credit risk characteristics and thus share a similar approach to the establishment of an allowance for loan losses. Each portfolio segment is divided into pools based on common characteristics such as contract or acquisition channel. For each pool, we determine the necessary allowance for uncollectible loans, interest and fees receivable by analyzing some or all of the following unique attributes for each type of receivable pool: historical loss rates; current delinquency and roll-rate trends; vintage analyses based on the number of months an account has been in existence; the effects of changes in the economy on our customers; changes in underwriting criteria; and estimated recoveries. For our Auto Finance segment we may further reduce the expected charge-off, taking into consideration specific dealer level reserves which may allow us to offset our losses and, in the case of secured loans, the impact of collateral available to offset a potential loss. Conversely, on our Credit and Other Investments segment, which generally do not have a secured interest in collateral, we look to reserve for the gross expected exposure to charge-offs.
These reserves are considered in conjunction with (and potentially reduced by) any unearned fees and discounts that may be applicable for an outstanding loan receivable. A considerable amount of judgment is required to assess the ultimate amount of uncollectible loans, interest and fees receivable, and we continuously evaluate and update our methodologies to determine the most appropriate allowance necessary. We may individually evaluate a receivable or pool of receivables for impairment if circumstances indicate that the receivable or pool of receivables may be at higher risk for non-performance than other receivables (e.g., if a particular retail or auto-finance partner has indications of non-performance (such as a bankruptcy) that could impact the underlying pool of receivables we purchased from the partner).
Certain of our loans, interest and fees receivable also contain components of deferred revenue including discounts on the purchases of receivables for our point-of-sale receivables and annual fee billings for our direct-to-consumer credit card offerings. Our point-of-sale and auto finance loans, interest and fees receivable include principal balances and associated fees and interest due from customers which are earned each period a loan is outstanding, net of the unearned portion of loan discounts. Additionally, many of our direct-to-consumer credit card offerings have an annual membership fee that is billed to the consumer on card activation and for each anniversary of that date thereafter. As of December 31, 2018 and December 31, 2017, the weighted average remaining accretion period for the $43.9 million and $37.0 million of deferred revenue reflected in the consolidated balance sheets was 11 months. Included within deferred revenue, are discounts on purchased loans of $30.0 million and $27.8 million as of December 31, 2018 and December 31, 2017, respectively.
A roll-forward (in millions) of our allowance for uncollectible loans, interest and fees receivable by class of receivable is as follows:
For the year ended December 31, 2018
|
|
Credit Cards
|
|
|
Auto Finance
|
|
|
Other Unsecured Lending Products
|
|
|
Total
|
|
Allowance for uncollectible loans, interest and fees receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(18.2
|
)
|
|
$
|
(2.3
|
)
|
|
$
|
(42.5
|
)
|
|
$
|
(63.0
|
)
|
Provision for loan losses
|
|
|
(46.6
|
)
|
|
|
(0.3
|
)
|
|
|
(53.4
|
)
|
|
|
(100.3
|
)
|
Charge offs
|
|
|
29.9
|
|
|
|
2.2
|
|
|
|
58.2
|
|
|
|
90.3
|
|
Recoveries
|
|
|
(0.5
|
)
|
|
|
(0.9
|
)
|
|
|
(4.8
|
)
|
|
|
(6.2
|
)
|
Balance at end of period
|
|
$
|
(35.4
|
)
|
|
$
|
(1.3
|
)
|
|
$
|
(42.5
|
)
|
|
$
|
(79.2
|
)
|
As of December 31, 2018
|
|
Credit Cards
|
|
|
Auto Finance
|
|
|
Other Unsecured Lending Products
|
|
|
Total
|
|
Allowance for uncollectible loans, interest and fees receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
(0.2
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
(0.3
|
)
|
Balance at end of period collectively evaluated for impairment
|
|
$
|
(35.4
|
)
|
|
$
|
(1.1
|
)
|
|
$
|
(42.4
|
)
|
|
$
|
(78.9
|
)
|
Loans, interest and fees receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, interest and fees receivable, gross
|
|
$
|
188.6
|
|
|
$
|
88.1
|
|
|
$
|
264.6
|
|
|
$
|
541.3
|
|
Loans, interest and fees receivable individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
0.4
|
|
|
$
|
0.1
|
|
|
$
|
0.5
|
|
Loans, interest and fees receivable collectively evaluated for impairment
|
|
$
|
188.6
|
|
|
$
|
87.7
|
|
|
$
|
264.5
|
|
|
$
|
540.8
|
|
For the year ended December 31, 2017
|
|
Credit Cards
|
|
|
Auto Finance
|
|
|
Other Unsecured Lending Products
|
|
|
Total
|
|
Allowance for uncollectible loans, interest and fees receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(1.4
|
)
|
|
$
|
(2.1
|
)
|
|
$
|
(39.8
|
)
|
|
$
|
(43.3
|
)
|
Provision for loan losses
|
|
|
(19.2
|
)
|
|
|
(1.9
|
)
|
|
|
(56.5
|
)
|
|
|
(77.6
|
)
|
Charge offs
|
|
|
3.8
|
|
|
|
3.0
|
|
|
|
57.0
|
|
|
|
63.8
|
|
Recoveries
|
|
|
(1.4
|
)
|
|
|
(1.3
|
)
|
|
|
(3.2
|
)
|
|
|
(5.9
|
)
|
Balance at end of period
|
|
$
|
(18.2
|
)
|
|
$
|
(2.3
|
)
|
|
$
|
(42.5
|
)
|
|
$
|
(63.0
|
)
|
As of December 31, 2017
|
|
Credit Cards
|
|
|
Auto Finance
|
|
|
Other Unsecured Lending Products
|
|
|
Total
|
|
Allowance for uncollectible loans, interest and fees receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
(0.2
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(0.4
|
)
|
Balance at end of period collectively evaluated for impairment
|
|
$
|
(18.2
|
)
|
|
$
|
(2.1
|
)
|
|
$
|
(42.3
|
)
|
|
$
|
(62.6
|
)
|
Loans, interest and fees receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, interest and fees receivable, gross
|
|
$
|
87.2
|
|
|
$
|
77.8
|
|
|
$
|
228.9
|
|
|
$
|
393.9
|
|
Loans, interest and fees receivable individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
0.4
|
|
|
$
|
0.2
|
|
|
$
|
0.6
|
|
Loans, interest and fees receivable collectively evaluated for impairment
|
|
$
|
87.2
|
|
|
$
|
77.4
|
|
|
$
|
228.7
|
|
|
$
|
393.3
|
|
Delinquent loans, interest and fees receivable reflect the principal, fee and interest components of loans we did not collect on or prior to the contractual due date. Amounts we believe we will not ultimately collect are included as a component in our overall allowance for uncollectible loans, interest and fees receivable. For most products we service other than our Auto Finance receivables, interest and fees are discontinued when loans, interest and fees receivable become contractually 90 or more days past due. We charge off our Credit and Other Investments and Auto Finance segment receivables when they become contractually more than 180 days past due. For all of our products, we charge off receivables within 30 days of notification and confirmation of a customer’s bankruptcy or death. However, in some cases of death, we do not charge off receivables if there is a surviving, contractually liable individual or an estate large enough to pay the debt in full.
Recoveries on accounts previously charged off are credited to the allowance for uncollectible loans, interest and fees receivable and effectively offset our provision for losses on loans, interest and fees receivable recorded at net realizable value on our consolidated statements of operations. (All of the above discussion relates only to our loans, interest and fees receivable for which we use net realizable value, as opposed to fair value accounting. For loans, interest and fees receivable recorded at fair value, recoveries offset losses upon impairment of the underlying loans, interest and fees receivable recorded at fair value, net of recoveries on our consolidated statements of operations.)
We consider loan delinquencies a key indicator of credit quality because this measure provides the best ongoing estimate of how a particular class of receivables is performing. An aging of our delinquent loans, interest and fees receivable, gross (in millions) by class of receivable as of December 31, 2018 and December 31, 2017 is as follows:
As of December 31, 2018
|
|
Credit Cards
|
|
|
Auto Finance
|
|
|
Other Unsecured Lending Products
|
|
|
Total
|
|
30-59 days past due
|
|
$
|
7.1
|
|
|
$
|
7.9
|
|
|
$
|
9.7
|
|
|
$
|
24.7
|
|
60-89 days past due
|
|
|
5.3
|
|
|
|
2.8
|
|
|
|
7.6
|
|
|
|
15.7
|
|
90 or more days past due
|
|
|
12.3
|
|
|
|
2.2
|
|
|
|
18.5
|
|
|
|
33.0
|
|
Delinquent loans, interest and fees receivable, gross
|
|
|
24.7
|
|
|
|
12.9
|
|
|
|
35.8
|
|
|
|
73.4
|
|
Current loans, interest and fees receivable, gross
|
|
|
163.9
|
|
|
|
75.2
|
|
|
|
228.8
|
|
|
|
467.9
|
|
Total loans, interest and fees receivable, gross
|
|
$
|
188.6
|
|
|
$
|
88.1
|
|
|
$
|
264.6
|
|
|
$
|
541.3
|
|
Balance of loans greater than 90-days delinquent still accruing interest and fees
|
|
$
|
—
|
|
|
$
|
1.5
|
|
|
$
|
—
|
|
|
$
|
1.5
|
|
As of December 31, 2017
|
|
Credit Cards
|
|
|
Auto Finance
|
|
|
Other Unsecured Lending Products
|
|
|
Total
|
|
30-59 days past due
|
|
$
|
3.2
|
|
|
$
|
6.4
|
|
|
$
|
9.0
|
|
|
$
|
18.6
|
|
60-89 days past due
|
|
|
3.3
|
|
|
|
2.1
|
|
|
|
7.1
|
|
|
|
12.5
|
|
90 or more days past due
|
|
|
4.9
|
|
|
|
1.9
|
|
|
|
15.7
|
|
|
|
22.5
|
|
Delinquent loans, interest and fees receivable, gross
|
|
|
11.4
|
|
|
|
10.4
|
|
|
|
31.8
|
|
|
|
53.6
|
|
Current loans, interest and fees receivable, gross
|
|
|
75.8
|
|
|
|
67.4
|
|
|
|
197.1
|
|
|
|
340.3
|
|
Total loans, interest and fees receivable, gross
|
|
$
|
87.2
|
|
|
$
|
77.8
|
|
|
$
|
228.9
|
|
|
$
|
393.9
|
|
Balance of loans greater than 90-days delinquent still accruing interest and fees
|
|
$
|
—
|
|
|
$
|
1.6
|
|
|
$
|
—
|
|
|
$
|
1.6
|
|
Troubled Debt Restructurings.
As part of ongoing collection efforts, once an account in our Credit and Other Investments segment is 90 days or more past due, the account is placed on a non-accrual status. Placement on a non-accrual status results in the use of programs under which the contractual interest associated with a receivable may be reduced or eliminated, or a certain amount of accrued fees is waived, provided a minimum number or amount of payments have been made. Following this adjustment, if a customer demonstrates a willingness and ability to resume making monthly payments and meets certain additional criteria, we will re-age the customer’s account. When we re-age an account, we adjust the status of the account to bring a delinquent account current, but generally do not make any further modifications to the payment terms or amount owed. Once an account is placed on a non-accrual status, it is closed for further purchases. Accounts that are placed on a non-accrual status and thereafter make at least one payment qualify as troubled debt restructurings (“TDRs”).
The following table details by class of receivable, the number and amount of modified loans, including TDRs that have been re-aged, as of December 31
,
2018
and
December
31,
2017:
|
|
As of
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Point-of-sale
|
|
|
Direct-to-consumer
|
|
|
Point-of-sale
|
|
|
Direct-to-consumer
|
|
Number of accounts on non-accrual status
|
|
|
14,174
|
|
|
|
12,734
|
|
|
|
11,432
|
|
|
|
6,681
|
|
Number of accounts on non-accrual status above that have been re-aged
|
|
|
1,322
|
|
|
|
688
|
|
|
|
915
|
|
|
|
80
|
|
Amount of receivables on non-accrual status (in thousands)
|
|
$
|
20,903
|
|
|
$
|
14,437
|
|
|
$
|
17,169
|
|
|
$
|
7,067
|
|
Amount of receivables on non-accrual status above that have been re-aged (in thousands)
|
|
$
|
2,613
|
|
|
$
|
722
|
|
|
$
|
1,570
|
|
|
$
|
86
|
|
Carrying value of receivables on non-accrual status (in thousands)
|
|
$
|
5,524
|
|
|
$
|
2,686
|
|
|
$
|
4,247
|
|
|
$
|
1,173
|
|
TDRs - Performing (carrying value, in thousands)*
|
|
$
|
3,171
|
|
|
$
|
1,639
|
|
|
$
|
2,368
|
|
|
$
|
508
|
|
TDRs - Nonperforming (carrying value, in thousands)*
|
|
$
|
2,353
|
|
|
$
|
1,047
|
|
|
$
|
1,879
|
|
|
$
|
665
|
|
*“TDRs - Performing” include accounts that are current on all amounts owed, while “TDRs - Nonperforming” include all accounts with past due amounts owed.
Given that the above TDRs have a high reserve rate prior to modification as TDRs, we do
not
separately reserve or impair these receivables outside of our general reserve process.
The Company modified 14,924 and 11,003 accounts in the amount of $22.0 million and $20.2 million during the twelve month periods ended December 31, 2018 and December 31, 2017, respectively, that qualified as TDRs. The following table details by class of receivable, the number of accounts and balance of loans that completed a modification (including those that were classified as TDRs) within the prior
twelve
months and subsequently defaulted.
|
|
Twelve Months Ended
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Point-of-sale
|
|
|
Direct-to-consumer
|
|
|
Point-of-sale
|
|
|
Direct-to-consumer
|
|
Number of accounts
|
|
|
6,217
|
|
|
|
3,776
|
|
|
|
1,720
|
|
|
|
870
|
|
Loan balance at time of charge off (in thousands)
|
|
$
|
7,863
|
|
|
$
|
3,275
|
|
|
$
|
2,675
|
|
|
$
|
2,466
|
|
Property at Cost, Net of Depreciation
We capitalize costs related to internal development and implementation of software used in our operating activities in accordance with applicable accounting literature. These capitalized costs consist almost exclusively of fees paid to third-party consultants to develop code and install and test software specific to our needs and to customize purchased software to maximize its benefit to us.
We record our property at cost less accumulated depreciation or amortization. We compute depreciation expense using the straight-line method over the estimated useful lives of our assets, which are approximately 5 years for furniture, fixtures and equipment, and 3 years for computers and software. We amortize leasehold improvements over the shorter of their estimated useful lives or the terms of their respective underlying leases.
We periodically review our property to determine if it is impaired. We incurred no impairment costs in 2018 and no impairment costs in 2017.
Investment in Equity-Method Investee
We account for an investment using the equity method of accounting if we have the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist based on ownership interest, although other factors, such as representation on an investee’s board of managers, specific voting and veto rights held by each investor and the effects of commercial arrangements, are considered in determining whether equity method accounting is appropriate. We record our interests in the income of our equity-method investee within the equity in income of equity-method investee category on our consolidated statements of operations.
We use the equity method for our 66.7% investment in a limited liability company formed in 2004 to acquire a portfolio of credit card receivables. We account for this investment using the equity method of accounting due to specific voting and veto rights held by each investor, which do not allow us to control this investee.
We evaluate our investments in the equity-method investee for impairment each quarter by comparing the carrying amount of the investment to its fair value. Because no active market exists for the investee’s limited liability company membership interests, we evaluate our investment for impairment based on our evaluation of the fair value of the equity-method investee’s net assets relative to its carrying value. If we ever were to determine that the carrying value of our investment in the equity-method investee was greater than its fair value, we would write the investment down to its fair value.
Prepaid Expenses and Other Assets
Prepaid expenses and other assets include amounts paid to third parties for marketing and other services as well as amounts owed to us by third parties. Prepaid amounts are expensed as the underlying related services are performed. Also included are (1) commissions paid associated with our various office leases which we amortize into expense over the lease terms, (2) ongoing deferred costs associated with service contracts and (3) investments in consumer finance technology platforms carried at the lower of cost or market valuation.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses reflect both the billed and unbilled amounts owed at the end of a period for services rendered. Also included within accounts payable and accrued expenses are amounts which
may
be owed in respect of
one
of our portfolios.
Revenue Recognition and Revenue from Contracts with Customers
Consumer Loans, Including Past Due Fees
Consumer loans, including past due fees reflect interest income, including finance charges, and late fees on loans in accordance with the terms of the related customer agreements. Premiums and discounts paid or received associated with an installment or auto loan are generally deferred and amortized over the average life of the related loans using the effective interest method. Finance charges and fees, net of amounts that we consider uncollectible, are included in loans, interest and fees receivable and revenue when the fees are earned based upon the contractual terms of the loans.
Fees and Related Income on Earning Assets
Fees and related income on earning assets primarily include: (
1
) fees associated with our credit products, including the receivables underlying our U.S. point-of-sale finance and direct-to-consumer activities, and our legacy credit card receivables; (
2
) changes in the fair value of loans, interest and fees receivable recorded at fair value; (
3
) changes in fair value of notes payable associated with structured financings recorded at fair value; and (4) gains or losses associated with our investments in securities (including an other than temporary impairment in 2017 of $2.1 million).
We assess fees on credit card accounts underlying our credit card receivables according to the terms of the related cardholder agreements and, except for annual membership fees, we recognize these fees as income when they are charged to the customers’ accounts. We accrete annual membership fees associated with our credit card receivables into income on a straight-line basis over the cardholder privilege period which is generally 12 months. Similarly, fees on our other credit products are recognized when earned, which coincides with the time they are charged to the customer’s account. Fees and related income on earning assets, net of amounts that we consider uncollectible, are included in loans, interest and fees receivable and revenue when the fees are earned based upon the contractual terms of the loans.
The components (in thousands) of our fees and related income on earning assets are as follows:
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Fees on credit products
|
|
$
|
25,694
|
|
|
$
|
10,427
|
|
Changes in fair value of loans, interest and fees receivable recorded at fair value
|
|
|
606
|
|
|
|
3,456
|
|
Changes in fair value of notes payable associated with structured financings recorded at fair value
|
|
|
3,589
|
|
|
|
2,315
|
|
Rental revenue
|
|
|
—
|
|
|
|
148
|
|
Other
|
|
|
103
|
|
|
|
(2,057
|
)
|
Total fees and related income on earning assets
|
|
$
|
29,992
|
|
|
$
|
14,289
|
|
The above changes in the fair value of loans, interest and fees receivable recorded at fair value category exclude the impact of current period charge offs associated with these receivables which are separately stated in Net (losses upon) recovery of charge off of loans, interest and fees receivable recorded at fair value on our consolidated statements of operations. See Note
6,
“Fair Values of Assets and Liabilities,” for further discussion of these receivables and their effects on our consolidated statements of operations.
Other income
Other income includes revenues associated with ancillary product offerings and interchange revenues. We recognize these fees as income in the period earned. For 2018, Other income also includes the receipt of £34 million (approximately $42.9 million) in settlement of litigation, resulting in income recognition of approximately $36.2 million after adjusting for amounts previously recorded.
Revenue from Contracts with Customers
In the
first
quarter of
2018,
we adopted Accounting Standards Update (“ASU”)
No.
2014
-
09,
“Revenue from Contracts with Customers” under the modified retrospective transition method. There was no material change in the timing of revenue recognition upon adoption. The majority of our revenue is earned from financial instruments and is not included within the scope of this standard. We have determined that revenue from contracts with customers would primarily consist of interchange revenues in our Credit and Other Investments segment and servicing revenue and other customer-related fees in both our Credit and Other Investments segment and our Auto Finance segment. Servicing revenue is generated by meeting contractual performance obligations related to the collection of amounts due on receivables, and is settled with the customer net of our fee. Revenue from these contracts with customers is included as a component of Other income on our consolidated statements of operations. Components (in thousands) of our revenue from contracts with customers is as follows:
|
|
Credit and
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2018
|
|
Other Investments
|
|
|
Auto Finance
|
|
|
Total
|
|
Interchange revenues, net (1)
|
|
$
|
2,881
|
|
|
$
|
—
|
|
|
$
|
2,881
|
|
Servicing income
|
|
|
947
|
|
|
|
1,022
|
|
|
|
1,969
|
|
Service charges and other customer related fees
|
|
|
637
|
|
|
|
69
|
|
|
|
706
|
|
Total revenue from contracts with customers
|
|
$
|
4,465
|
|
|
$
|
1,091
|
|
|
$
|
5,556
|
|
(
1
) Interchange revenue is presented net of customer reward expense.
|
|
Credit and
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2017
|
|
Other Investments
|
|
|
Auto Finance
|
|
|
Total
|
|
Interchange revenues, net (1)
|
|
$
|
1,345
|
|
|
$
|
—
|
|
|
$
|
1,345
|
|
Servicing income
|
|
|
3,010
|
|
|
|
844
|
|
|
|
3,854
|
|
Service charges and other customer related fees
|
|
|
74
|
|
|
|
—
|
|
|
|
74
|
|
Total revenue from contracts with customers
|
|
$
|
4,429
|
|
|
$
|
844
|
|
|
$
|
5,273
|
|
(
1
) Interchange revenue is presented net of customer reward expense.
Card and Loan Servicing Expenses
Card and loan servicing costs primarily include collections and customer service expenses. Within this category of expenses are personnel, service bureau, cardholder correspondence and other direct costs associated with our collections and customer service efforts. Card and loan servicing costs also include outsourced collections and customer service expenses. We expense card and loan servicing costs as we incur them, with the exception of prepaid costs, which we expense over respective service periods.
Marketing and Solicitation Expenses
We expense product solicitation costs, including printing, credit bureaus, list processing, telemarketing, postage, and internet marketing fees, as we incur these costs or expend resources.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The guidance requires an assessment of credit losses based on expected rather than incurred losses (known as the current expected credit loss model). This generally will result in the recognition of allowances for losses earlier than under current accounting guidance for trade and other receivables, held to maturity debt securities and other instruments. The standard will be adopted on a prospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. We are currently in the process of reviewing accounting interpretations, expected data requirements and necessary changes to our loss estimation methods, processes and systems. This standard is expected to result in an increase to our allowance for loan losses given the change to expected losses for the estimated life of the financial asset. The extent of the increase will depend on the asset quality of the portfolio, and economic conditions and forecasts at adoption.
In February 2016, the FASB issued ASU No. 2016-02, Leases, along with subsequent guidance, which requires lessees to recognize assets and liabilities for most leases and changes certain aspects of current lessor accounting, among other things. We will adopt these standards using a modified retrospective transition approach for leases existing at, or entered into after, January 1, 2019 and will not recast the comparative periods presented in the Consolidated Financial Statements upon adoption.
ASU 2016-02 provides a number of optional practical expedients and policy elections in transition. We currently expect to elect the ‘package of practical expedients’ under which we will not reassess prior conclusions about lease identification, lease classification and initial direct costs. We do not expect to elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us. We also currently expect to elect the short-term lease recognition exemption for all leases that qualify, meaning we would not recognize right-of-use assets or lease liabilities for these short term leases.
Based on our current leases we expect this adoption will result in a increase in the Total assets and Total liabilities on our Consolidated Balance Sheet. We do not anticipate adoption will have a significant impact on our Consolidated Statements of Operations or Cash Flows. Upon adoption, we currently expect to recognize additional lease liabilities of $30.2 million and corresponding right-of-use assets of $18.6 million. The impact of our status as a lessor in the sublease arrangements we maintain will not result in a material change upon completion.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 establishes a principles-based model under which revenue from a contract is allocated to the distinct performance obligations within the contract and recognized in income as each performance obligation is satisfied. Additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract is also required. In August 2015, the FASB delayed the effective date by one year and the guidance was effective for annual and interim periods beginning January 1, 2018. Most revenue associated with financial instruments, including interest income, loan origination fees and credit card fees, is outside the scope of the guidance. This includes most of the revenue of the Company. We adopted this standard as of January 1, 2018 using the modified retrospective method of adoption. Our adoption of this standard did not have a material impact on our consolidated financial statements.
Subsequent Events
We evaluate subsequent events that occur after our consolidated balance sheet date but before our consolidated financial statements are issued. There are
two
types of subsequent events: (
1
) recognized, or those that provide additional evidence with respect to conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements; and (
2
) nonrecognized, or those that provide evidence with respect to conditions that did
not
exist at the date of the balance sheet but arose subsequent to that date. We have evaluated subsequent events occurring after
December 31, 2018,
and based on our evaluation we did
not
identify any recognized or nonrecognized subsequent events that would have required further adjustments to our consolidated financial statements.
We operate primarily within
one
industry consisting of
two
reportable segments by which we manage our business. Our
two
reportable segments are: Credit and Other Investments, and Auto Finance.
As of both
December 31, 2018
and
December
31,
2017,
we did
not
have a material amount of long-lived assets located outside of the U.S., and only a negligible portion of our revenues for the years ended Dec
ember 31, 2018
and
2017
were generated outside of the U.S.
We measure the profitability of our reportable segments based on their income after allocation of specific costs and corporate overhead; however, our segment results do
not
reflect any charges for internal capital allocations among our segments. Overhead costs are allocated based on headcounts and other applicable measures to better align costs with the associated revenues.
Summary operating segment information (in thousands) is as follows:
Year ended December 31, 2018
|
|
Credit and Other Investments
|
|
|
Auto Finance
|
|
|
Total
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans, including past due fees
|
|
$
|
131,096
|
|
|
$
|
29,872
|
|
|
$
|
160,968
|
|
Other
|
|
|
200
|
|
|
|
—
|
|
|
|
200
|
|
Total interest income
|
|
|
131,296
|
|
|
|
29,872
|
|
|
|
161,168
|
|
Interest expense
|
|
|
(35,564
|
)
|
|
|
(1,332
|
)
|
|
|
(36,896
|
)
|
Net interest income before fees and related income on earning assets and provision for losses on loans, interest and fees receivable
|
|
$
|
95,732
|
|
|
$
|
28,540
|
|
|
$
|
124,272
|
|
Fees and related income on earning assets
|
|
$
|
29,912
|
|
|
$
|
80
|
|
|
$
|
29,992
|
|
Servicing income
|
|
$
|
947
|
|
|
$
|
1,022
|
|
|
$
|
1,969
|
|
Equity in income of equity-method investees
|
|
$
|
581
|
|
|
$
|
—
|
|
|
$
|
581
|
|
(Loss) income before income taxes
|
|
$
|
(6,767
|
)
|
|
$
|
10,249
|
|
|
$
|
3,482
|
|
Income tax benefit (expense)
|
|
$
|
6,345
|
|
|
$
|
(2,215
|
)
|
|
$
|
4,130
|
|
Total assets
|
|
$
|
507,232
|
|
|
$
|
75,376
|
|
|
$
|
582,608
|
|
Year ended December 31, 2017
|
|
Credit and Other Investments
|
|
|
Auto Finance
|
|
|
Total
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans, including past due fees
|
|
$
|
86,395
|
|
|
$
|
28,093
|
|
|
$
|
114,488
|
|
Other
|
|
|
219
|
|
|
|
—
|
|
|
|
219
|
|
Total interest income
|
|
|
86,614
|
|
|
|
28,093
|
|
|
|
114,707
|
|
Interest expense
|
|
|
(26,702
|
)
|
|
|
(998
|
)
|
|
|
(27,700
|
)
|
Net interest income before fees and related income on earning assets and provision for losses on loans, interest and fees receivable
|
|
$
|
59,912
|
|
|
$
|
27,095
|
|
|
$
|
87,007
|
|
Fees and related income on earning assets
|
|
$
|
14,170
|
|
|
$
|
119
|
|
|
$
|
14,289
|
|
Servicing income
|
|
$
|
3,010
|
|
|
$
|
844
|
|
|
$
|
3,854
|
|
Depreciation of rental merchandise
|
|
$
|
(27
|
)
|
|
$
|
—
|
|
|
$
|
(27
|
)
|
Equity in income of equity-method investees
|
|
$
|
1,158
|
|
|
$
|
—
|
|
|
$
|
1,158
|
|
(Loss) income before income taxes
|
|
$
|
(54,387
|
)
|
|
$
|
7,137
|
|
|
$
|
(47,250
|
)
|
Income tax benefit (expense)
|
|
$
|
9,417
|
|
|
$
|
(3,039
|
)
|
|
$
|
6,378
|
|
Total assets
|
|
$
|
359,563
|
|
|
$
|
66,050
|
|
|
$
|
425,613
|
|
During the years ended
December
31,
2018 and 2017,
we repurchased and contemporaneously retired
281,787
and
158,202
shares of our common stock at an aggregate cost of
$723,000
and
$389,000,
respectively, pursuant to both open market and private purchases and the return of stock by holders of equity incentive awards to pay tax withholding obligations.
We had
1,459,233
loaned shares outstanding at
December 31, 2018
and
December
31,
2017,
which were originally lent in connection with our
November 2005
issuance of convertible senior notes. We retire lent shares as they are returned to us.
5.
|
Investment in Equity-Method Investee
|
Our equity-method investment outstanding at
December 31, 2018
consists of our
66.7%
interest in a joint venture formed to purchase a credit card receivable portfolio.
In the following tables, we summarize (in thousands) balance sheet and results of operations data for our equity-method investee:
|
|
As of
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Loans, interest and fees receivables, at fair value
|
|
$
|
3,546
|
|
|
$
|
6,123
|
|
Total assets
|
|
$
|
3,732
|
|
|
$
|
6,392
|
|
Total liabilities
|
|
$
|
18
|
|
|
$
|
26
|
|
Members’ capital
|
|
$
|
3,714
|
|
|
$
|
6,366
|
|
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net interest income, fees and related income on earning assets
|
|
$
|
875
|
|
|
$
|
1,742
|
|
Net income
|
|
$
|
613
|
|
|
$
|
1,370
|
|
Net income attributable to investee
|
|
$
|
581
|
|
|
$
|
1,158
|
|
6.
|
Fair Values of Assets and Liabilities
|
We elected the fair value option with respect to our investments in equity securities, included in other assets, as well as our credit card loans, interest and fees receivable portfolios, the retained interests in which we historically recorded at fair value under securitization structures that were off balance sheet prior to accounting rules changes requiring their consolidation into our financial statements. The legal structure qualifies as a VIE but is consolidated as the Company is the primary beneficiary. With respect to our equity securities, we decided to carry these assets at fair value due to our intent to invest and redeem these investments with expected frequency. For our credit card loans, interest and fees receivable portfolios underlying our formerly off-balance-sheet securitization structures, we elected the fair value option because, in contrast to substantially all of our other assets, we had significant experiences in determining the fair value of these assets in connection with our historical fair value accounting for our retained interests in their associated securitization structures. Because we elected to account for the credit card receivables underlying our formerly off-balance-sheet securitization structures at fair value, accounting rules require that we account for the notes payable issued by such securitization structures at fair value as well. For our other credit card receivables that have never been owned by our formerly off-balance-sheet securitization structures, we have not elected the fair value option, and we record such receivables at net realizable value within loans, interest and fees receivable, net on our consolidated balance sheets.
For all of our other debt other than the notes payable underlying our formerly off-balance sheet credit card securitization structures, we have not elected the fair value option. Nevertheless, pursuant to applicable requirements, we include disclosures of the fair value of this other debt to the extent practicable within the disclosures below. Additionally, we have other liabilities, associated with consolidated legacy credit card securitization trusts, that we are required to carry at fair value in our consolidated financial statements, and they also are addressed within the disclosures below.
Where applicable as noted above, we account for our financial assets and liabilities at fair value based upon a three-tiered valuation system. In general, fair values determined by Level 1 inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Fair values determined by Level 2 inputs use inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. Where inputs used to measure fair value may fall into different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety has been determined is based on the lowest level input that is significant to the fair value measurement in its entirety.
Valuations and Techniques for Assets
Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The table below summarizes (in thousands) by fair value hierarchy the
December
31,
2018
and
December
31,
2017
fair values and carrying amounts of (
1
) our assets that are required to be carried at fair value in our consolidated financial statements and (
2
) our assets
not
carried at fair value, but for which fair value disclosures are required:
Assets – As of December 31, 2018 (1)
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
|
Significant Other Observable Inputs (Level 2)
|
|
|
Significant Unobservable Inputs (Level 3)
|
|
|
Carrying Amount of Assets
|
|
Loans, interest and fees receivable, net for which it is practicable to estimate fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
470,496
|
|
|
$
|
418,236
|
|
Loans, interest and fees receivable, at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,306
|
|
|
$
|
6,306
|
|
Assets – As of December 31, 2017 (1)
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
|
Significant Other Observable Inputs (Level 2)
|
|
|
Significant Unobservable Inputs (Level 3)
|
|
|
Carrying Amount of Assets
|
|
Loans, interest and fees receivable, net for which it is practicable to estimate fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
324,945
|
|
|
$
|
293,972
|
|
Loans, interest and fees receivable, at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,109
|
|
|
$
|
11,109
|
|
|
(
1
)
|
For cash, deposits and investments in equity securities, 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 our loans, interest and fees receivable included in the above tables, we assess the fair value of these assets based on our estimate of future cash flows net of servicing costs, and to the extent that such cash flow estimates change from period to period, any such changes are considered to be attributable to changes in instrument-specific credit risk.
For Level
3
assets carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) a reconciliation of the beginning and ending balances for the year ended December 31
,
2018
and
2017:
|
|
Loans, Interest and Fees Receivables, at Fair Value
|
|
|
|
2018
|
|
|
2017
|
|
Balance at January 1,
|
|
$
|
11,109
|
|
|
$
|
15,648
|
|
Total gains—realized/unrealized:
|
|
|
|
|
|
|
|
|
Net revaluations of loans, interest and fees receivable, at fair value
|
|
|
606
|
|
|
|
3,456
|
|
Settlements
|
|
|
(5,395
|
)
|
|
|
(8,049
|
)
|
Impact of foreign currency translation
|
|
|
(14
|
)
|
|
|
54
|
|
Balance at December 31,
|
|
$
|
6,306
|
|
|
$
|
11,109
|
|
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 when recognized.
Net Revaluation of Loans, Interest and Fees Receivable.
We record the net revaluation of loans, interest and fees receivable (including those pledged as collateral) in the fees and related income on earning assets category in our consolidated statements of operations, specifically as changes in fair value of loans, interest and fees receivable recorded at fair value. The net revaluation of loans, interest and fees receivable is based on the present value of future cash flows using a valuation model of expected cash flows and the estimated cost to service and collect those cash flows. We estimate the present value of these future cash flows using a valuation model consisting of internally developed estimates of assumptions
third
-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. Interest income on receivables underlying our asset classes that are carried at fair value in our consolidated financial statements is recorded in Interest income - Consumer loans, including past due fees in our consolidated statements of operations.
For Level
3
assets carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) quantitative information about the valuation techniques and the inputs used in the fair value measurement as of December 31
,
2018
and
December
31,
2017:
Quantitative Information about Level
3
Fair Value Measurements
Fair Value Measurements
|
|
Fair Value at December 31, 2018 (in thousands)
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range (Weighted Average)
|
|
|
|
|
|
|
|
|
|
|
|
Loans, interest and fees receivable, at fair value
|
|
$
|
6,306
|
|
Discounted cash flows
|
|
Gross yield
|
|
|
25.8% to 30.8% (26.4%)
|
|
|
|
|
|
|
|
|
Principal payment rate
|
|
|
2.2% to 3.0% (2.3%)
|
|
|
|
|
|
|
|
|
Expected credit loss rate
|
|
|
8.7% to 11.3% (9.0%)
|
|
|
|
|
|
|
|
|
Servicing rate
|
|
|
14.9% to 19.5% (15.5%)
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
14.9% to 14.9% (14.9%)
|
|
Quantitative Information about Level
3
Fair Value Measurements
Fair Value Measurements
|
|
Fair Value at December 31, 2017 (in thousands)
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range (Weighted Average)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, interest and fees receivable, at fair value
|
|
$
|
11,109
|
|
Discounted cash flows
|
|
Gross yield
|
|
|
15.8% to 27.4% (24.5%)
|
|
|
|
|
|
|
|
|
Principal payment rate
|
|
|
1.9% to 3.6% (2.6%)
|
|
|
|
|
|
|
|
|
Expected credit loss rate
|
|
|
9.4% to 10.4% (9.7%)
|
|
|
|
|
|
|
|
|
Servicing rate
|
|
|
10.2% to 12.3% (10.5%)
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.0% to 14.2% (12.8%)
|
|
Valuations and Techniques for Liabilities
Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the liability. The table below summarizes (in thousands) by fair value hierarchy the December 31
,
2018
and
December
31,
2017
fair values and carrying amounts of (
1
) our liabilities that are required to be carried at fair value in our consolidated financial statements and (
2
) our liabilities
not
carried at fair value, but for which fair value disclosures are required:
Liabilities – As of December 31, 2018
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
|
Significant Other Observable Inputs (Level 2)
|
|
|
Significant Unobservable Inputs (Level 3)
|
|
|
Carrying Amount of Liabilities
|
|
Liabilities not carried at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
389,707
|
|
|
$
|
389,707
|
|
Amortizing debt facilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,220
|
|
|
$
|
1,220
|
|
Notes payable to related parties
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
40,000
|
|
|
$
|
40,000
|
|
Convertible senior notes
|
|
$
|
—
|
|
|
$
|
47,230
|
|
|
$
|
—
|
|
|
$
|
62,142
|
|
Liabilities carried at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable associated with structured financings, at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,651
|
|
|
$
|
5,651
|
|
Liabilities - As of December 31, 2017
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
|
Significant Other Observable Inputs (Level 2)
|
|
|
Significant Unobservable Inputs (Level 3)
|
|
|
Carrying Amount of Liabilities
|
|
Liabilities not carried at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
160,854
|
|
|
$
|
160,854
|
|
Amortizing debt facilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
65,384
|
|
|
$
|
65,384
|
|
Notes payable to related parties
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
40,000
|
|
|
$
|
40,000
|
|
Convertible senior notes
|
|
$
|
—
|
|
|
$
|
43,588
|
|
|
$
|
—
|
|
|
$
|
61,393
|
|
Liabilities carried at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable associated with structured financings, at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,240
|
|
|
$
|
9,240
|
|
For our notes payable, we assess the fair value of these liabilities based on our estimate of future cash flows generated from their underlying credit card receivables collateral, net of servicing compensation required under the note facilities, and to the extent that such cash flow estimates change from period to period, any such changes are considered to be attributable to changes in instrument-specific credit risk. Gains and losses associated with fair value changes for our notes payable associated with structured financing liabilities that are carried at fair value are detailed on our fees and related income on earning assets table within Note 2, “Significant Accounting Policies and Consolidated Financial Statement Components.” For our 5.875% convertible senior notes due 2035 (“5.875% convertible senior notes”), we assess fair value based upon the most recent trade data available from third-party providers. We have evaluated the fair value of our third party debt by analyzing the expected repayment terms and credit spreads included in our recent financing arrangements obtained with similar terms. These recent financing arrangements provide positive evidence that the underlying data used in our assessment of fair value has not changed relative to the general market and therefore the fair value of our debt continues to be the same as the carrying value. See Note 9, “Notes Payable,” for further discussion on our other notes payable.
For our material Level
3
liabilities carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) a reconciliation of the beginning and ending balances for the year ended December 31
,
2018
and
2017.
|
|
Notes Payable Associated with
Structured Financings, at Fair Value
|
|
|
|
2018
|
|
|
2017
|
|
Beginning balance, January 1,
|
|
$
|
9,240
|
|
|
$
|
12,276
|
|
Total (gains) losses—realized/unrealized:
|
|
|
|
|
|
|
|
|
Net revaluations of notes payable associated with structured financings, at fair value
|
|
|
(3,589
|
)
|
|
|
(2,315
|
)
|
Repayments on outstanding notes payable, net
|
|
|
—
|
|
|
|
(721
|
)
|
Ending balance, December 31,
|
|
$
|
5,651
|
|
|
$
|
9,240
|
|
The unrealized gains and losses for liabilities within the Level
3
category presented in the table above include changes in fair value that are attributable to both observable and unobservable inputs. We provide below a brief description of the valuation techniques used for Level
3
liabilities.
Net Revaluation of Notes Payable Associated with Structured Financings, at Fair Value.
We record the net revaluations of notes payable associated with structured financings, at fair value, in the changes in fair value of notes payable associated with structured financings line item within the fees and related income on earning assets category of our consolidated statements of operations. The legal entity associated with the securitization transaction is consolidated as a VIE as the Company is deemed the primary beneficiary of the entity. The Company is not liable for the full face value of the liability in the VIE so it is carried at fair value based upon amounts the borrower will receive from the legal entity. The net revaluation of these notes is based on the present value of future cash flows utilized in repayment of the outstanding principal and interest under the facilities using a valuation model of expected cash flows net of the contractual service expenses within the facilities. We estimate the present value of these future cash flows using a valuation model consisting of internally developed estimates of assumptions
third
-party market participants would use in determining fair value, including: estimates of net collected yield, principal payment rates and expected principal credit loss rates on the credit card receivables that secure the non-recourse notes payable; costs of funds; discount rates; and contractual servicing fees. Accrued interest expense on notes payable underlying our notes payable associated with structured financings, at fair value is recorded in Interest expense in our consolidated statements of operations.
For material Level
3
liabilities carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) quantitative information about the valuation techniques and the inputs used in the fair value measurement as of December 31
,
2018
and
December
31,
2017:
Quantitative Information about Level
3
Fair Value Measurements
Fair Value Measurements
|
|
Fair Value at December 31, 2018 (in thousands)
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Weighted Average
|
|
Notes payable associated with structured financings, at fair value
|
|
$
|
5,651
|
|
Discounted cash flows
|
|
Gross yield
|
|
|
25.8
|
%
|
|
|
|
|
|
|
|
Principal payment rate
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
Expected credit loss rate
|
|
|
8.7
|
%
|
|
|
|
|
|
|
|
Discount rate
|
|
|
14.9
|
%
|
Quantitative Information about Level
3
Fair Value Measurements
Fair Value Measurements
|
|
Fair Value at December
31, 2017 (in thousands)
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Weighted Average
|
|
Notes payable associated with structured financings, at fair value
|
|
$
|
9,240
|
|
Discounted cash flows
|
|
Gross yield
|
|
|
25.9
|
%
|
|
|
|
|
|
|
|
Principal payment rate
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
Expected credit loss rate
|
|
|
9.4
|
%
|
|
|
|
|
|
|
|
Discount rate
|
|
|
14.2
|
%
|
Other Relevant Data
Other relevant data (in thousands) as of
December 31, 2018
and
December
31,
2017
concerning certain assets and liabilities we carry at fair value are as follows:
As of December 31, 2018
|
|
Loans, Interest and Fees Receivable at Fair Value
|
|
|
Loans, Interest and Fees Receivable Pledged as Collateral under Structured Financings at Fair Value
|
|
Aggregate unpaid principal balance within loans, interest and fees receivable that are reported at fair value
|
|
$
|
1,160
|
|
|
$
|
7,708
|
|
Aggregate fair value of loans, interest and fees receivable that are reported at fair value
|
|
$
|
655
|
|
|
$
|
5,651
|
|
Aggregate fair value of receivables carried at fair value that are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies)
|
|
$
|
3
|
|
|
$
|
7
|
|
Unpaid principal balance of receivables within loans, interest and fees receivable that are reported at fair value and are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies) over the fair value of such loans, interest and fees receivable
|
|
$
|
35
|
|
|
$
|
224
|
|
As of December 31, 2017
|
|
Loans, Interest and Fees Receivable at Fair Value
|
|
|
Loans, Interest and Fees Receivable Pledged as Collateral under Structured Financings at Fair Value
|
|
Aggregate unpaid principal balance within loans, interest and fees receivable that are reported at fair value
|
|
$
|
4,416
|
|
|
$
|
11,349
|
|
Aggregate fair value of loans, interest and fees receivable that are reported at fair value
|
|
$
|
1,869
|
|
|
$
|
9,240
|
|
Aggregate fair value of receivables carried at fair value that are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies)
|
|
$
|
5
|
|
|
$
|
17
|
|
Unpaid principal balance of receivables within loans, interest and fees receivable that are reported at fair value and are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies) over the fair value of such loans, interest and fees receivable
|
|
$
|
107
|
|
|
$
|
369
|
|
Notes Payable
|
|
Notes Payable Associated with Structured Financings, at Fair Value as of December 31, 2018
|
|
|
Notes Payable Associated with Structured Financings, at Fair Value as of December 31, 2017
|
|
Aggregate unpaid principal balance of notes payable
|
|
$
|
101,314
|
|
|
$
|
101,314
|
|
Aggregate fair value of notes payable
|
|
$
|
5,651
|
|
|
$
|
9,240
|
|
Details (in thousands) of our property on our consolidated balance sheets are as follows:
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Software
|
|
$
|
3,467
|
|
|
$
|
5,542
|
|
Furniture and fixtures
|
|
|
6,307
|
|
|
|
6,252
|
|
Data processing and telephone equipment
|
|
|
7,625
|
|
|
|
11,196
|
|
Leasehold improvements
|
|
|
10,570
|
|
|
|
10,651
|
|
Other
|
|
|
1,156
|
|
|
|
—
|
|
Total cost
|
|
|
29,125
|
|
|
|
33,641
|
|
Less accumulated depreciation
|
|
|
(25,500
|
)
|
|
|
(30,412
|
)
|
Property, net
|
|
$
|
3,625
|
|
|
$
|
3,229
|
|
Depreciation expense totaled $1.0 million and $1.0 million for the years ended December 31, 2018 and 2017, respectively.
We lease premises and certain equipment under cancelable and non-cancelable leases, some of which contain renewal options under various terms. Total rental expense associated with these operating leases was $1.7 million in 2018 and $1.7 million in 2017, net of sublease income of $5.1 million and $5.0 million for the years ended December 31, 2018 and 2017, respectively. During the fourth quarter of 2006, we entered into a 15-year lease in Atlanta, Georgia for 335,372 square feet (net of space which was surrendered to the landlord through our exercise of a termination option), 254,710 square feet of which we have subleased, and the remainder of which houses our corporate offices. In connection with this lease, we received a $21.2 million construction allowance for the build-out of our new corporate offices. We are amortizing the construction allowance as a reduction of rent expense over the term of the lease. As of December 31, 2018, the future minimum rental commitments (in thousands) for all non-cancelable operating leases with initial or remaining terms of more than one year (both gross and net of any sublease income) are as follows:
|
|
Gross
|
|
|
Sublease Income
|
|
|
Net
|
|
2019
|
|
$
|
9,998
|
|
|
$
|
(6,919
|
)
|
|
$
|
3,079
|
|
2020
|
|
|
10,075
|
|
|
|
(7,115
|
)
|
|
|
2,960
|
|
2021
|
|
|
10,089
|
|
|
|
(7,315
|
)
|
|
|
2,774
|
|
2022
|
|
|
4,285
|
|
|
|
(3,112
|
)
|
|
|
1,173
|
|
2023
|
|
|
71
|
|
|
|
—
|
|
|
|
71
|
|
Thereafter
|
|
|
12
|
|
|
|
—
|
|
|
|
12
|
|
Total
|
|
$
|
34,530
|
|
|
$
|
(24,461
|
)
|
|
$
|
10,069
|
|
In addition, we occasionally lease certain equipment under cancelable and non-cancelable leases, which are accounted for as capital leases in our consolidated financial statements. As of December 31, 2018, we had no material non-cancelable capital leases with initial or remaining terms of more than one year.
The Company contributes certain receivables to VIEs. These entities are established to facilitate a more efficient means of obtaining third party financing. When assets are contributed to the VIE, they serve as collateral for the debt securities issued by the VIE. The evaluation of whether the entity qualifies as a VIE is based upon the sufficiency of the equity at risk in the legal entity. This evaluation is generally a function of the level of excess collateral in the legal entity. We consolidate VIEs when we hold a variable interest and are the primary beneficiary. We are the primary beneficiary when we have the power to direct activities that most significantly affect the economic performance and have the obligation to absorb the majority of the losses or benefits. In certain circumstances we guarantee the performance of the underlying debt or agree to contribute additional collateral when necessary. When collateral is pledged it is not available for the general use of the Company and can only be used to satisfy the related debt obligation. The results of operations and financial position of consolidated VIEs are included in our consolidated financial statements.
The following table presents a summary of VIEs in which we had continuing involvement or held a variable interest (in millions):
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cash and restricted cash
|
|
$
|
78
|
|
|
$
|
40
|
|
Loans, interest and fees receivable, at fair value
|
|
|
6
|
|
|
|
9
|
|
Loans, interest and fees receivable, gross
|
|
|
403
|
|
|
|
253
|
|
Allowances for uncollectible loans, interest and fees receivable
|
|
|
(57
|
)
|
|
|
(32
|
)
|
Deferred revenue
|
|
|
(13
|
)
|
|
|
(9
|
)
|
Total Assets held by VIEs
|
|
$
|
416
|
|
|
$
|
261
|
|
Notes Payable, at face value held by VIEs
|
|
$
|
367
|
|
|
$
|
204
|
|
Notes Payable, at fair value held by VIEs
|
|
$
|
6
|
|
|
$
|
9
|
|
Maximum exposure to loss due to involvement with VIE
|
|
$
|
438
|
|
|
$
|
455
|
|
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 December 31
,
2018
and
December
31,
2017,
(
2
) the outstanding face amount of our structured financing note secured by certain credit card receivables and reported at fair value as of December 31
,
2018
and
December
31,
2017,
and (
3
) the carrying amount of the credit card receivables and restricted cash that provide the exclusive means of repayment for the note (i.e., lenders have recourse only to the specific credit card receivables and restricted cash underlying each respective facility and cannot look to our general credit for repayment) as of
December 31, 2018
and
December
31,
2017.
|
|
Carrying Amounts at Fair Value as of
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Securitization facility (stated maturity of December 2021), outstanding face amount of $101.3 million as of December 31, 2018 ($101.3 million as of December 31, 2017) bearing interest at a weighted average 7.5% interest rate, based upon LIBOR, at December 31, 2018 (6.7% at December 31, 2017), which is secured by credit card receivables and restricted cash aggregating $5.7 million as of December 31, 2018 ($9.2 million as of December 31, 2017) in carrying amount
|
|
$
|
5.7
|
|
|
$
|
9.2
|
|
Contractual payment allocations within this credit card receivables structured financing provide for a priority distribution of cash flows to us to service the credit card receivables, a distribution of cash flows to pay interest and principal due on the notes, and a distribution of all excess cash flows (if any) to us. The structured financing facility included in the above table is amortizing down along with collections of the underlying receivables and there are
no
provisions within the debt agreement that allow for acceleration or bullet repayment of the facility prior to its scheduled expiration date. The aggregate carrying amount of the credit card receivables and restricted cash that provide security for the
$5.7
million in fair value of the structured financing facility indicated in the above table is
$5.7
million, which means that we have
no
aggregate exposure to pre-tax equity loss associated with the above structured financing arrangement at
December 31, 2018.
As discussed elsewhere, the legal entity holding the securitization facility discussed in the table above, is a VIE. Beyond our role as servicer of the underlying assets within the credit cards receivables structured financing, we have provided
no
other financial or other support to the structure, and we have
no
explicit or implicit arrangements that could require us to provide financial support to the structure.
Notes Payable, at Face Value and Notes Payable to Related Parties
Other notes payable outstanding as of December 31
,
2018
and
December
31,
2017
that are secured by the financial and operating assets of either the borrower, another of our subsidiaries or both, include the following, scheduled (in millions); except as otherwise noted, the assets of our holding company (Atlanticus Holdings Corporation) are subject to creditor claims under these scheduled facilities:
|
|
As of
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Revolving credit facilities at a weighted average interest rate equal to 7.6% at December 31, 2018 (7.8% at December 31, 2017) secured by the financial and operating assets of CAR and/or certain receivables and restricted cash with a combined aggregate carrying amount of $468.8 million as of December 31, 2018 ($216.0 million at December 31, 2017)
|
|
|
|
|
|
|
|
|
Revolving credit facility, not to exceed $40.0 million (expiring November 1, 2020) (1) (2)
|
|
|
30.0
|
|
|
|
24.8
|
|
Revolving credit facility, not to exceed $50.0 million (expiring October 30, 2019) (2) (3) (7)
|
|
|
49.9
|
|
|
|
49.4
|
|
Revolving credit facility, not to exceed $12.0 million (expiring December 21, 2019) (2) (3) (4) (7)
|
|
|
—
|
|
|
|
3.8
|
|
Revolving credit facility, not to exceed $20.0 million (expiring December 31, 2019) (3) (4) (7)
|
|
—
|
|
|
19.8
|
|
Revolving credit facility, not to exceed $90.0 million (expiring February 8, 2022) (3) (5) (7) (8)
|
|
|
61.0
|
|
|
|
65.0
|
|
Revolving credit facility, not to exceed $100.0 million (expiring June 11, 2020) (3) (5) (7) (8)
|
|
|
80.5
|
|
|
|
—
|
|
Revolving credit facility, not to exceed $15.0 million (expiring June 25, 2020) (2) (3) (4) (7)
|
|
|
—
|
|
|
|
7.5
|
|
Revolving credit facility, not to exceed $100.0 million (expiring November 16, 2020) (3) (5) (7) (8)
|
|
|
8.0
|
|
|
|
—
|
|
Revolving credit facility, not to exceed $167.3 million (expiring November 15, 2023) (3) (5) (7) (8)
|
|
|
167.3
|
|
|
|
—
|
|
Amortizing facilities at a weighted average interest rate equal to 6.0% at December 31, 2017, secured by certain receivables and restricted cash with a combined aggregate carrying amount of $77.9 million as of December 31, 2017
|
|
|
|
|
|
|
|
|
Amortizing debt facility (repaid in March 2018) (3) (6) (7)
|
|
|
—
|
|
|
|
3.7
|
|
Amortizing debt facility (repaid in June 2018) (3) (6) (7)
|
|
|
—
|
|
|
|
18.3
|
|
Amortizing debt facility (repaid in September 2018) (3) (7)
|
|
|
—
|
|
|
|
6.0
|
|
Amortizing debt facility (repaid in November 2018) (3) (4) (6) (7)
|
|
|
—
|
|
|
|
20.5
|
|
Amortizing debt facility (repaid in November 2018) (3) (4) (6) (7)
|
|
|
—
|
|
|
|
10.0
|
|
Other facilities
|
|
|
|
|
|
|
|
|
Other secured debt (expiring September 8, 2023) that is secured by certain assets of the Company with an annual rate equal to 5.5%
|
|
|
1.2
|
|
|
|
—
|
|
Senior secured term loan to related parties (expiring November 21, 2019) that is secured by certain assets of the Company with an annual rate equal to 9.0% (5)
|
|
|
40.0
|
|
|
|
40.0
|
|
Total notes payable before unamortized debt issuance costs and discounts
|
|
|
437.9
|
|
|
|
268.8
|
|
Unamortized debt issuance costs and discounts
|
|
|
(7.0
|
)
|
|
|
(2.6
|
)
|
Total notes payable outstanding
|
|
$
|
430.9
|
|
|
$
|
266.2
|
|
(
1
)
|
Loan is subject to certain affirmative covenants, including a coverage ratio, a leverage ratio and a collateral performance test, the failure of which could result in required early repayment of all or a portion of the outstanding balance by our CAR Auto Finance operations.
|
(
2
)
|
These notes reflect modifications to either extend the maturity date, increase the loan amount or both, and are treated as accounting modifications.
|
(
3
)
|
Loans are subject to certain affirmative covenants tied to default rates and other performance metrics the failure of which could result in required early repayment of the remaining unamortized balances of the notes.
|
(
4
)
|
Loans were paid down in November
2018
as part of securitization discussed below.
|
(5
)
|
See below for additional information.
|
(6
)
|
Loans were comprised of
four
tranches with the same lenders. Terms and conditions were substantially identical with the exception of maturity date as indicated in the table above.
|
(7)
|
Loans are associated with variable interest entities.
|
(8)
|
Creditors do not have recourse against the general assets of the Company but only to the collateral within the VIEs.
|
On
November 26, 2014,
we and certain of our subsidiaries entered into a Loan and Security Agreement with Dove Ventures, LLC, a Nevada limited liability company (“Dove”). 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 was fully drawn with
$40.0
million outstanding as of
December 31, 2018.
In
November 2018,
the agreement was amended to extend the maturity date of the term loan to
November
21,
2019.
All other terms remain unchanged.
Our obligations under the agreement are guaranteed by certain subsidiary guarantors and secured by a pledge of certain assets of ours and the subsidiary guarantors. The loans bear interest at the rate of
9.0%
per annum, payable monthly in arrears. The principal amount of these loans is payable in a single installment on
November
21,
2019
(as amended). The agreement includes customary affirmative and negative covenants, as well as customary representations, warranties and events of default. Subject to certain conditions, we can prepay the principal amounts of these loans without premium or penalty.
Dove is a limited liability company owned by
three
trusts. David G. Hanna is the sole shareholder and the President of the corporation that serves as the sole trustee of
one
of the trusts, and David G. Hanna and members of his immediate family are the beneficiaries of this trust. Frank J. Hanna, III is the sole shareholder and the President of the corporation that serves as the sole trustee of the other
two
trusts, and Frank J. Hanna, III and members of his immediate family are the beneficiaries of these other
two
trusts.
In October 2015, we (through a wholly owned subsidiary) entered a revolving credit facility with a (as subsequently amended) $50.0 million revolving borrowing limit that can be drawn to the extent of outstanding eligible principal receivables (of which $49.9 million was drawn as of December 31, 2018). This facility is secured by the loans and fees receivable and related restricted cash and accrues interest at an annual rate equal to LIBOR plus 5.0%. The loan is subject to certain affirmative covenants, including a liquidity test and an eligibility test, the failure of which could result in required early repayment of all or a portion of the outstanding balance. The note is guaranteed by Atlanticus who is required to maintain certain minimum liquidity levels.
In October 2016, we (through a wholly owned subsidiary) entered a revolving credit facility with a $40.0 million borrowing limit that can be drawn to the extent of outstanding eligible principal receivables of our CAR subsidiary (of which $30.0 million was drawn as of December 31, 2018). This facility is secured by the financial and operating assets of CAR and accrues interest at an annual rate equal to LIBOR plus a range between 2.4% and 3.0% based on certain ratios. The loan is subject to certain affirmative covenants, including a coverage ratio, a leverage ratio and a collateral performance test, the failure of which could result in required early repayment of all or a portion of the outstanding balance. In February 2019, we extended the maturity date of this revolving credit facility to November 1, 2020. There were no other material changes to the existing terms or conditions and the new maturity date is reflected in the table above.
In
February 2017,
we (through a wholly owned subsidiary) established a program under which we sell certain receivables to a consolidated trust in exchange for notes issued by the trust. The notes are secured by the receivables and other assets of the trust. Simultaneously with the establishment of the program, the trust issued a series of variable funding notes and sold an aggregate amount of up to
$90.0
million (of which
$61.0
million was outstanding as of
December 31, 2018)
to an unaffiliated
third
party pursuant to a facility that can be drawn upon to the extent of outstanding eligible receivables. Interest rates on the notes are fixed and range from 10
.0%
to
14.0%.
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 or other fee.
In
2018,
we (through a wholly owned subsidiary) entered into two separate facilities associated with the above mentioned program to sell up to an aggregate
$200.0
million of notes which are secured by the receivables and other assets of the trust (of which
$88.5
million was outstanding as of
December 31, 2018)
to separate unaffiliated
third
parties pursuant to facilities that can be drawn upon to the extent of outstanding eligible receivables. Interest rates on the notes are based on commercial paper rates plus
4.25% and LIBOR plus 4.5%, respectively.
The facilities mature on
June
11,
2020 and November 16, 2020,
respectively, and are subject to certain affirmative covenants and collateral performance tests, the failure of which could result in required early repayment of all or a portion of the outstanding balance of notes. The facilities also
may
be prepaid subject to payment of a prepayment or other fee.
In November 2018, we sold $167.3 million of asset backed securities (“ABS”) secured by certain retail point-of-sale receivables. A portion of the proceeds from the sale were used to pay-down our existing term and revolving facilities associated with our point-of-sale receivables, noted in the table above, and the remaining proceeds are available to fund the acquisition of future receivables. The terms of the ABS allow for a two-year revolving structure with a subsequent 18-month amortization period. The weighted average interest rate on the securities is fixed at 5.76%.
We are in compliance with the covenants underlying our various notes payable.
10.
|
Convertible Senior Notes
|
In
November
2005,
we issued
$300.0
million aggregate principal amount of
5.875%
convertible senior notes due
November
30,
2035
. The 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 convertible senior notes.
The following summarizes (in thousands) components of our consolidated balance sheets associated with our convertible senior notes:
|
|
As of
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Face amount of 5.875% convertible senior notes
|
|
$
|
88,280
|
|
|
$
|
88,280
|
|
Discount
|
|
|
(26,138
|
)
|
|
|
(26,887
|
)
|
Net carrying value
|
|
$
|
62,142
|
|
|
$
|
61,393
|
|
Carrying amount of equity component included in paid-in capital
|
|
$
|
108,714
|
|
|
$
|
108,714
|
|
Excess of instruments’ if-converted values over face principal amounts
|
|
$
|
—
|
|
|
$
|
—
|
|
During certain periods and subject to certain conditions, the remaining $88.3 million of outstanding 5.875% convertible senior notes as of December 31, 2018 (as referenced in the table above) are convertible by holders into cash and, if applicable, shares of our common stock at an adjusted effective conversion rate of 40.63 shares of common stock per $1,000 principal amount of notes, subject to further adjustment; the conversion rate is based on an adjusted conversion price of $24.61 per share of common stock. Upon any conversion of the notes, we will deliver to holders of the notes cash of up to $1,000 per $1,000 aggregate principal amount of notes and, at our option, either cash or shares of our common stock in respect of the remainder of the conversion obligation, if any. The maximum number of shares of common stock that any note holder may receive upon conversion is fixed at 40.63 shares per $1,000 aggregate principal amount of notes, and we have a sufficient number of authorized shares of our common stock to satisfy this conversion obligation. We are required to pay contingent interest on the notes during a 6-month period if the average trading price of the notes is above a specified level. Thus far we have not paid any contingent interest on these notes. In addition, holders of the notes may require us to repurchase the notes for cash upon certain specified events.
In conjunction with the offering of the 5.875% convertible senior notes, we entered into a 30-year share lending agreement with Bear, Stearns International Limited (“BSIL”) and Bear, Stearns & Co. Inc, as agent for BSIL, pursuant to which we lent BSIL 5,677,950 shares of our common stock. We exclude the loaned shares from earnings per share computations. The obligations of Bear Stearns were assumed by JP Morgan in 2008. JP Morgan (as the guarantor of the obligation) is required to return the loaned shares to us at the end of the 30-year term of the share lending agreement or earlier upon the occurrence of specified events. Such events include the bankruptcy of JP Morgan, its failure to make payments when due, its failure to post collateral when required or return loaned shares when due, notice of its inability to perform obligations, or its untrue representations. If an event of default occurs, then the borrower (JP Morgan) may settle the obligation in cash. Further, in the event that JP Morgan’s credit rating drops below A/A2, it would be required to post collateral for the market value of the lent shares ($5.3 million based on the 1,459,233 shares remaining outstanding under the share lending arrangement as of December 31, 2018). JP Morgan has agreed to use the loaned shares for the purpose of directly or indirectly facilitating the hedging of our convertible senior notes by the holders thereof or for such other purpose as reasonably determined by us. We deem it highly remote that any event of default will occur and therefore cash settlement, while an option, is an unlikely scenario.
We analogize the share lending agreement to a prepaid forward contract, which we have evaluated under applicable accounting guidance. We determined that the instrument was not a derivative in its entirety and that the embedded derivative would not require separate accounting. The net effect on shareholders’ equity of the shares lent pursuant to the share lending agreement, which includes our requirement to lend the shares and the counterparties’ requirement to return the shares, is the fee received upon our lending of the shares.
Accounting for Convertible Senior Notes
Under applicable accounting literature, the accounting for the issuance of the notes includes (1) allocation of the issuance proceeds between the notes and paid-in capital, (2) establishment of a discount to the face amount of the notes equal to the portion of the issuance proceeds that are allocable to paid-in capital, (3) creation of a deferred tax liability related to the discount on the notes, and (4) an allocation of issuance costs between the portion of such costs considered to be associated with the notes and the portion of such costs considered to be associated with the equity component of the notes’ issuances (i.e., paid-in capital). We are amortizing the discount to the remaining face amount of the notes into interest expense over the expected life of the notes, which results in a corresponding release of associated deferred tax liability. Amortization for the years ended December 31, 2018 and 2017 totaled $0.6 million and $0.5 million, respectively. Actual incurred interest (based on the contractual interest rates within the two convertible senior notes series) totaled $5.2 million for each of the years ended December 31, 2018 and 2017. We will amortize the discount remaining at December 31, 2018 into interest expense over the expected term of the 5.875% convertible senior notes (currently expected to be October 2035). The weighted average effective interest rate for the 5.875% convertible senior notes was 9.2% for all periods presented.
11.
|
Commitments and Contingencies
|
General
Under finance products available in the point-of-sale and direct-to-consumer channels, consumers have the ability to borrow up to the maximum credit limit assigned to each individual’s account. Unfunded commitments under these products aggregated $631.0 million at
December 31, 2018.
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 floor plan financing allows dealers and finance companies to borrow up to the maximum pre-approved credit limit allowed in order to finance ongoing inventory needs. These loans are secured by the underlying auto inventory and, in certain cases where we have other lending products outstanding with the dealer, are secured by the collateral under those lending arrangements as well, including any outstanding dealer reserves. As of
December 31, 2018,
CAR had unfunded outstanding floor-plan financing commitments totaling
$7.7
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
$11.7
million remains pledged as of
December 31, 2018
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
December 31, 2018,
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”
.
Litigation
We are involved in various legal proceedings that are incidental to the conduct of our business. There are currently no pending legal proceedings that are expected to be material to us.
Deferred tax assets and liabilities reflect the effects of tax losses, credits, and the future income tax effects of temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The current and deferred portions (in thousands) of federal, foreign and state income tax benefit or expense are as follows:
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Federal income tax benefit:
|
|
|
|
|
|
|
|
|
Current tax benefit (expense)
|
|
$
|
5,932
|
|
|
$
|
(113
|
)
|
Deferred tax (expense) benefit
|
|
|
(1,159
|
)
|
|
|
6,187
|
|
Total federal income tax benefit
|
|
$
|
4,773
|
|
|
$
|
6,074
|
|
Foreign income tax expense:
|
|
|
|
|
|
|
|
|
Current tax expense
|
|
$
|
(53
|
)
|
|
$
|
(94
|
)
|
Deferred tax benefit
|
|
|
3
|
|
|
|
8
|
|
Total foreign income tax expense
|
|
$
|
(50
|
)
|
|
$
|
(86
|
)
|
State and other income tax benefit:
|
|
|
|
|
|
|
|
|
Current tax (expense) benefit
|
|
$
|
(3
|
)
|
|
$
|
16
|
|
Deferred tax (expense) benefit
|
|
|
(590
|
)
|
|
|
374
|
|
Total state and other income tax (expense) benefit
|
|
$
|
(593
|
)
|
|
$
|
390
|
|
Total income tax benefit
|
|
$
|
4,130
|
|
|
$
|
6,378
|
|
We experienced a negative effective income tax expense rate of 118.6% for the year ended December 31, 2018, compared to an effective income tax benefit rate of 13.5% for the year ended December 31, 2017. Our negative effective income tax expense rate for the year ended December 31, 2018 is significantly below the statutory rate principally as a result of our settlement during 2018 of an IRS examination of our 2008 tax return and the carryback of its resulting net operating losses to pre-2008 tax years. The settlement resulted in a decrease in our federal tax valuation allowance and net reductions in our accruals of interest on liabilities for uncertain tax positions and unpaid taxes. Our effective income tax benefit rate for the year ended December 31, 2017 was below the statutory rate principally due to (1) interest and penalties that we accrued on unpaid federal tax liabilities and (2) our establishment of valuation allowances against our net federal deferred tax assets associated with our net loss incurred in that year.
We report income tax-related interest and penalties (including those associated with both our accrued liabilities for uncertain tax positions and unpaid tax liabilities) within our income tax line item on our consolidated statements of operations. We likewise report the reversal of income tax-related interest and penalties within such line item to the extent that we resolve our liabilities for uncertain tax positions or unpaid tax liabilities in a manner favorable to our accruals therefor. For 2018, we reported a net reversal of income tax-related interest and penalties of $1.2 million within our income tax line item, and, for 2017, we reported net income tax-related interest and penalties of $0.5 million within our income tax line item.
In December 2014, we reached a settlement with the IRS concerning the tax treatment of net operating losses we incurred in 2007 and 2008 and carried back to obtain refunds of federal income taxes paid in earlier years dating back to 2003. In 2015, we filed an amended return claim that, if accepted, would have eliminated the $7.4 million assessment (and corresponding interest and penalties) under a negotiated provision of the December 2014 IRS settlement. The IRS filed a lien (as is customarily the case) associated with the assessment. Subsequently, an IRS examination team denied our amended return claims, and we filed a protest with IRS Appeals. Following correspondence and conferences held with IRS Appeals, we received and accepted a settlement offer from IRS Appeals in June 2018 that reduced our $7.4 million net unpaid income tax assessment referenced above to $3.7 million. In July 2018, we paid $5.4 million to the IRS to cover the $3.7 million unpaid income tax assessment and most of the interest that had accrued thereon; subsequently, during the three months ended September 30, 2018, the IRS refunded $0.5 million of our $5.4 million payment. Although we have paid all assessed income taxes related to this matter, we still have an outstanding accrued liability for some of the interest and for failure-to-pay penalties related to this matter. We are pursuing complete abatement of the failure-to-pay penalties of $0.9 million, and once this matter is resolved and we pay any remaining interest liability, we expect the IRS to remove the aforementioned lien in due course.
The following table reconciles our effective income tax benefit rates for 2018 and 2017:
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Statutory benefit rate
|
|
|
21.0
|
%
|
|
|
35.0
|
%
|
Increase (decrease) in statutory tax benefit rate resulting from:
|
|
|
|
|
|
|
|
|
Federal valuation allowance
|
|
|
(132.0
|
)
|
|
|
(12.7
|
)
|
Global intangible low-taxed income
|
|
|
9.6
|
|
|
|
—
|
|
Interest and penalties related to uncertain tax positions and IRS settlement adjustment
|
|
|
(27.2
|
)
|
|
|
(0.9
|
)
|
Foreign taxes, net of valuation allowance
|
|
|
(8.2
|
)
|
|
|
0.6
|
|
Permanent and other prior year true ups and tax effect of non-controlling interest
|
|
|
4.7
|
|
|
|
(0.4
|
)
|
Impact of change in federal tax rate
|
|
|
—
|
|
|
|
(8.7
|
)
|
State taxes, net of valuation allowance
|
|
|
13.5
|
|
|
|
0.6
|
|
Effective benefit rate
|
|
|
(118.6
|
)%
|
|
|
13.5
|
%
|
As of December 31, 2018 and December 31, 2017, the respective significant components (in thousands) of our deferred tax assets and liabilities were:
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Software development costs/fixed assets
|
|
$
|
108
|
|
|
$
|
83
|
|
Goodwill and intangible assets
|
|
|
895
|
|
|
|
1,801
|
|
Provision for loan loss
|
|
|
19,479
|
|
|
|
16,320
|
|
Equity-based compensation
|
|
|
748
|
|
|
|
604
|
|
Accrued expenses
|
|
|
307
|
|
|
|
113
|
|
Accruals for state taxes and interest associated with unrecognized tax benefits
|
|
|
87
|
|
|
|
78
|
|
Federal net operating loss carry-forward
|
|
|
44,485
|
|
|
|
49,098
|
|
Minimum tax credit carry-forward
|
|
|
1,015
|
|
|
|
2,005
|
|
Foreign net operating loss carry-forward
|
|
|
256
|
|
|
|
362
|
|
Other
|
|
|
151
|
|
|
|
—
|
|
State tax benefits, primarily from net operating losses
|
|
|
42,318
|
|
|
|
44,643
|
|
Deferred tax assets, gross
|
|
$
|
109,849
|
|
|
$
|
115,107
|
|
Valuation allowances
|
|
|
(40,830
|
)
|
|
|
(48,242
|
)
|
Deferred tax assets net of valuation allowance
|
|
$
|
69,019
|
|
|
$
|
66,865
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses and other
|
|
$
|
(210
|
)
|
|
$
|
(194
|
)
|
Equity in income of equity-method investee
|
|
|
(1,092
|
)
|
|
|
(1,054
|
)
|
Other
|
|
|
—
|
|
|
|
(511
|
)
|
Credit card fair value election differences
|
|
|
(21,021
|
)
|
|
|
(19,381
|
)
|
Market discount on loans
|
|
|
(21,749
|
)
|
|
|
(13,083
|
)
|
Deferred costs
|
|
|
(469
|
)
|
|
|
(466
|
)
|
Convertible senior notes
|
|
|
(22,106
|
)
|
|
|
(20,098
|
)
|
Cancellation of indebtedness income
|
|
|
(1,882
|
)
|
|
|
(9,841
|
)
|
Deferred tax liabilities, gross
|
|
$
|
(68,529
|
)
|
|
$
|
(64,628
|
)
|
Deferred tax assets, net
|
|
$
|
490
|
|
|
$
|
2,237
|
|
We undertook a detailed review of our deferred taxes and determined that a valuation allowance was required for certain deferred tax assets in the U.S. (federal and state) and the U.K. We reduce our deferred tax assets by a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible. In making our valuation allowance determinations, we consider all available positive and negative evidence affecting specific deferred tax assets, including our past and anticipated future performance, the reversal of deferred tax liabilities, the length of carry-back and carry-forward periods, and the implementation of tax planning strategies. We also considered future global intangible low-tax income inclusions in taxable income (as enacted in the Tax Cuts and Jobs Act of 2017) as potential positive evidence toward the ultimate realization of federal deferred tax assets, but we concluded that this potential positive evidence was insufficient to support a conclusion that a valuation allowance was not needed against such deferred tax assets. Because our valuation allowance evaluations require consideration of future events, significant judgment is required in making the evaluations, and our conclusions could be materially different should certain of our expectations not be met. Our valuation allowance was $40.8 million and $48.2 million at December 31, 2018, and December 31, 2017, respectively.
Certain of our deferred tax assets relate to federal, foreign and state net operating losses, capital losses, and credits as noted in the above table, and we have no other net operating losses, capital losses, or credit carry-forwards other than those noted herein. We have recorded a federal deferred tax asset of $44.5 million (based on gross federal net operating loss and capital loss carryforwards of $198.9 million, which expire in varying amounts between 2029 and 2033).
Beyond allowing for the refundability of federal minimum tax credits, the Tax Cuts and Jobs Act of 2017 made other significant changes to the Internal Revenue Code. Because of the significance of these changes, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allowed us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Accordingly, in 2017, we recorded provisional amounts in our consolidated financial statements. We did not record any remeasurements of our recorded amounts in our 2018 consolidated financial statements.
We conduct business globally, and as a result, our subsidiaries file federal, state and/or foreign income tax returns. In the normal course of our business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the U.S., the U.K., and various U.S. states and territories. With a few exceptions of a non-material nature and considering that we settled with the IRS our 2008 tax-settlement-related claims discussed previously, we are no longer subject to federal, state, local, or foreign income tax examinations for years prior to 2014.
Reconciliations (in thousands) of our unrecognized tax benefits from the beginning to the end of 2018 and 2017, respectively, are as follows:
|
|
2018
|
|
|
2017
|
|
Balance at January 1,
|
|
$
|
(373
|
)
|
|
$
|
(818
|
)
|
Reductions based on tax positions related to prior years
|
|
|
51
|
|
|
|
583
|
|
Additions based on tax positions related to the current year
|
|
|
(71
|
)
|
|
|
(87
|
)
|
Interest and penalties accrued
|
|
|
(21
|
)
|
|
|
(51
|
)
|
Balance at December 31,
|
|
$
|
(414
|
)
|
|
$
|
(373
|
)
|
Further, our unrecognized tax benefits that, if recognized, would affect the effective tax rate are not material at only $0.4 million and $0.4 million at December 31, 2018, and 2017, respectively.
13.
|
Net Income (Loss) Attributable to Controlling Interests Per Common Share
|
We compute net income (loss) attributable to controlling interests per common share by dividing net income (loss) attributable to controlling interests by the weighted-average common shares (including participating securities) outstanding during the period, as discussed below. Diluted computations applicable in financial reporting periods in which we report income reflect the potential dilution to the basic income per common share computations that could occur if securities or other contracts to issue common stock were exercised, were converted into common stock or were to result in the issuance of common stock that would share in our results of operations. In performing our net income (loss) attributable to controlling interests per common share computations, we apply accounting rules that require us to include all unvested stock awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of shares outstanding in our basic and diluted calculations. Common stock and certain unvested share-based payment awards earn dividends equally, and we have included all outstanding restricted stock awards in our basic and diluted calculations for current and prior periods.
The following table sets forth the computations of net income (loss) attributable to controlling interests per common share (in thousands, except per share data):
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to controlling interests
|
|
$
|
7,856
|
|
|
$
|
(40,781
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic (including unvested share-based payment awards) (1)
|
|
|
13,927
|
|
|
|
13,925
|
|
Effect of dilutive stock compensation arrangements (2)
|
|
|
75
|
|
|
|
15
|
|
Diluted (including unvested share-based payment awards) (1)
|
|
|
14,002
|
|
|
|
13,940
|
|
Net income (loss) attributable to controlling interests per common share—basic
|
|
$
|
0.56
|
|
|
$
|
(2.93
|
)
|
Net income (loss) attributable to controlling interests per common share—diluted
|
|
$
|
0.56
|
|
|
$
|
(2.93
|
)
|
|
(
1
)
|
Shares related to unvested share-based payment awards included in our basic and diluted share counts were 272,172 for the year ended
December 31, 2018,
compared to 281,282 for the year ended
December 31, 2017.
|
|
(
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.
|
As their effects were anti-dilutive, we excluded 2.9 million and 2.5 million stock options from our net income (loss) attributable to controlling interests per common share calculations for the years ended December 31, 2018 and 2017, respectively.
For the years ended
December 31, 2018
and
2017,
there were
no
shares potentially issuable and thus includible in the diluted net income (loss) attributable to controlling interests per common share calculations pursuant to our convertible senior notes. However, in future reporting periods during which our closing stock price is above the
$24.61
conversion price for the 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 (loss) per common share calculations. See Note 10
,
“Convertible Senior Notes,” for a further discussion of these convertible securities.
14.
|
Stock-Based Compensation
|
We currently have
two
stock-based compensation plans, the Second Amended and Restated Employee Stock Purchase Plan (the “ESPP”) and the Second Amended and Restated
2014
Equity Incentive Plan (the
“2014
Plan”). As of
December 31, 2018, 85,412
shares remained available for issuance under the ESPP and
45,826
shares remained available for issuance under the
2014
Plan.
Exercises and vestings under our stock-based compensation plans resulted in
no
income tax-related charges to paid-in capital during the years ended
December 31, 2018
and
2017.
Restricted Stock
During the year ended
December 31, 2018
and
2017,
we granted
533,177
and
102,000
shares of restricted stock (net of any forfeitures), respectively, with aggregate grant date fair values of
$1.3
million and
$0.3
million, respectively. We incurred expenses of
$0.7
million and
$0.6
million during the year ended
December 31, 2018
and
2017,
respectively, related to restricted stock 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 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 which may include the achievement of performance measures) and are amortized to salaries and benefits expense ratably over applicable vesting periods. As of
December 31, 2018,
our unamortized deferred compensation costs associated with non-vested restricted stock awards were
$0.7
million with a weighted-average remaining amortization period of
1.3
years.
Stock Options
Our
2014
Plan provides that we
may
grant options on or shares of our common stock (and other types of equity awards) to members of our Board of Directors, employees, consultants and advisors. The exercise price per share of the options must be equal to or greater than the market price on the date the option is granted. The option period
may
not
exceed
10
years from the date of grant. The vesting requirements for options are determined by the Compensation Committee of the Board of Directors. We had expense of
$0.6
million and
$0.9
million related to stock option-related compensation costs during the years ended
December 31, 2018
and
2017,
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. The table below includes additional information about outstanding options:
|
|
Number of Shares
|
|
|
Weighted-Average Exercise Price
|
|
|
Weighted-Average of Remaining Contractual Life (in years)
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding at December 31, 2017
|
|
|
2,619,334
|
|
|
$
|
3.04
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
533,500
|
|
|
$
|
5.73
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(20,300
|
)
|
|
$
|
2.45
|
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
(11,334
|
)
|
|
$
|
3.04
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
3,121,200
|
|
|
$
|
3.50
|
|
|
|
2.8
|
|
|
$
|
1,791,200
|
|
Exercisable at December 31, 2018
|
|
|
1,162,349
|
|
|
$
|
3.11
|
|
|
|
1.5
|
|
|
$
|
728,735
|
|
We had
$1.2
million and
$0.9
million of unamortized deferred compensation costs associated with non-vested stock options as of
December 31, 2018
and
December 31, 2017,
respectively.
15.
|
Employee Benefit Plans
|
We maintain a defined contribution retirement plan (“401(k) plan”) for our U.S. employees that provides for a matching contribution by us. All full time U.S. employees are eligible to participate in the 401(k) plan. Our U.K. credit card subsidiary offers eligible employees membership in a Group Personal Pension Plan which is set up with Friends Provident. This plan is a defined contribution plan in which all permanent employees who have completed 3 months of continuous service are eligible to join the plan. Company matching contributions are available to U.K. employees who contribute a minimum of 3% of their salaries under our Group Personal Pension Plan and to U.S. employees who participate in our 401(k) plan. We made matching contributions under our U.S. and U.K. plans of $285,477 and $272,005 in 2018 and 2017, respectively.
Also, all employees, excluding executive officers, are eligible to participate in the ESPP. Under the ESPP, employees can elect to have up to 10% of their annual wages withheld to purchase our common stock up to a fair market value of $10,000. The amounts deducted and accumulated by each participant are used to purchase shares of common stock on or as promptly as practicable after the last business day of each month. The price of stock purchased under the ESPP is approximately 85% of the fair market value per share of our common stock on the purchase date. Employees contributed $51,593 to purchase 23,681 shares of common stock in 2018 and $35,593 to purchase 16,954 shares of common stock in 2017 under the ESPP. The ESPP covers up to 150,000 shares of common stock. Our charge to expense associated with the ESPP was $28,629 and $22,590 in 2018 and 2017, respectively.
16.
|
Related Party Transactions
|
Under a shareholders’ agreement which we entered into with certain shareholders, including David G. Hanna, Frank J. Hanna, III and certain trusts that were Hanna affiliates, following our initial public offering (1) if one or more of the shareholders accepts a bona fide offer from a third party to purchase more than 50% of the outstanding common stock, each of the other shareholders that is a party to the agreement may elect to sell his shares to the purchaser on the same terms and conditions, and (2) if shareholders that are a party to the agreement owning more than 50% of the common stock propose to transfer all of their shares to a third party, then such transferring shareholders may require the other shareholders that are a party to the agreement to sell all of the shares owned by them to the proposed transferee on the same terms and conditions.
In June 2007, we entered into a sublease for 1,000 square feet (as later amended to cover 600 square feet) of excess office space at our Atlanta headquarters with HBR Capital, Ltd. (“HBR”), a company co-owned by David G. Hanna and his brother Frank J. Hanna, III. The sublease rate per square foot is the same as the rate that we pay under the prime lease. Under the sublease, HBR paid us $18,089 and $26,629 for 2018 and 2017, respectively. The aggregate amount of payments required under the sublease from January 1, 2019 to the expiration of the sublease in May 2022 is $58,154.
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 years ended December 31, 2018 and 2017, we received $270,932 and $263,453, 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 was fully drawn with $40.0 million outstanding as of December 31, 2018. In November 2018, the agreement was amended to extend the maturity date of the term loan to November 21, 2019. All other terms remain unchanged.
Our obligations under the agreement are guaranteed by certain subsidiary guarantors and secured by a pledge of certain assets of ours and the subsidiary guarantors. The loans bear interest at the rate of 9.0% per annum, payable monthly in arrears. The principal amount of these loans is payable in a single installment on November 21, 2019 (as amended). The agreement includes customary affirmative and negative covenants, as well as customary representations, warranties and events of default. Subject to certain conditions, we can prepay the principal amounts of these loans without premium or penalty.
Dove is a limited liability company owned by three trusts. David G. Hanna is the sole shareholder and the President of the corporation that serves as the sole trustee of one of the trusts, and David G. Hanna and members of his immediate family are the beneficiaries of this trust. Frank J. Hanna, III is the sole shareholder and the President of the corporation that serves as the sole trustee of the other two trusts, and Frank J. Hanna, III and members of his immediate family are the beneficiaries of these other two trusts.
F-32