CONSOLIDATED RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
Income
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|
|
|
For the Three Months Ended September 30,
|
|
|
Increases (Decreases)
|
|
(In Thousands)
|
|
2019
|
|
|
2018
|
|
|
from 2018 to 2019
|
|
Total interest income
|
|
$
|
70,581
|
|
|
$
|
41,952
|
|
|
$
|
28,629
|
|
Interest expense
|
|
|
(13,099
|
)
|
|
|
(9,281
|
)
|
|
|
(3,818
|
)
|
Fees and related income on earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees on credit products
|
|
|
19,725
|
|
|
|
6,823
|
|
|
|
12,902
|
|
Changes in fair value of loans, interest and fees receivable recorded at fair value
|
|
|
355
|
|
|
|
2,102
|
|
|
|
(1,747
|
)
|
Changes in fair value of notes payable associated with structured financings recorded at fair value
|
|
|
346
|
|
|
|
577
|
|
|
|
(231
|
)
|
Other
|
|
|
9
|
|
|
|
34
|
|
|
|
(25
|
)
|
Other operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing income
|
|
|
356
|
|
|
|
382
|
|
|
|
(26
|
)
|
Other income
|
|
|
30,486
|
|
|
|
898
|
|
|
|
29,588
|
|
Gain on repurchase of convertible senior notes
|
|
|
5,127
|
|
|
|
—
|
|
|
|
5,127
|
|
Equity in income (loss) of equity-method investee
|
|
|
284
|
|
|
|
(49
|
)
|
|
|
333
|
|
Total
|
|
$
|
114,170
|
|
|
$
|
43,438
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|
|
$
|
70,732
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|
Net losses upon impairment of loans, interest and fees receivable recorded at fair value
|
|
|
190
|
|
|
|
1,957
|
|
|
|
1,767
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|
Provision for losses on loans, interest and fees receivable recorded at net realizable value
|
|
|
65,527
|
|
|
|
32,798
|
|
|
|
(32,729
|
)
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
6,429
|
|
|
|
5,838
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|
|
|
(591
|
)
|
Card and loan servicing
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|
|
13,152
|
|
|
|
9,286
|
|
|
|
(3,866
|
)
|
Marketing and solicitation
|
|
|
10,757
|
|
|
|
3,649
|
|
|
|
(7,108
|
)
|
Depreciation
|
|
|
284
|
|
|
|
234
|
|
|
|
(50
|
)
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Other
|
|
|
1,333
|
|
|
|
5,725
|
|
|
|
4,392
|
|
Net income (loss)
|
|
|
13,020
|
|
|
|
(16,170
|
)
|
|
|
29,190
|
|
Net loss attributable to noncontrolling interests
|
|
|
57
|
|
|
|
78
|
|
|
|
(21
|
)
|
Net income (loss) attributable to controlling interests
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|
|
13,077
|
|
|
|
(16,092
|
)
|
|
|
29,169
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
Increases (Decreases)
|
|
(In Thousands)
|
|
2019
|
|
|
2018
|
|
|
from 2018 to 2019
|
|
Total interest income
|
|
$
|
176,240
|
|
|
$
|
115,462
|
|
|
$
|
60,778
|
|
Interest expense
|
|
|
(36,259
|
)
|
|
|
(26,241
|
)
|
|
|
(10,018
|
)
|
Fees and related income on earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees on credit products
|
|
|
44,329
|
|
|
|
17,226
|
|
|
|
27,103
|
|
Changes in fair value of loans, interest and fees receivable recorded at fair value
|
|
|
725
|
|
|
|
2,597
|
|
|
|
(1,872
|
)
|
Changes in fair value of notes payable associated with structured financings recorded at fair value
|
|
|
1,673
|
|
|
|
3,020
|
|
|
|
(1,347
|
)
|
Other
|
|
|
109
|
|
|
|
1
|
|
|
|
108
|
|
Other operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing income
|
|
|
1,417
|
|
|
|
1,646
|
|
|
|
(229
|
)
|
Other income
|
|
|
75,900
|
|
|
|
2,185
|
|
|
|
73,715
|
|
Gain on repurchase of convertible senior notes
|
|
|
5,127
|
|
|
|
—
|
|
|
|
5,127
|
|
Equity in income of equity-method investee
|
|
|
736
|
|
|
|
491
|
|
|
|
245
|
|
Total
|
|
$
|
269,997
|
|
|
$
|
116,387
|
|
|
$
|
153,610
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|
Net losses upon impairment of loans, interest and fees receivable recorded at fair value
|
|
|
715
|
|
|
|
2,396
|
|
|
|
1,681
|
|
Provision for losses on loans, interest and fees receivable recorded at net realizable value
|
|
|
148,539
|
|
|
|
65,265
|
|
|
|
(83,274
|
)
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
19,455
|
|
|
|
17,738
|
|
|
|
(1,717
|
)
|
Card and loan servicing
|
|
|
35,123
|
|
|
|
27,378
|
|
|
|
(7,745
|
)
|
Marketing and solicitation
|
|
|
26,254
|
|
|
|
8,088
|
|
|
|
(18,166
|
)
|
Depreciation
|
|
|
856
|
|
|
|
698
|
|
|
|
(158
|
)
|
Other
|
|
|
9,232
|
|
|
|
14,871
|
|
|
|
5,639
|
|
Net income (loss)
|
|
|
23,857
|
|
|
|
(15,314
|
)
|
|
|
39,171
|
|
Net loss attributable to noncontrolling interests
|
|
|
177
|
|
|
|
182
|
|
|
|
(5
|
)
|
Net income (loss) attributable to controlling interests
|
|
|
24,034
|
|
|
|
(15,132
|
)
|
|
|
39,166
|
|
Three and Nine Months Ended September 30, 2019, Compared to Three and Nine Months Ended September 30, 2018
Total interest income. Total interest income consists primarily of finance charges and late fees earned on point-of-sale and direct-to-consumer receivables, credit card and auto finance receivables. Period-over-period results primarily relate to growth in point-of-sale finance and direct-to-consumer products, the receivables of which increased from $395.6 million as of September 30, 2018 to $769.0 million as of September 30, 2019. We are currently experiencing continued period-over-period growth in point-of-sale and direct-to-consumer receivables and to a lesser extent in our CAR receivables—growth which we expect to result in net period-over-period growth in our total interest income for these operations in 2019. Future periods’ growth is also dependent on the addition of new retail partners to expand the reach of point-of-sale operations as well as growth within existing partnerships and continued growth and marketing within the direct-to-co.
Interest expense. Variations in interest expense are due to new borrowings associated with growth in point-of-sale and direct-to-consumer receivables and CAR operations as evidenced within Note 8, “Notes Payable and Variable Interest Entities,” to our consolidated financial statements offset by our debt facilities being repaid commensurate with net liquidations of the underlying credit card, auto finance and installment loan receivables that serve as collateral for the facilities. Outstanding notes payable associated with our point-of-sale and direct-to-consumer operations increased from $266.8 million as of September 30, 2018 to $566.2 million as of September 30, 2019. We anticipate additional debt financing over the next few quarters as we continue to acquire receivables, and as such, we expect our quarterly interest expense to be above that experienced in the prior periods for these operations.
Fees and related income on earning assets. The significant factors affecting our differing levels of fees and related income on earning assets include:
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•
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increases in fees on credit products, primarily associated with growth in direct-to-consumer products and to a lesser degree by growth in point-of-sale finance products; and
|
|
•
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the effects of changes in the fair values of credit card receivables recorded at fair value and notes payable associated with structured financings recorded at fair value as described below.
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We expect increasing levels of direct-to-consumer fee income throughout 2019 as we continue to invest in new credit card receivables as part of our direct-to-consumer operations. Additionally, for credit card accounts for which we use fair value accounting, we expect our change in fair value of credit card receivables recorded at fair value and our change in fair value of notes payable associated with structured financings recorded at fair value amounts to gradually diminish (absent significant changes in the assumptions used to determine these fair values) in the future. These amounts, however, are subject to potentially high levels of volatility if we experience changes in the quality of our credit card receivables or if there are significant changes in market valuation factors (e.g., interest rates and spreads) in the future. Such volatility will be muted somewhat, however, by the offsetting nature of the receivables and underlying debt being recorded at fair value and with the expected reductions in the face amounts of such outstanding receivables and debt as we experience further legacy credit card receivables liquidations and associated debt repayments.
Servicing income. We earn servicing income by servicing loan portfolios for third parties (including our equity-method investee). Additionally, we will receive periodic compensation for processing reimbursements to consumers with respect to one of our portfolios. Unless and/or until we grow the number of contractual servicing relationships we have with third parties or our current relationships grow their loan portfolios, we will not experience significant growth and income within this category, and we currently expect to experience continued declines in this category of revenue relative to revenue earned in prior periods.
Other income. Included within our Other income category are ancillary and interchange revenues. Given recent growth associated with new credit card offerings and related receivables, we expect ancillary and interchange revenues to grow throughout the year. Also included in Other income for the three and nine months ended September 30, 2019 is $26.7 million and $68.1 million, respectively, associated with reductions in accruals related to one of our portfolios. The original accrual was based upon our estimate of the amount that could be claimed by customers and is based upon several factors including customer claims volume, average claim amount and a determination of the amount, if any, which may be offered to resolve such claims. The assumptions used in the accrual estimate are subjective, mainly due to uncertainty associated with future claims volumes and the resolution costs, if any, per claim. As of September 30, 2019, we had approximately $36 million accrued related to this liability within accounts payable and accrued expenses on the consolidated balance sheets, including the reclassification of approximately $26 million from unrestricted cash and cash equivalents on our consolidated balance sheets. We currently expect a significant majority of the remaining accrued amount either to be reduced or paid to customers by early 2020. Any further reduction in the amount accrued would result in future earnings within this income statement category.
Equity in income of equity-method investee. Because our equity-method investee uses the fair value option to account for its financial assets and liabilities, changes in fair value estimates can cause some volatility in the earnings of this investee. Because of continued liquidations in the credit card receivables portfolio of our equity-method investee, absent additional investments in our existing or in new equity-method investees in the future, we expect gradually declining effects from our equity-method investment on our operating results.
Net losses upon impairment of loans, interest and fees receivable recorded at fair value. This account reflects charge offs (net of recoveries) of the face amount of credit card receivables we record at fair value on our consolidated balance sheet. We have experienced a general trending decline in, and we expect future trending declines in, these charge-offs as we continue to liquidate our historical credit card receivables.
Provision for losses on loans, interest and fees receivable recorded at net realizable value. Our provision for losses on loans, interest and fees receivable recorded at net realizable value covers, with respect to such receivables, changes in estimates regarding our aggregate loss exposures on (1) principal receivable balances, (2) finance charges and late fees receivable underlying income amounts included within our total interest income category, and (3) other fees receivable. We have experienced a period-over-period increase in this category between both the three months ended September 30, 2019 and 2018 and the nine months ended September 30, 2019 and 2018 primarily reflecting the effects of volume associated with point-of-sale and direct-to-consumer finance receivables (i.e., growth of new product receivables and their subsequent maturation), rather than specific credit quality changes or deterioration, which also impacted our provision for losses on loans, interest and fees receivable recorded at net realizable value to a lesser degree. See Note 2, “Significant Accounting Policies and Consolidated Financial Statement Components,” to our consolidated financial statements and the discussions of our Credit and Other Investments and Auto Finance segments for further credit quality statistics and analysis.
Total other operating expense. Total other operating expense variances for the three and nine months ended September 30, 2019, relative to the three and nine months ended September 30, 2018, reflect the following:
|
•
|
increases in salaries reflecting marginal growth in both the number of employees and increases in related benefit costs. We expect some marginal increase in this cost for 2019 when compared to 2018 as we expect our receivables to continue to grow;
|
|
•
|
increases in card and loan servicing expenses in the three and nine months ended September 30, 2019 when compared to the three and nine months ended September 30, 2018 due to growth in receivables associated with our investments in point-of-sale and direct-to-consumer receivables which grew from $395.6 million outstanding to $769.0 million outstanding at September 30, 2018 and September 30, 2019, respectively, offset by the continued net liquidations in our historical credit card portfolios, the receivables of which declined from $10.5 million outstanding to $7.1 million outstanding at September 30, 2018 and September 30, 2019, respectively;
|
|
•
|
increases in marketing and solicitation costs for the three and nine months ended September 30, 2019 when compared to the three and nine months ended September 30, 2018, primarily due to volume-related increases in costs attributable to the growth in our direct-to-consumer and (to a lesser extent) retail point-of-sale portfolios. We expect that increased origination and brand marketing support will result in overall increases in year-over-year costs during 2019 although the frequency and timing of marketing efforts could result in reductions in quarter-over-quarter marketing costs; and
|
|
•
|
slight decreases in other expenses primarily related to realized translation gains and losses recognized during both periods.
|
Certain operating costs are variable based on the levels of accounts and receivables we service (both for our own account and for others) and the pace and breadth of our growth in receivables. However, a number of our operating costs are fixed and until recently have comprised a larger percentage of our total costs based on the ongoing contraction of our legacy credit card receivables. This trend is reversing as we continue to grow our earning assets (including loans, interest and fees receivable) based principally on growth of point-of-sale and direct-to-consumer receivables and to a lesser extent, growth within our CAR operations. This is evidenced by the growth we experienced in our managed receivables levels with minimal growth in the fixed portion of our card and loan servicing expenses as well as our salaries and benefits costs as we were able to better utilize our fixed costs to grow our asset base. We continue to manage our costs effectively.
Notwithstanding our cost-control efforts and focus, we expect increased levels of expenditures associated with anticipated growth in point-of-sale and direct-to-consumer credit card-related operations. These expenses will primarily relate to the variable costs of marketing efforts and card and loan servicing expenses associated with new receivable acquisitions. While we have greater control over our variable expenses, it is difficult (as explained above) for us to appreciably reduce our fixed and other costs associated with an infrastructure (particularly within our Credit and Other Investments segment) that was built to support levels of managed receivables that are significantly higher than both our current levels and the levels that we expect to see in the near future. At this point, our Credit and Other Investments segment cash inflows are sufficient to cover its direct variable costs and a portion, but not all, of its share of overhead costs (including, for example, corporate-level executive and administrative costs and our convertible senior notes interest costs). As such, if we are unable to contain overhead costs or expand revenue-earning activities to levels commensurate with such costs, then we may experience continuing pressure on our ability to achieve consistent profitability.
Noncontrolling interests. We reflect the ownership interests of noncontrolling holders of equity in our majority-owned subsidiaries as noncontrolling interests in our consolidated statements of operations. Unless we enter into significant new majority-owned subsidiary ventures with noncontrolling interest holders in the future, we expect to have negligible noncontrolling interests in our majority-owned subsidiaries and negligible allocations of income or loss to noncontrolling interest holders in future quarters.
Income Taxes. We experienced effective income tax expense rates of 21.1% and 20.0% for the three and nine months ended September 30, 2019, respectively; these rates are compared to a negative effective income tax expense rate of 0.8% for the three months ended September 30, 2018, and an effective income tax benefit rate of 23.6% for the nine months ended September 30, 2018. Our effective income tax expense rates for the three and nine months ended September 30, 2019, are below the statutory rate principally due to reductions in our valuation allowances against net federal deferred tax assets during such periods—the effect of such reductions being partially offset by interest accruals on unpaid federal tax liabilities and uncertain tax positions and state and foreign income tax accruals during such periods.
Our negative effective income tax expense rate for the three months ended September 30, 2018, differed from the statutory rate, primarily due to the unfavorable effects of our (1) accruals of local, state and foreign income taxes, (2) accruals of interest on liabilities for uncertain tax positions and unpaid taxes, and (3) increase in our valuation allowance associated with net federal deferred tax assets that arose due to our net loss incurred in that period. Principal factors that caused the statutory rate to differ from our effective income tax benefit rate for the nine months ended September 30, 2018, included (1) an increase in our valuation allowance for the net losses incurred during the period, (2) our accruals of local, state and foreign taxes, and (3) significant net reductions in our accruals of interest on liabilities for uncertain tax positions and unpaid taxes, principally due to the favorable effects of our settlement in such period of the Internal Revenue Service (“IRS”) examination of our 2008 tax return and the carryback of its resulting net operating losses to pre-2008 tax years.
We report income tax-related interest and penalties (including those associated with both our accrued liabilities for uncertain tax positions and unpaid tax liabilities) within our income tax line item on our consolidated statements of operations. We likewise report the reversal of income tax-related interest and penalties within such line item to the extent that we resolve our liabilities for uncertain tax positions or unpaid tax liabilities in a manner favorable to our accruals therefor. During the three and nine months ended September 30, 2019, we included $0.0 million and $0.3 million, respectively, of net income tax-related interest and penalties within those periods’ respective income tax expense line items.
In December 2014, we reached a settlement with the IRS concerning the tax treatment of net operating losses we incurred in 2007 and 2008 and carried back to obtain refunds of federal income taxes paid in earlier years dating back to 2003. In 2015, we filed an amended return claim that, if accepted, would have eliminated the $7.4 million assessment (and corresponding interest and penalties) under a negotiated provision of the December 2014 IRS settlement. The IRS filed a lien (as is customarily the case) associated with the assessment. Subsequently, an IRS examination team denied our amended return claims, and we filed a protest with IRS Appeals. Following correspondence and conferences held with IRS Appeals, we received and accepted a settlement offer from IRS Appeals in June 2018 that reduced our $7.4 million net unpaid income tax assessment referenced above to $3.7 million. In July 2018, we paid $5.4 million to the IRS to cover the $3.7 million unpaid income tax assessment and most of the interest that had accrued thereon; during the three months ended September 30, 2018, the IRS refunded $0.5 million of the $5.4 million payment. Although we have paid all assessed income taxes related to this matter, we still have an outstanding accrued liability for interest and failure-to-pay penalties related to this matter. We paid another $0.2 million against accrued interest liabilities in March 2019, and we are continuing to pursue complete abatement of failure-to-pay penalties of $0.9 million. Once this matter is resolved and we pay any amounts ultimately determined to be owed to the IRS, we expect the IRS to remove the aforementioned lien in due course.
Credit and Other Investments Segment
Our Credit and Other Investments segment includes our activities relating to our servicing of and our investments in the point-of-sale, direct-to-consumer personal finance and credit card operations, our various credit card receivables portfolios, as well as other product testing and investments that generally utilize much of the same infrastructure. The types of revenues we earn from our investments in receivables portfolios and services primarily include finance charges, fees and the accretion of discounts associated with the point-of-sale receivables or annual fees on our direct-to-consumer receivables.
We record (i) the finance charges, discount accretion and late fees assessed on our Credit and Other Investments segment receivables in the interest income - consumer loans, including past due fees category on our consolidated statements of operations, (ii) the rental revenue, annual, activation, monthly maintenance, returned-check, cash advance and other fees in the fees and related income on earning assets category on our consolidated statements of operations, and (iii) the charge offs (and recoveries thereof) within our provision for losses on loans, interest and fees receivable recorded at net realizable value on our consolidated statements of operations (for all credit product receivables other than those for which we have elected the fair value option) and within net losses upon impairment of loans, interest and fees receivable recorded at fair value on our consolidated statements of operations (for all of our other receivables for which we have elected the fair value option). Additionally, we show the effects of fair value changes for those credit card receivables for which we have elected the fair value option as a component of fees and related income on earning assets in our consolidated statements of operations.
We historically have invested in receivables portfolios through subsidiary entities. If we control through direct ownership or exert a controlling interest in the entity, we consolidate it and reflect its operations as noted above. If we exert significant influence but do not control the entity, we record our share of its net operating results in the equity in income of equity-method investee category on our consolidated statements of operations.
Managed Receivables
We make various references within our discussion of the Credit and Other Investments segment to our managed receivables. Our managed receivables data includes only the performance of those receivables underlying consolidated subsidiaries and excludes from managed receivables data the performance of receivables held by our equity method investee. As the receivables underlying our equity method investee reflect a diminishing portion of our overall receivables base, we do not believe their inclusion or exclusion in the overall results is material. Additionally, we calculate average managed receivables based on the quarter-end balances.
Financial, operating and statistical data based on aggregate managed receivables are important to any evaluation of the performance of our credit portfolios, including our risk management, servicing and collection activities and our valuing of purchased receivables. In allocating our resources and managing our business, management relies heavily upon financial data and results prepared on this “managed basis.” Analysts, investors and others also consider it important that we provide selected financial, operating and statistical data on a managed basis because this allows a comparison of us to others within the specialty finance industry. Moreover, our management, analysts, investors and others believe it is critical that they understand the credit performance of our managed receivables because it provides information concerning the quality of loan originations and the related credit risks inherent within the portfolios.
Reconciliation of the managed receivables data to our GAAP financial statements requires an understanding that: (1) our managed receivables data are based on billings and actual charge-offs as they occur, without regard to any changes in our allowance for uncollectible loans, interest and fees receivable; (2) our managed receivables data exclude non-consolidated receivables (3) the period-end and average managed receivables data include the face value of receivables which are accounted for under the fair value option; and (4) when applicable, we exclude from our managed receivables data certain reimbursements received in respect of one of our portfolios which resulted in pre-tax income benefits within our net recovery of impairment of loans, interest and fees receivable recorded at fair value line item on our consolidated statements of operations totaling approximately $0.4 million for the three months ended September 30, 2018 and $1.7 million for the three months ended June 30, 2018. This last category of reconciling items above is excluded because it does not bear on our performance in managing our credit card portfolios, including our risk management, servicing and collection activities and our valuing of purchased receivables; moreover, we do not expect to receive any further material reimbursements with respect to this portfolio.
A reconciliation of our Loans, interest and fees receivable, at fair value to the assets underlying those receivables which are included in our managed receivables are as follows (in thousands):
|
|
At or for the Three Months Ended
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
Sept. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
Loans, interest and fees receivable, gross
|
|
|
7,070
|
|
|
|
7,803
|
|
|
|
8,664
|
|
|
|
9,575
|
|
|
|
10,504
|
|
|
|
13,790
|
|
|
|
15,557
|
|
|
|
16,601
|
|
Fair value adjustment
|
|
|
(2,545
|
)
|
|
|
(2,899
|
)
|
|
|
(3,270
|
)
|
|
|
(3,269
|
)
|
|
|
(3,379
|
)
|
|
|
(5,504
|
)
|
|
|
(6,144
|
)
|
|
|
(5,492
|
)
|
Loans, interest and fees receivable, at fair value
|
|
|
4,525
|
|
|
|
4,904
|
|
|
|
5,394
|
|
|
|
6,306
|
|
|
|
7,125
|
|
|
|
8,286
|
|
|
|
9,413
|
|
|
|
11,109
|
|
Asset quality. Our delinquency and charge-off data at any point in time reflect the credit performance of our managed receivables. The average age of the accounts underlying our receivables, the timing of portfolio purchases, the success of our collection and recovery efforts and general economic conditions all affect our delinquency and charge-off rates. The average age of the accounts underlying our receivables portfolio also affects the stability of our delinquency and loss rates. We consider this delinquency and charge-off data in our allowance for uncollectible loans, interest and fees receivable for our other credit product receivables that we report at net realizable value. Our strategy for managing delinquency and receivables losses consists of account management throughout the life of the receivable. This strategy includes credit line management and pricing based on the risks. See also our discussion of collection strategies under the “How Do We Collect?” in Item 1, “Business” of our Annual Report on Form 10-K for the year ended December 31, 2018.
The following table presents the delinquency trends of the receivables we manage within our Credit and Other Investments segment, as well as charge-off data and other managed receivables statistics (in thousands; percentages of total):
|
|
At or for the Three Months Ended
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
Sept. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
Period-end managed receivables
|
|
$
|
776,102
|
|
|
$
|
610,129
|
|
|
$
|
480,928
|
|
|
$
|
462,862
|
|
|
$
|
406,057
|
|
|
$
|
371,331
|
|
|
$
|
337,848
|
|
|
$
|
333,286
|
|
Percent 30 or more days past due
|
|
|
12.9
|
%
|
|
|
11.5
|
%
|
|
|
13.7
|
%
|
|
|
13.2
|
%
|
|
|
12.7
|
%
|
|
|
11.8
|
%
|
|
|
12.1
|
%
|
|
|
13.7
|
%
|
Percent 60 or more days past due
|
|
|
9.2
|
%
|
|
|
8.2
|
%
|
|
|
10.3
|
%
|
|
|
9.5
|
%
|
|
|
9.3
|
%
|
|
|
8.5
|
%
|
|
|
9.1
|
%
|
|
|
9.8
|
%
|
Percent 90 or more days past due
|
|
|
6.1
|
%
|
|
|
5.8
|
%
|
|
|
7.5
|
%
|
|
|
6.7
|
%
|
|
|
6.4
|
%
|
|
|
5.7
|
%
|
|
|
6.5
|
%
|
|
|
6.5
|
%
|
Averaged managed receivables
|
|
$
|
693,116
|
|
|
$
|
545,529
|
|
|
$
|
471,895
|
|
|
$
|
434,460
|
|
|
$
|
388,694
|
|
|
$
|
354,590
|
|
|
$
|
335,567
|
|
|
$
|
318,183
|
|
Total yield ratio
|
|
|
49.7
|
%
|
|
|
47.0
|
%
|
|
|
46.5
|
%
|
|
|
44.3
|
%
|
|
|
43.2
|
%
|
|
|
41.6
|
%
|
|
|
41.0
|
%
|
|
|
39.5
|
%
|
Combined gross charge-off ratio
|
|
|
17.6
|
%
|
|
|
23.8
|
%
|
|
|
23.6
|
%
|
|
|
21.6
|
%
|
|
|
19.7
|
%
|
|
|
22.4
|
%
|
|
|
24.2
|
%
|
|
|
20.1
|
%
|
The following table presents additional trends and data with respect to our current point-of-sale (“Retail”) and direct-to-consumer operations (“Direct”) (dollars in thousands). Results of our historical credit card receivables portfolios are excluded:
|
|
Retail - At or for the Three Months Ended
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
Sept. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
Period-end managed receivables
|
|
$
|
365,652
|
|
|
$
|
308,382
|
|
|
$
|
255,922
|
|
|
$
|
257,772
|
|
|
$
|
238,851
|
|
|
$
|
223,873
|
|
|
$
|
207,231
|
|
|
$
|
206,877
|
|
Percent 30 or more days past due
|
|
|
11.6
|
%
|
|
|
10.4
|
%
|
|
|
12.7
|
%
|
|
|
13.6
|
%
|
|
|
13.4
|
%
|
|
|
12.4
|
%
|
|
|
12.6
|
%
|
|
|
14.0
|
%
|
Percent 60 or more days past due
|
|
|
8.2
|
%
|
|
|
7.3
|
%
|
|
|
9.8
|
%
|
|
|
9.9
|
%
|
|
|
9.8
|
%
|
|
|
8.8
|
%
|
|
|
9.4
|
%
|
|
|
10.1
|
%
|
Percent 90 or more days past due
|
|
|
5.6
|
%
|
|
|
5.0
|
%
|
|
|
7.2
|
%
|
|
|
7.1
|
%
|
|
|
6.9
|
%
|
|
|
5.8
|
%
|
|
|
6.8
|
%
|
|
|
7.2
|
%
|
Average APR
|
|
|
22.5
|
%
|
|
|
24.0
|
%
|
|
|
24.8
|
%
|
|
|
25.0
|
%
|
|
|
24.7
|
%
|
|
|
24.8
|
%
|
|
|
24.2
|
%
|
|
|
24.2
|
%
|
Receivables purchased during period
|
|
$
|
133,528
|
|
|
$
|
123,533
|
|
|
$
|
69,120
|
|
|
$
|
80,096
|
|
|
$
|
70,860
|
|
|
$
|
74,391
|
|
|
$
|
60,932
|
|
|
$
|
64,036
|
|
|
|
Direct - At or for the Three Months Ended
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
Sept. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
Period-end managed receivables
|
|
$
|
403,380
|
|
|
$
|
293,944
|
|
|
$
|
216,342
|
|
|
$
|
195,515
|
|
|
$
|
156,702
|
|
|
$
|
133,668
|
|
|
$
|
115,060
|
|
|
$
|
109,808
|
|
Percent 30 or more days past due
|
|
|
14.2
|
%
|
|
|
12.8
|
%
|
|
|
15.1
|
%
|
|
|
13.0
|
%
|
|
|
12.1
|
%
|
|
|
11.5
|
%
|
|
|
12.2
|
%
|
|
|
12.9
|
%
|
Percent 60 or more days past due
|
|
|
10.3
|
%
|
|
|
9.3
|
%
|
|
|
11.2
|
%
|
|
|
9.3
|
%
|
|
|
8.9
|
%
|
|
|
8.5
|
%
|
|
|
9.2
|
%
|
|
|
9.1
|
%
|
Percent 90 or more days past due
|
|
|
6.7
|
%
|
|
|
6.7
|
%
|
|
|
8.0
|
%
|
|
|
6.4
|
%
|
|
|
6.0
|
%
|
|
|
5.9
|
%
|
|
|
6.4
|
%
|
|
|
5.3
|
%
|
Average APR
|
|
|
28.2
|
%
|
|
|
28.5
|
%
|
|
|
27.9
|
%
|
|
|
28.1
|
%
|
|
|
27.6
|
%
|
|
|
27.2
|
%
|
|
|
26.9
|
%
|
|
|
27.5
|
%
|
Receivables purchased during period
|
|
$
|
174,026
|
|
|
$
|
123,776
|
|
|
$
|
60,733
|
|
|
$
|
69,585
|
|
|
$
|
48,729
|
|
|
$
|
48,966
|
|
|
$
|
33,747
|
|
|
$
|
38,338
|
|
The following discussion relates to the tables above.
Managed receivables levels. We experienced overall quarterly growth for the last eight quarters related to our current product offerings including over $373.4 million in net receivables growth associated with our point-of-sale and direct-to-consumer products from September 30, 2018 to September 30, 2019. The addition of large point-of-sale retail partners and ongoing purchases of receivables from existing retail partners helped grow our point-of-sale receivables by $126.8 million from September 30, 2018 to September 30, 2019. This growth increased at a slower rate in the first quarter of 2019 compared to the prior quarter, which included the holiday shopping season. Similarly, our direct-to-consumer acquisitions grew by $246.7 million from September 30, 2018 to September 30, 2019. While we expect continued quarterly growth in our managed receivables balances for all of our products throughout 2019 and into 2020, this growth in future periods largely is dependent on the addition of new retail partners to the point-of-sale operations as well as the timing of solicitations within the direct-to-consumer operations. Further, the loss of existing retail partner relationships could adversely affect new loan acquisition levels.
Delinquencies. Delinquencies have the potential to impact net income in the form of net credit losses. Delinquencies also are costly in terms of the personnel and resources dedicated to resolving them. We intend for the receivables management strategies we use on our portfolios to manage and, to the extent possible, reduce the higher delinquency rates that can be expected with the younger average age of the newer originations in our managed portfolio. These account management strategies include conservative credit line management, purging of inactive accounts and collection strategies intended to optimize the effective account-to-collector ratio across delinquency categories. We measure the success of these efforts by reviewing delinquency rates. These rates exclude receivables that have been charged off.
As we continue to invest in our newer point-of-sale and direct-to-consumer receivables, our delinquency rates have increased when compared to the same periods in prior years. This is largely a result of the risk profiles (and corresponding expected returns) for these receivables. Our delinquency rates have continued to be somewhat lower than what we ultimately expect for our new point-of-sale and direct-to-consumer receivables given the continued growth and age of the related accounts. This trend can be seen in periods of large growth in the charts above which result in lower delinquency rates. If and when growth for these product lines moderates, we expect increased overall delinquency rates as the existing receivables mature through their peak charge-off periods. Additionally, we expect to continue to see seasonal payment patterns on these receivables which impact our delinquencies. For example, delinquency rates historically are lower in the first quarter of each year due to the benefits of seasonally strong payment patterns associated with year-end tax refunds for most consumers.
Total yield ratio. Currently, we are experiencing growth in our newer, higher yielding receivables, including point-of-sale receivables and direct-to-consumer receivables. While this growth has contributed to increases in our total yield ratio, we expect this growth also will continue to result in higher charge-off and delinquency rates than those experienced historically. Additionally, our direct-to-consumer receivables tend to have higher total yields than our point-of-sale receivables, so recent accelerated growth in our direct-to-consumer receivables has also contributed to the trending higher total yield ratio. Our third, second and first quarter 2019 total yield ratios exclude the impacts of $26.7, $26.0 and $15.4 million, respectively, associated with our aforementioned reduction in reserves associated with one of our portfolios. Similarly, our fourth quarter 2018 total yield ratio excludes the impact of $36.2 million associated with litigation settlement in such quarter. Additionally, our fourth quarter 2017 total yield ratio excludes the impact of our $2.1 million write-down of the carrying value associated with a previous investment in a consumer finance technology platform.
We expect total yield ratios to continue to fluctuate somewhat based on the relative mix of growth in point-of-sale receivables and our higher yielding direct-to-consumer credit card receivables.
Combined gross charge-off ratio.We charge off our Credit and Other Investments 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.
Growth within point-of-sale finance and direct-to-consumer receivables has resulted in increases in our charge-off rates over time. Our fourth quarter 2017 and first quarter 2018 combined gross charge-off ratios reflect further significant investments during the second and third quarters in 2017 in direct-to-consumer receivables, which reached their peak charge off periods during the fourth quarter of 2017 and first quarter of 2018. Second and third quarter 2018 declines in the gross charge-off ratio are reflective of this as well and are also indicative of some of the seasonal delinquency benefits discussed above. Combined gross charge-off rates for the fourth quarter of 2018 and first quarter of 2019 reflect the expected higher charge-off rates associated with a mix shift to higher yielding products and ongoing testing of new products throughout 2018.
The growth in the point-of-sale and direct-to-consumer receivables continues to result in higher charge-offs than those experienced historically. In the next few quarters, we expect continued elevated charge off rates when compared to historical results, given the following: (1) higher expected charge off rates on the point-of-sale and direct-to-consumer receivables corresponding with higher yields on these product offerings, (2) continued testing of receivables with higher risk profiles, which could lead to periodic increases in combined gross charge-offs, and (3) recent vintages reaching peak charge-off periods. Offsetting these increases will be growth in the underlying receivables base which will serve to mute to a varying degree some of the aforementioned impacts as has been seen in recent quarters. Further impacting our charge-off rates are the timing of solicitations which serve to minimize charge-off rates in periods of higher receivable acquisitions but also exacerbate charge-off rates in periods of lower receivable acquisitions.
Average APR. Our average annual percentage rate (“APR”) charged to customers varies by receivable type, credit history and other factors. The average APR for receivables in our point-of-sale operations range from 9.99% to 36.0%. For our direct-to-consumer receivables, average APR ranges from 19.99% to 36.0%. We have experienced minor fluctuations in our average APR based on the relative product mix of receivables purchased during a period. We currently expect our average APRs in 2020 to remain consistent with the average APRs we have experienced over the past several quarters; however, the timing and relative mix of receivables acquired could cause some minor fluctuations.
Receivables purchased during period. Receivables purchased during the period reflect the gross amount of investments we have made in a given period, net of any credits issued to consumers during that same period. For most periods presented, our point-of-sale receivable purchases experienced overall growth throughout the periods presented largely based on the addition of new point-of-sale retail partners, as previously discussed. We may experience periodic declines in these acquisitions due to: the loss of one or more retail partners; seasonal purchase activity by consumers; or the timing of new customer originations by our lending partners. We currently expect to see increases in receivable acquisitions when compared to the same period in prior years. Our direct-to-consumer receivable acquisitions tend to have more volatility based on the issuance of new credit card accounts by our banking partner and the availability of capital to fund new purchases. Nonetheless, we expect continued growth in the acquisition of these receivables throughout 2020.
Auto Finance Segment
CAR, our auto finance platform acquired in April 2005, principally purchases and/or services loans secured by automobiles from or for, and also provides floor-plan financing for, a pre-qualified network of independent automotive dealers and automotive finance companies in the buy-here, pay-here used car business. We have expanded these operations to also include certain installment lending products in addition to our traditional loans secured by automobiles both in the U.S. and U.S. territories.
Collectively, as of September 30, 2019, we served more than 600 dealers through our Auto Finance segment in 34 states, the District of Columbia and two U.S. territories.
Managed Receivables Background
For reasons set forth above within our Credit and Other Investments segment discussion, we also provide managed receivables-based financial, operating and statistical data for our Auto Finance segment. Reconciliation of the auto finance managed receivables data to our GAAP financial statements requires an understanding that our managed receivables data are based on billings and actual charge offs as they occur, without regard to any changes in our allowance for uncollectible loans, interest and fees receivable. Similar to the managed receivables calculation above, the average managed receivables used in the ratios below is calculated based on the quarter-end balances of consolidated receivables.
Analysis of Statistical Data
Financial, operating and statistical metrics for our Auto Finance segment are detailed (in thousands; percentages of total) in the following table:
|
|
At or for the Three Months Ended
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
Sept. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
Period-end managed receivables
|
|
$
|
89,451
|
|
|
$
|
89,490
|
|
|
$
|
90,208
|
|
|
$
|
88,057
|
|
|
$
|
85,338
|
|
|
$
|
83,872
|
|
|
$
|
78,436
|
|
|
$
|
77,213
|
|
Percent 30 or more days past due
|
|
|
14.5
|
%
|
|
|
13.3
|
%
|
|
|
11.4
|
%
|
|
|
14.7
|
%
|
|
|
13.3
|
%
|
|
|
10.8
|
%
|
|
|
8.8
|
%
|
|
|
12.8
|
%
|
Percent 60 or more days past due
|
|
|
5.9
|
%
|
|
|
5.4
|
%
|
|
|
5.3
|
%
|
|
|
5.7
|
%
|
|
|
4.3
|
%
|
|
|
3.6
|
%
|
|
|
3.3
|
%
|
|
|
5.0
|
%
|
Percent 90 or more days past due
|
|
|
3.1
|
%
|
|
|
2.6
|
%
|
|
|
2.9
|
%
|
|
|
2.5
|
%
|
|
|
1.7
|
%
|
|
|
1.4
|
%
|
|
|
1.6
|
%
|
|
|
2.4
|
%
|
Average managed receivables
|
|
$
|
89,471
|
|
|
$
|
89,849
|
|
|
$
|
89,133
|
|
|
$
|
86,698
|
|
|
$
|
84,605
|
|
|
$
|
81,154
|
|
|
$
|
77,825
|
|
|
$
|
76,068
|
|
Total yield ratio
|
|
|
36.4
|
%
|
|
|
36.7
|
%
|
|
|
36.0
|
%
|
|
|
36.1
|
%
|
|
|
37.9
|
%
|
|
|
38.2
|
%
|
|
|
37.9
|
%
|
|
|
37.9
|
%
|
Combined gross charge-off ratio
|
|
|
2.7
|
%
|
|
|
4.9
|
%
|
|
|
2.7
|
%
|
|
|
2.8
|
%
|
|
|
0.9
|
%
|
|
|
0.5
|
%
|
|
|
2.1
|
%
|
|
|
3.0
|
%
|
Recovery ratio
|
|
|
1.8
|
%
|
|
|
1.8
|
%
|
|
|
1.3
|
%
|
|
|
0.9
|
%
|
|
|
0.9
|
%
|
|
|
1.0
|
%
|
|
|
1.5
|
%
|
|
|
1.5
|
%
|
Managed receivables. We expect modest growth in the level of our managed receivables for 2020 when compared to the same periods in prior years in both the U.S. and U.S. territories as CAR expands within its existing locations and continues plans for service area expansion. Although we are expanding our CAR operations, the Auto Finance segment faces strong competition from other specialty finance lenders, as well as the indirect effects on us of our buy-here, pay-here dealership partners’ competition with more traditional franchise dealerships for consumers interested in purchasing automobiles. Managed receivable levels have increased in each of the periods of 2019 when compared to the same periods in 2018 primarily due to the acquisition of new dealer relationships which has resulted in the ability to purchase higher levels of auto receivables. We expect this increase in receivables when compared to the same periods in the prior year will continue to result in period over period increases for the coming quarters.
Delinquencies. Current delinquency levels are consistent with our expectations for levels in the near term with some improvement noted in the first quarter of 2019 due to seasonal performance improvements. Delinquency levels experienced for the first three quarters of 2018 generally were lower than those experienced during the same periods in 2017 largely due to the absence of any significant dealer-related losses (as opposed to individual consumer defaults) that are typical during any given year and which tend to produce larger portfolio level defaults on receivables. These low delinquencies also contributed to lower combined gross charge-off rates during 2018 as discussed further below. Delinquency rates also tend to fluctuate based on seasonal trends and historically are lower in the first quarter of each year as seen above due to the benefits of strong payment patterns associated with year-end tax refunds for most consumers. While we have experienced some increase in our delinquency rates in 2019 when compared to the same periods in 2018, we are not concerned with modest fluctuations in delinquency rates and do not believe they will have a significantly positive or adverse impact on our results of operations; even at slightly elevated rates, we earn significant yields on CAR’s receivables and have significant dealer reserves (i.e., retainages or holdbacks on the amount of funding CAR provides to its dealer customers) to protect against meaningful credit losses.
Total yield ratio. We have experienced modest fluctuations in our total yield ratio largely impacted by the relative mix of receivables in various products offered by CAR as some shorter term product offerings tend to have higher yields. Yields on our CAR products over the last few quarters are consistent with our expectations. Further, we expect our total yield ratio to remain in line with current experience, with moderate fluctuations based on relative growth or declines in average managed receivables for a given quarter. These variations would be based on the relative mix of receivables in our various product offerings. Additionally, our product offerings in the U.S. territories tend to have slightly lower yields than those offered in the U.S. As such, continued growth in that region also will serve to slightly depress our overall total yield ratio, yet we expect growth in that region to continue to generate attractive returns on assets.
Combined gross charge-off ratio and recovery ratio. We charge off auto finance receivables when they are between 120 and 180 days past due, unless the collateral is repossessed and sold before that point, in which case we will record a charge off when the proceeds are received. Combined gross charge-off ratios in the above table reflect the lower delinquency rates we have recently experienced. While we anticipate our charge-offs to be incurred ratably across our portfolio of dealers, specific dealer-related losses are difficult to predict and can negatively influence our combined gross charge-off ratio. This is evidenced by the slightly elevated combined gross charge-off rate we have experienced during 2019. We continually re-assess our dealers and will take appropriate action if we believe a particular dealer’s risk characteristics adversely change. While we have appropriate dealer reserves to mitigate losses across the majority of our pool of receivables, the timing of recognition of these reserves as an offset to charge offs is largely dependent on various factors specific to each of our dealer partners including ongoing purchase volumes, outstanding balances of receivables and current performance of outstanding loans. As such, the timing of charge-off offsets is difficult to predict; however, we believe that these reserves are adequate to offset any loss exposure we may incur. Additionally, the products we issue in the U.S. territories do not have dealer reserves with which we can offset losses. Further, given our expectation of some gradual increase in our delinquency rates as discussed above, we expect gross charge-off rates will climb slightly over existing rates although as indicated above, the timing of individual dealer-related losses is difficult to predict. We also expect our recovery rate to fluctuate modestly from quarter to quarter due to the timing of the sale of repossessed autos.
Definitions of Financial, Operating and Statistical Measures
Total yield ratio. Represents an annualized fraction, the numerator of which includes (as appropriate for each applicable disclosed segment) the: 1) finance charge and late fee income billed on all consolidated outstanding receivables and the amortization of the accretable yield component of our acquisition discounts for portfolio purchases, collectively included in the consumer loans, including past due fees category on our consolidated statements of income; plus 2) credit card fees (including over-limit fees, cash advance fees, returned check fees and interchange income), earned, amortized amounts of annual membership fees and activation fees with respect to certain credit card receivables, collectively included in our fees and related income on earning assets category on our consolidated statements of income; plus 3) servicing, other income and other activities collectively included in our other operating income category on our consolidated statements of income. The denominator used represents our average managed receivables.
Combined gross charge-off ratio. Represents an annualized fraction, the numerator of which is the aggregate consolidated amounts of finance charge, fee and principal losses from consumers unwilling or unable to pay their receivables balances, as well as from bankrupt and deceased consumers, less current-period recoveries (including recoveries from dealer reserve offsets for our CAR operations) and the related portion of unamortized discounts, as reflected in Note 2 “Significant Accounting Policies and Consolidated Financial Statement Components-Loans, Interest and Fees Receivable”, and the denominator of which is average managed receivables. Recoveries on managed receivables represent all amounts received related to managed receivables that previously have been charged off, including payments received directly from consumers and proceeds received from the sale of those charged-off receivables. Recoveries typically have represented less than 2% of average managed receivables.
LIQUIDITY, FUNDING AND CAPITAL RESOURCES
As discussed elsewhere in this report, we incur a significant level of costs associated with a fixed infrastructure that had been designed to support our significant legacy credit card operations. Our infrastructure costs are still somewhat elevated, and while we had in the past focused on cost reduction, our primary focus now is growing the point-of-sale and direct-to-consumer credit card receivables so that our revenues from these investments can cover our infrastructure costs and return us to consistent profitability. Increases in new and existing retail partnerships and the expansion of our investments in direct-to-consumer finance products have resulted in quarterly growth of total managed receivables levels, and we expect this growth to continue in the coming quarters.
Accordingly, we will continue to focus in the coming quarters on (i) containing costs (as opposed to our previous focus on reducing expenses) (ii) obtaining new retail partners to continue growth of the point-of-sale receivables (iii) continuing growth in direct-to-consumer credit card receivables and (iv) obtaining the funding necessary to meet capital needs required by the growth of our receivables and to cover our infrastructure costs until our receivables investments generate enough revenues and cash flows to cover such costs.
All of our Credit and Other Investments segment’s structured financing facilities are expected to amortize down with collections on the receivables within their underlying trusts and should not represent significant refunding or refinancing risks to our consolidated balance sheet. Additionally, we do not expect any imminent refunding or financing needs associated with our convertible senior notes given their maturity in 2035. As such, facilities that could represent near-term significant refunding or refinancing needs as of September 30, 2019 are those associated with the following notes payable in the amounts indicated (in millions):
Revolving credit facility (expiring December 30, 2019) that is secured by certain receivables and restricted cash
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$
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14.3
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Revolving credit facility (expiring December 31, 2019) that is secured by certain receivables and restricted cash
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19.7
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Revolving credit facility (expiring December 21, 2020) that is secured by certain receivables and restricted cash
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13.7
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Senior secured term loan from related parties (expiring November 21, 2019) that is secured by certain assets of the Company
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40.0
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Total
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$
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87.7
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Further details concerning the above debt facilities are provided in Note 8, “Notes Payable and Variable Interest Entities,” to our consolidated financial statements included herein. Based on the state of the debt capital markets, the performance of our assets that serve as security for the above facilities, and our relationships with lenders, we view imminent refunding or refinancing risks with respect to the above facilities as low in the current environment, and we believe that the quality of our new receivables should allow us to raise more capital through increasing the size of our facilities with our existing lenders and attracting new lending relationships.
In February 2017, we (through a wholly owned subsidiary) established a program under which we sell certain receivables to a consolidated trust in exchange for notes issued by the trust. The notes are secured by the receivables and other assets of the trust. Simultaneously with the establishment of the program, the trust issued a series of variable funding notes and sold an aggregate amount of up to $90.0 million (of which $58.5 million was outstanding as of September 30, 2019) to an unaffiliated third party pursuant to a facility that is available to the extent of outstanding eligible receivables. Interest rates on the notes range from 12.0% 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 June 2018 and again in November 2018, we (through a wholly owned subsidiary) expanded the above mentioned program to sell up to an additional $100.0 million of notes ($200.0 million in total notes through the June and November 2018 expansions) which are secured by the receivables and other assets of the trust (of which $63.0 million was outstanding as of September 30, 2019) to separate unaffiliated third parties pursuant to facilities that is available 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 above 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. The weighted average interest rate on the securities is 5.76%.
In June 2019, we sold $200.0 million of ABS secured by certain credit card receivables. A portion of the proceeds from the sale was used to pay-down our existing facilities associated with our credit card receivables and the remaining proceeds are available to fund the acquisition of additional receivables. The terms of the ABS allow for a two-year revolving structure with a subsequent 12-month to 18-month amortization period. The weighted average interest rate on the securities is fixed at 5.37%.
In September 2019, we extended the maturity date of the revolving credit facility secured by the financial and operating assets of CAR to November 1, 2021, and, in October 2019, we expanded the borrowing capacity to $55.0 million. All other material terms remain unchanged.
The use of the London Interbank Offered Rate (“LIBOR”) is expected to be phased out by the end of 2021. Currently, LIBOR is used as a reference rate for certain of our financial instruments, particularly our revolving credit facilities. In any event, our revolving credit facilities mature prior to the expected phase out of LIBOR. At this time, there is no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. Going forward, we will work with our lenders to use suitable alternative reference rates for our financial instruments. We will continue to monitor, assess and plan for the phase out of LIBOR; however, we currently do not expect the impact to be material to the Company.
At September 30, 2019, we had $42.6 million in unrestricted cash held by our various business subsidiaries. Because the characteristics of our assets and liabilities change, liquidity management has been a dynamic process for us, driven by the pricing and maturity of our assets and liabilities. We historically have financed our business through cash flows from operations, asset-backed structured financings and the issuance of debt and equity. Details concerning our cash flows for the nine months ended September 30, 2019 and 2018 are as follows:
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During the nine months ended September 30, 2019, we generated $70.2 million of cash flows from operations compared to use of $1.7 million of cash flows from operations during the nine months ended September 30, 2018. The increase in cash provided by operating activities was principally related to the reclassification of approximately $26 million from unrestricted cash and cash equivalents on our consolidated balance sheets and increases in finance collections associated with our growing point-of-sale and direct-to-consumer receivables. Offsetting this increase was reimbursements received in the second and third quarters of 2018 in respect of one of our portfolios with no corresponding receipt during the nine months ended 2019.
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During the nine months ended September 30, 2019, we used $289.8 million of cash from our investing activities, compared to use of $75.3 million of cash from investing activities during the nine months ended September 30, 2018. This increase in cash used is primarily due to: 1) the shrinking size of our historical credit card receivables, resulting in lower corresponding payments from consumers; and 2) significant increases in the level of investments for 2019 in the point-of-sale and direct-to-consumer receivables relative to the same period in 2018 and which we expect to continue to make throughout 2019. Slightly offsetting this increase in cash used by investing activities are returns on our aforementioned investments in point-of-sale and direct-to-consumer receivables which contributed positively to our cash generated from investing activities.
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During the nine months ended September 30, 2019, we generated $190.3 million of cash in financing activities, compared to our generating $65.2 million of cash in financing activities during the nine months ended September 30, 2018. In both periods, the data reflect borrowings associated with point-of-sale and direct-to-consumer receivables offset by net repayments of amortizing debt facilities as payments are made on the underlying receivables that serve as collateral.
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Beyond our immediate financing efforts discussed throughout this report, we will continue to evaluate debt and equity issuances as a means to fund our investment opportunities. We expect to take advantage of any opportunities to raise additional capital if terms and pricing are attractive to us. Any proceeds raised under these efforts or additional liquidity available to us could be used to fund (1) the acquisition of additional financial assets associated with the point-of-sale and direct-to-consumer finance operations as well as the acquisition of credit card receivables portfolios and (2) further repurchases of our convertible senior notes and common stock. Pursuant to a share repurchase plan authorized by our Board of Directors on May 10, 2018, we are authorized to repurchase up to 5,000,000 shares of our common stock through June 30, 2020. As of September 30, 2019 we were authorized to repurchase a remaining 4,475,851 shares under this share repurchase plan.
CONTRACTUAL OBLIGATIONS, COMMITMENTS AND OFF-BALANCE-SHEET ARRANGEMENTS
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2018.
Commitments and Contingencies
We do not currently have any off-balance-sheet arrangements; however, we do have certain contractual arrangements that would require us to make payments or provide funding if certain circumstances occur, which we refer to as contingent commitments. We do not currently expect that these contingent commitments will result in any material amounts being paid by us. See Note 10, “Commitments and Contingencies,” to our consolidated financial statements included herein for further discussion of these matters.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2, “Significant Accounting Policies and Consolidated Financial Statement Components,” to our consolidated financial statements included herein for a discussion of recent accounting pronouncements.
CRITICAL ACCOUNTING ESTIMATES
We have prepared our financial statements in accordance with GAAP. These principles are numerous and complex. We have summarized our significant accounting policies in the notes to our consolidated financial statements. In many instances, the application of GAAP requires management to make estimates or to apply subjective principles to particular facts and circumstances. A variance in the estimates used or a variance in the application or interpretation of GAAP could yield a materially different accounting result. It is impracticable for us to summarize every accounting principle that requires us to use judgment or estimates in our application. Nevertheless, we describe below the areas for which we believe that the estimations, judgments or interpretations that we have made, if different, would have yielded the most significant differences in our consolidated financial statements.
On a quarterly basis, we review our significant accounting policies and the related assumptions, in particular, those mentioned below, with the audit committee of the Board of Directors.
Revenue Recognition
Consumer Loans, Including Past Due Fees
Consumer loans, including past due fees, reflect interest income, including finance charges, and late fees on loans in accordance with the terms of the related customer agreements. Premiums and discounts paid or received associated with a loan are generally deferred and amortized over the average life of the related loans using the effective interest method. Finance charges and fees, net of amounts that we consider uncollectible, are included in loans, interest and fees receivable and revenue when the fees are earned.
Fees and Related Income on Earning Assets
Fees and related income on earning assets primarily include: (1) fees associated with our credit products, including the receivables underlying our U.S. point-of-sale finance and direct-to-consumer activities, and our legacy credit card receivables; (2) changes in the fair value of loans, interest and fees receivable recorded at fair value; (3) changes in fair value of notes payable associated with structured financings recorded at fair value; (4) revenues associated with rent payments on rental merchandise; and (5) gains or losses associated with our investments in securities.
We assess fees on credit card accounts underlying our credit card receivables according to the terms of the related cardholder agreements and, except for annual membership fees, we recognize these fees as income when they are charged to the customers’ accounts. We accrete annual membership fees associated with our credit card receivables into income on a straight-line basis over the cardholder privilege period. Similarly, fees on our other credit products are recognized when earned, which coincides with the time they are charged to the customer’s account. Fees and related income on earning assets, net of amounts that we consider uncollectible, are included in loans, interest and fees receivable and revenue when the fees are earned.
Measurements for Loans, Interest and Fees Receivable at Fair Value and Notes Payable Associated with Structured Financings at Fair Value
Our valuation of loans, interest and fees receivable, at fair value is based on the present value of future cash flows using a valuation model of expected cash flows and the estimated cost to service and collect those cash flows. We estimate the present value of these future cash flows using a valuation model consisting of internally developed estimates of assumptions third-party market participants would use in determining fair value, including: estimates of net collected yield, principal payment rates, expected principal credit loss rates, costs of funds, discount rates and servicing costs. Similarly, our valuation of notes payable associated with structured financings, at fair value is based on the present value of future cash flows utilized in repayment of the outstanding principal and interest under the facilities using a valuation model of expected cash flows net of the contractual service expenses within the facilities. We estimate the present value of these future cash flows using a valuation model consisting of internally developed estimates of assumptions third-party market participants would use in determining fair value, including: estimates of net collected yield, principal payment rates and expected principal credit loss rates on the credit card receivables that secure the non-recourse notes payable; costs of funds; discount rates; and contractual servicing fees.
The estimates for credit losses, payment rates, servicing costs, contractual servicing fees, costs of funds, discount rates and yields earned on credit card receivables significantly affect the reported amount of our loans, interest and fees receivable, at fair value and our notes payable associated with structured financings, at fair value on our consolidated balance sheet, and they likewise affect our changes in fair value of loans, interest and fees receivable recorded at fair value and changes in fair value of notes payable associated with structured financings recorded at fair value categories within our fees and related income on earning assets line item on our consolidated statements of operations.
Allowance for Uncollectible Loans, Interest and Fees
Through our analysis of loan performance, delinquency data, charge-off data, economic trends and the potential effects of those economic trends on consumers, we establish an allowance for uncollectible loans, interest and fees receivable as an estimate of the probable losses inherent within those loans, interest and fees receivable that we do not report at fair value. Our loans, interest and fees receivable consist of smaller-balance, homogeneous loans, divided into two portfolio segments: Credit and Other Investments; and Auto Finance. Each of these portfolio segments is further divided into pools based on common characteristics such as contract or acquisition channel. For each pool, we determine the necessary allowance for uncollectible loans, interest and fees receivable by analyzing some or all of the following unique to each type of receivable pool: historical loss rates; current delinquency and roll-rate trends; vintage analyses based on the number of months an account has been in existence; the effects of changes in the economy on our customers; changes in underwriting criteria; and estimated recoveries. These inputs are considered in conjunction with (and potentially reduced by) any unearned fees and discounts that may be applicable for an outstanding loan receivable. To the extent that actual results differ from our estimates of uncollectible loans, interest and fees receivable, our results of operations and liquidity could be materially affected.
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 nine months ended September 30, 2019 and 2018, we received $202,813 and $204,379, 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 September 30, 2019. 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.
FORWARD-LOOKING INFORMATION
We make forward-looking statements in this report and in other materials we file with the Securities and Exchange Commission (“SEC”) or otherwise make public. This Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements. In addition, our senior management might make forward-looking statements to analysts, investors, the media and others. Statements with respect to expected revenue; income; receivables; income ratios; net interest margins; long-term shareholder returns; acquisitions of financial assets and other growth opportunities; divestitures and discontinuations of businesses; loss exposure and loss provisions; delinquency and charge-off rates; 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; 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 II, Item 1A, and the risk factors and other cautionary statements elsewhere in this report and in other documents we file with the SEC, including the following:
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the availability of adequate financing to support growth;
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the extent to which federal, state, local and foreign governmental regulation of our various business lines and the products we service for others limits or prohibits the operation of our businesses;
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current and future litigation and regulatory proceedings against us;
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the effect of adverse economic conditions on our revenues, loss rates and cash flows;
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competition from various sources providing similar financial products, or other alternative sources of credit, to consumers;
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the adequacy of our allowances for uncollectible loans, interest and fees receivable and estimates of loan losses used within our risk management and analyses;
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the possible impairment of assets;
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our ability to manage costs in line with the expansion or contraction of our various business lines;
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our relationship with (i) the merchants that participate in point-of-sale finance operations and (ii) the bank that issues credit cards and provides certain other credit products utilizing our technology platform and related services; and
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theft and employee errors.
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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.