Atlanticus Holdings Corp 10-Q for FY2021 Q1
Atlanticus Holdings Corp (ATLC)
About this 10-Q
Atlanticus Holdings Corp filed this 10-Q on May 14, 2021, covering the quarter ended March 31, 2021 (FY2021 Q1).
Headline figures
Quarter ended March 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $144.74M
- up 3.0% from $140.51M a year earlier
- Net income
- $44.08M
- up 712.4% from net income of $5.43M a year earlier
- Diluted EPS
- $1.91
- up 1023.5% from $0.17 a year earlier
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2021
of
ATLANTICUS HOLDINGS CORPORATION
a Georgia Corporation
IRS Employer Identification No. 58-2336689
SEC File Number 0-53717
Five Concourse Parkway, Suite 300
Atlanta, Georgia 30328
(770) 828-2000
Atlanticus’ common stock, no par value per share, is registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the “Act”) and trades on the NASDAQ Global Select Market under the ticker symbol "ATLC".
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 is a smaller reporting company and a non-accelerated filer. Atlanticus is not a shell company or an emerging growth company.
As of May 7, 2021, 16,640,267 shares of common stock, no par value, of Atlanticus were outstanding, including 1,459,233 loaned shares to be returned.
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PART I. FINANCIAL INFORMATION |
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Item 1. |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II. OTHER INFORMATION |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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ITEM 1. |
FINANCIAL STATEMENTS |
Atlanticus Holdings Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands)
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March 31, |
December 31, |
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2021 |
2020 |
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Assets |
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| Unrestricted cash and cash equivalents (including $131.7 million and $96.6 million associated with variable interest entities at March 31, 2021 and December 31, 2020, respectively) | $ | 203,050 | $ | 178,102 | ||||
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Restricted cash and cash equivalents (including $29.0 million and $70.2 million associated with variable interest entities at March 31, 2021 and December 31, 2020, respectively) |
40,477 | 80,859 | ||||||
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Loans, interest and fees receivable: |
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Loans, interest and fees receivable, at fair value (including $424.5 million and $374.2 million associated with variable interest entities at March 31, 2021 and December 31, 2020, respectively) |
481,434 | 417,098 | ||||||
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Loans, interest and fees receivable, gross (including $489.0 million and $560.2 million associated with variable interest entities at March 31, 2021 and December 31, 2020, respectively) |
592,934 | 667,556 | ||||||
| Allowances for uncollectible loans, interest and fees receivable (including $102.7 million and $120.9 million associated with variable interest entities at March 31, 2021 and December 31, 2020, respectively) | (105,881 | ) | (124,961 | ) | ||||
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Deferred revenue (including $7.4 million and $10.3 million associated with variable interest entities at March 31, 2021 and December 31, 2020, respectively) |
(33,995 | ) | (39,456 | ) | ||||
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Net loans, interest and fees receivable |
934,492 | 920,237 | ||||||
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Property at cost, net of depreciation |
2,002 | 2,240 | ||||||
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Investments in equity-method investee |
1,244 | 1,415 | ||||||
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Operating lease right-of-use assets |
8,011 | 9,181 | ||||||
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Prepaid expenses and other assets |
10,219 | 15,180 | ||||||
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Total assets |
$ | 1,199,495 | $ | 1,207,214 | ||||
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Liabilities |
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Accounts payable and accrued expenses |
$ | 41,153 | $ | 41,731 | ||||
| Operating lease liabilities | 11,697 | 13,776 | ||||||
| Notes payable, net (including $781.0 million and $827.1 million associated with variable interest entities at March 31, 2021 and December 31, 2020, respectively) | 839,251 | 882,610 | ||||||
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Notes payable associated with structured financings, at fair value (associated with variable interest entities) |
2,791 | 2,919 | ||||||
| Convertible senior notes | 13,818 | 24,386 | ||||||
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Income tax liability |
33,566 | 25,932 | ||||||
| Total liabilities | 942,276 | 991,354 | ||||||
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Commitments and contingencies (Note 11) |
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| Preferred stock, no par value, 10,000,000 shares authorized: | ||||||||
| Series A preferred stock, 400,000 shares issued and outstanding at March 31, 2021 (liquidation preference - $40.0 million); 400,000 shares issued and outstanding at December 31, 2020 (Note 4) | 40,000 | 40,000 | ||||||
| Class B preferred units issued to noncontrolling interests (Note 4) | 99,425 | 99,350 | ||||||
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Shareholders' Equity |
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Common stock, no par value, 150,000,000 shares authorized: 16,640,267 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at March 31, 2021; and 16,115,353 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at December 31, 2020 |
— | — | ||||||
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Paid-in capital |
192,207 | 194,950 | ||||||
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Retained deficit |
(73,591 | ) | (117,666 | ) | ||||
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Total shareholders’ equity |
118,616 | 77,284 | ||||||
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Noncontrolling interests |
(822 | ) | (774 | ) | ||||
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Total equity |
117,794 | 76,510 | ||||||
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Total liabilities, preferred stock and shareholders' equity |
$ | 1,199,495 | $ | 1,207,214 | ||||
See accompanying notes.
Atlanticus Holdings Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share data)
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For the Three Months Ended |
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March 31, |
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2021 |
2020 |
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Revenue: |
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Consumer loans, including past due fees |
$ | 102,296 | $ | 103,147 | ||||
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Fees and related income on earning assets |
37,020 | 34,645 | ||||||
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Other revenue |
4,579 | 2,726 | ||||||
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Total operating revenue |
143,895 | 140,518 | ||||||
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Other non-operating revenue |
840 | (10 | ) | |||||
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Total revenue |
144,735 | 140,508 | ||||||
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Interest expense |
(12,298 | ) | (13,584 | ) | ||||
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Loss on repurchase of convertible senior notes |
(7,807 | ) | — | |||||
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Provision for losses on loans, interest and fees receivable recorded at net realizable value |
(4,135 | ) | (67,336 | ) | ||||
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Changes in fair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value |
(27,491 | ) | (15,191 | ) | ||||
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Net margin |
93,004 | 44,397 | ||||||
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Operating expense: |
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Salaries and benefits |
8,239 | 7,510 | ||||||
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Card and loan servicing |
17,387 | 15,837 | ||||||
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Marketing and solicitation |
10,301 | 9,317 | ||||||
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Depreciation |
312 | 285 | ||||||
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Other |
4,968 | 4,801 | ||||||
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Total operating expense |
41,207 | 37,750 | ||||||
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Income before income taxes |
51,797 | 6,647 | ||||||
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Income tax expense |
(7,770 | ) | (1,285 | ) | ||||
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Net income |
44,027 | 5,362 | ||||||
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Net loss attributable to noncontrolling interests |
48 | 63 | ||||||
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Net income attributable to controlling interests |
44,075 | 5,425 | ||||||
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Preferred dividends and discount accretion |
(4,687 | ) | (2,759 | ) | ||||
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Net income attributable to common shareholders |
$ | 39,388 | $ | 2,666 | ||||
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Net income attributable to common shareholders per common share—basic |
$ | 2.62 | $ | 0.18 | ||||
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Net income attributable to common shareholders per common share—diluted |
$ | 1.91 | $ | 0.17 | ||||
See accompanying notes.
Atlanticus Holdings Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Equity (Deficit) (Unaudited)
For the Three Months Ended March 31, 2021 and March 31, 2020
(Dollars in thousands)
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Common Stock |
Temporary Equity |
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Shares Issued |
Amount |
Paid-In Capital |
Retained Deficit |
Noncontrolling Interests |
Total Equity |
Class B Preferred Units |
Series A Preferred Stock |
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Balance at December 31, 2020 |
16,115,353 | $ | — | $ | 194,950 | $ | (117,666 | ) | $ | (774 | ) | $ | 76,510 | $ | 99,350 | $ | 40,000 | |||||||||||||||
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Accretion of discount associated with issuance of subsidiary equity |
— | — | (75 | ) | — | — | (75 | ) | 75 | — | ||||||||||||||||||||||
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Preferred dividends |
— | — | (4,612 | ) | — | — | (4,612 | ) | — | — | ||||||||||||||||||||||
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Stock option exercises and proceeds related thereto |
494,900 | — | 1,696 | — | — | 1,696 | — | — | ||||||||||||||||||||||||
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Compensatory stock issuances, net of forfeitures |
39,942 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
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Deferred stock-based compensation costs |
— | — | 545 | — | — | 545 | — | — | ||||||||||||||||||||||||
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Redemption and retirement of shares |
(9,928 | ) | — | (297 | ) | — | — | (297 | ) | — | — | |||||||||||||||||||||
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Comprehensive income |
— | — | — | 44,075 | (48 | ) | 44,027 | — | — | |||||||||||||||||||||||
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Balance at March 31, 2021 |
16,640,267 | $ | — | $ | 192,207 | $ | (73,591 | ) | $ | (822 | ) | $ | 117,794 | $ | 99,425 | $ | 40,000 | |||||||||||||||
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Common Stock |
Temporary Equity |
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Shares Issued |
Amount |
Paid-In Capital |
Retained Deficit |
Noncontrolling Interests |
Total Equity |
Class B Preferred Units |
Series A Preferred Stock |
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Balance at December 31, 2019 |
15,885,314 | $ | — | $ | 212,692 | $ | (211,786 | ) | $ | (571 | ) | $ | 335 | $ | 49,050 | $ | 40,000 | |||||||||||||||
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Accretion of discount associated with issuance of subsidiary equity |
— | — | (75 | ) | — | — | (75 | ) | 75 | — | ||||||||||||||||||||||
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Preferred dividends |
— | — | (2,684 | ) | — | — | (2,684 | ) | — | — | ||||||||||||||||||||||
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Stock option exercises and proceeds related thereto |
2,000 | — | 6 | — | — | 6 | — | — | ||||||||||||||||||||||||
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Compensatory stock issuances, net of forfeitures |
64,915 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
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Contributions by preferred unit holders |
— | — | — | — | — | — | 50,000 | — | ||||||||||||||||||||||||
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Deferred stock-based compensation costs |
— | — | 368 | — | — | 368 | — | — | ||||||||||||||||||||||||
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Redemption and retirement of shares |
(74,724 | ) | — | (559 | ) | — | — | (559 | ) | — | — | |||||||||||||||||||||
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Comprehensive income |
— | — | — | 5,425 | (63 | ) | 5,362 | — | — | |||||||||||||||||||||||
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Balance at March 31, 2020 |
15,877,505 | $ | — | $ | 209,748 | $ | (206,361 | ) | $ | (634 | ) | $ | 2,753 | $ | 99,125 | $ | 40,000 | |||||||||||||||
See accompanying notes.
Atlanticus Holdings Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
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For the Three Months Ended March 31, |
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2021 |
2020 |
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Operating activities |
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| Net income | $ | 44,027 | $ | 5,362 | ||||
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation, amortization and accretion, net |
844 | 1,962 | ||||||
| Provision for losses on loans, interest and fees receivable | 4,135 | 67,336 | ||||||
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Interest expense from accretion of discount on notes |
132 | 143 | ||||||
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Income from accretion of merchant fees and discount associated with receivables purchases |
(34,213 | ) | (35,763 | ) | ||||
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Changes in fair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value |
27,491 | 15,191 | ||||||
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Amortization of deferred loan costs |
888 | 1,326 | ||||||
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Income from equity-method investments |
(19 | ) | 66 | |||||
| Loss on repurchase of convertible senior notes | 7,807 | — | ||||||
| Deferred stock-based compensation costs | 545 | 368 | ||||||
| Lease liability payments | (2,584 | ) | (2,540 | ) | ||||
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Changes in assets and liabilities: |
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Increase in uncollected fees on earning assets |
(9,517 | ) | (13,206 | ) | ||||
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Increase in income tax liability |
7,634 | 1,206 | ||||||
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Increase (decrease) in accounts payable and accrued expenses |
658 | (6,605 | ) | |||||
| Other | 4,952 | 101 | ||||||
| Net cash provided by operating activities | 52,780 | 34,947 | ||||||
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Investing activities |
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Proceeds from equity-method investee |
190 | 285 | ||||||
| Proceeds from recoveries on charged off receivables | 1,892 | 1,484 | ||||||
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Investments in earning assets |
(356,011 | ) | (276,219 | ) | ||||
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Proceeds from earning assets |
351,839 | 229,814 | ||||||
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Purchases and development of property, net of disposals |
(73 | ) | (99 | ) | ||||
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Net cash used in investing activities |
(2,163 | ) | (44,735 | ) | ||||
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Financing activities |
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| Noncontrolling interests contributions | — | 50,000 | ||||||
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Preferred dividends |
(4,701 | ) | (1,497 | ) | ||||
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Proceeds from exercise of stock options |
1,696 | 6 | ||||||
| Purchase and retirement of outstanding stock | (297 | ) | (559 | ) | ||||
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Proceeds from borrowings |
53,314 | 61,074 | ||||||
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Repayment of borrowings |
(116,069 | ) | (72,687 | ) | ||||
| Net cash (used in) provided by financing activities | (66,057 | ) | 36,337 | |||||
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Effect of exchange rate changes on cash |
6 | (42 | ) | |||||
| Net (decrease) increase in cash and cash equivalents | (15,434 | ) | 26,507 | |||||
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Cash and cash equivalents and restricted cash at beginning of period |
258,961 | 176,394 | ||||||
| Cash and cash equivalents and restricted cash at end of period | $ | 243,527 | $ | 202,901 | ||||
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Supplemental cash flow information |
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| Cash paid for interest | $ | 12,265 | $ | 13,542 | ||||
| Net cash income tax payments | $ | 136 | $ | 79 | ||||
| (Decrease) increase in accrued and unpaid preferred dividends | $ | (89 | ) | $ | 1,187 | |||
See accompanying notes.
Atlanticus Holdings Corporation and Subsidiaries
Notes to Consolidated Financial Statements
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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 facilitating consumer credit through the use of our 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 by other providers of credit.
We are principally engaged in providing products and services to lenders in the U.S. and, 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 these Notes to Consolidated Financial Statements, “receivables” or “loans” typically refer to receivables we have purchased from our bank partners or from third parties.
Within our Credit and Other Investments segment, we facilitate consumer finance programs offered by our bank partner to originate consumer loans through multiple channels, including retail and healthcare point-of-sale (collectively "point-of-sale"), direct mail solicitation, digital marketing and through partner relationships. In the point-of-sale 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 bank partner are often extended to consumers who may have been declined by other providers of credit. We specialize in supporting this “second look” credit service in various market segments across the U.S. Additionally, we support lenders who market general purpose credit cards directly to consumers (collectively, the “direct-to-consumer” operations) through multiple channels enabling them to reach consumers through a diverse origination platform. Using our infrastructure and technology platform, we also provide loan servicing, including risk management and customer service outsourcing, for third parties.
We also report within our Credit and Other Investments segment: 1) the servicing income from our legacy credit card receivables, 2) the income earned from an investment in an equity-method investee that holds credit card receivables for which we are the servicer; and 3) gains or losses associated with investments previously made in consumer finance technology platforms. These include investments in companies engaged in mobile technologies, marketplace lending and other financial technologies. These investments are carried at cost. 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.
On March 13, 2020, a national emergency was declared under the National Emergencies Act due to a new strain of coronavirus ("COVID-19"). On March 11, 2021, the American Rescue Plan, a $1.9 trillion stimulus package that extended and expanded benefits provided under previous legislation, was signed into law. The impacts of the new law on the economy and our consumers is currently unknown.
The duration and severity of the effects of COVID-19 on our financial condition, results of operations and liquidity remain highly uncertain. Likewise, we do not know the duration and severity of the impact of COVID-19 on all members of the Company’s ecosystem – our bank partner, merchants and consumers – as well as our employees. We continue to monitor the ongoing pandemic and have modified certain business practices including minimizing employee travel and executing on a company-wide remote work program. These practices have also been adopted by certain of our third party service partners.
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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 (and changes thereon) of our Loans, interest and fees receivables, at fair value and Notes payable associated with structured financings recorded at fair value on our consolidated balance sheets and 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. Certain prior year amounts on our consolidated statements of operations have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
We have eliminated all significant intercompany balances and transactions for financial reporting purposes.
Loans, Interest and Fees Receivable
We maintain two categories of Loans, Interest and Fees Receivable on our consolidated balance sheets: those that are carried at fair value (Loans, interest and fees receivable, at fair value) and those that are carried at net amortized cost (Loans, interest and fees receivable, gross). For both categories of loans, interest and fees receivable, 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 estate large enough to pay the debt in full.
Loans, Interest and Fees Receivable, at Fair Value. Loans, interest and fees receivable held at fair value represent both the receivables underlying credit card securitization trusts (the "Securitized Receivables") and those receivables for which we elected the fair value option on January 1, 2020 (the "Fair Value Receivables"). Both the Securitized Receivables and the Fair Value Receivables are held by entities that qualify as variable interest entities ("VIE"), and are consolidated onto our consolidated balance sheets, some portfolios of which are unencumbered and some of which are still encumbered under structured or other financing facilities. Loans and finance receivables include accrued and unpaid interest and fees.
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, Gross. Our loans, interest and fees receivable, gross, currently consist of receivables associated with (a) a portion (those which are not part of our Fair Value Receivables) of our U.S. point-of-sale and direct-to-consumer financing and other credit products platform 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 for which we hold the vehicle title. We purchased auto loans with outstanding principal of $50.5 million and $47.4 million for the three months ended March 31, 2021 and 2020, respectively, through our pre-qualified network of independent automotive dealers and automotive finance companies.
As of March 31, 2021 and December 31, 2020, the weighted average remaining accretion period for the $34.0 million and $39.5 million of deferred revenue reflected in the consolidated balance sheets was 15 months and 14 months, respectively. Included within deferred revenue, are merchant fees and discounts on purchased loans of $19.6 million and $28.2 million as of March 31, 2021 and December 31, 2020, respectively.
As a result of the recent COVID-19 pandemic and subsequent declaration of a national emergency by the President on March 13, 2020 under the National Emergencies Act, certain consumers have been offered the ability to defer their payment without penalty during the national emergency period. On March 22, 2020, the federal bank regulatory agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus”, ("COVID-19 Guidance"). The COVID-19 Guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. In accordance with the COVID-19 Guidance, certain consumers negatively impacted by COVID-19 have been provided short-term payment deferrals and fee waivers. Receivables enrolled in these short-term payment deferrals continue to accrue interest and their delinquency status will not change through the deferment period. As of March 31, 2021 we continue to actively work with consumers that indicate hardship as a result of COVID-19; however, the number of impacted consumers continues to be a diminishing part of our overall receivable base. In order to establish appropriate reserves for this population we considered various factors such as subsequent payment behavior and additional requests by the consumer for further deferrals or hardship claims.
A roll-forward (in millions) of our allowance for uncollectible loans, interest and fees receivable by class of receivable is as follows:
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For the Three Months Ended March 31, 2021 |
Credit Cards |
Auto Finance |
Other Unsecured Lending Products |
Total |
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Allowance for uncollectible loans, interest and fees receivable: |
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Balance at beginning of period |
$ | (88.2 | ) | $ | (1.7 | ) | $ | (35.1 | ) | $ | (125.0 | ) | ||||
| Provision for loan losses | (4.2 | ) | (0.1 | ) | 0.2 | (4.1 | ) | |||||||||
| Charge offs | 19.0 | 0.6 | 7.3 | 26.9 | ||||||||||||
| Recoveries | (1.7 | ) | (0.3 | ) | (1.7 | ) | (3.7 | ) | ||||||||
| Balance at end of period | $ | (75.1 | ) | $ | (1.5 | ) | $ | (29.3 | ) | $ | (105.9 | ) | ||||
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As of March 31, 2021 |
Credit Cards |
Auto Finance |
Other Unsecured Lending Products |
Total |
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Allowance for uncollectible loans, interest and fees receivable: |
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Balance at end of period individually evaluated for impairment |
$ | — | $ | (0.1 | ) | $ | — | $ | (0.1 | ) | ||||||
| Balance at end of period collectively evaluated for impairment | $ | (75.1 | ) | $ | (1.4 | ) | $ | (29.3 | ) | $ | (105.8 | ) | ||||
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Loans, interest and fees receivable: |
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| Loans, interest and fees receivable, gross | $ | 322.9 | $ | 94.1 | $ | 175.9 | $ | 592.9 | ||||||||
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Loans, interest and fees receivable individually evaluated for impairment |
$ | — | $ | 1.7 | $ | — | $ | 1.7 | ||||||||
| Loans, interest and fees receivable collectively evaluated for impairment | $ | 322.9 | $ | 92.4 | $ | 175.9 | $ | 591.2 | ||||||||
|
For the Three Months Ended March 31, 2020 |
Credit Cards |
Auto Finance |
Other Unsecured Lending Products |
Total |
||||||||||||
|
Allowance for uncollectible loans, interest and fees receivable: |
||||||||||||||||
|
Balance at beginning of period |
$ | (121.3 | ) | $ | (1.6 | ) | $ | (63.4 | ) | $ | (186.3 | ) | ||||
|
Provision for loan losses |
(51.0 | ) | (0.8 | ) | (15.5 | ) | (67.3 | ) | ||||||||
|
Charge offs |
46.2 | 0.9 | 24.3 | 71.4 | ||||||||||||
|
Recoveries |
(2.3 | ) | (0.3 | ) | (2.1 | ) | (4.7 | ) | ||||||||
|
Balance at end of period |
$ | (128.4 | ) | $ | (1.8 | ) | $ | (56.7 | ) | $ | (186.9 | ) | ||||
|
As of December 31, 2020 |
Credit Cards |
Auto Finance |
Other Unsecured Lending Products |
Total |
||||||||||||
|
Allowance for uncollectible loans, interest and fees receivable: |
||||||||||||||||
|
Balance at end of period individually evaluated for impairment |
$ | — | $ | (0.3 | ) | $ | — | $ | (0.3 | ) | ||||||
|
Balance at end of period collectively evaluated for impairment |
$ | (88.2 | ) | $ | (1.4 | ) | $ | (35.1 | ) | $ | (124.7 | ) | ||||
|
Loans, interest and fees receivable: |
||||||||||||||||
|
Loans, interest and fees receivable, gross |
$ | 364.2 | $ | 93.2 | $ | 210.2 | $ | 667.6 | ||||||||
|
Loans, interest and fees receivable individually evaluated for impairment |
$ | — | $ | 2.3 | $ | — | $ | 2.3 | ||||||||
|
Loans, interest and fees receivable collectively evaluated for impairment |
$ | 364.2 | $ | 90.9 | $ | 210.2 | $ | 665.3 | ||||||||
Recoveries, noted above, consist of amounts received from the efforts of third-party collectors we employ and through the sale of charged-off accounts to unrelated third-parties. All proceeds received, associated with charged-off accounts, 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. For the three months ended March 31, 2021, $2.4 million and $1.3 million of our recoveries noted above related to collections from third-party collectors we employ and sales of charged-off accounts to unrelated third-parties, respectively. For the three months ended March 31, 2020, $3.2 million and $1.5 million of our recoveries noted above related to collections from third-party collectors we employ and sales of charged-off accounts to unrelated third-parties, respectively.
An aging of our delinquent loans, interest and fees receivable, gross (in millions) by class of receivable as of March 31, 2021 and December 31, 2020 is as follows:
|
As of March 31, 2021 |
Credit Cards |
Auto Finance |
Other Unsecured Lending Products |
Total |
||||||||||||
|
30-59 days past due |
$ | 7.5 | $ | 4.6 | $ | 3.4 | $ | 15.5 | ||||||||
| 60-89 days past due | 5.0 | 1.8 | 2.2 | 9.0 | ||||||||||||
| 90 or more days past due | 21.2 | 1.7 | 6.8 | 29.7 | ||||||||||||
| Delinquent loans, interest and fees receivable, gross | 33.7 | 8.1 | 12.4 | 54.2 | ||||||||||||
| Current loans, interest and fees receivable, gross | 289.2 | 86.0 | 163.5 | 538.7 | ||||||||||||
| Total loans, interest and fees receivable, gross | $ | 322.9 | $ | 94.1 | $ | 175.9 | $ | 592.9 | ||||||||
| Balance of loans greater than 90-days delinquent still accruing interest and fees | $ | — | $ | 1.1 | $ | — | $ | 1.1 | ||||||||
|
As of December 31, 2020 |
Credit Cards |
Auto Finance |
Other Unsecured Lending Products |
Total |
||||||||||||
|
30-59 days past due |
$ | 12.4 | $ | 7.6 | $ | 5.1 | $ | 25.1 | ||||||||
|
60-89 days past due |
8.0 | 2.8 | 3.8 | 14.6 | ||||||||||||
|
90 or more days past due |
19.9 | 2.1 | 9.5 | 31.5 | ||||||||||||
|
Delinquent loans, interest and fees receivable, gross |
40.3 | 12.5 | 18.4 | 71.2 | ||||||||||||
|
Current loans, interest and fees receivable, gross |
323.9 | 80.7 | 191.8 | 596.4 | ||||||||||||
|
Total loans, interest and fees receivable, gross |
$ | 364.2 | $ | 93.2 | $ | 210.2 | $ | 667.6 | ||||||||
|
Balance of loans greater than 90-days delinquent still accruing interest and fees |
$ | — | $ | 1.5 | $ | — | $ | 1.5 | ||||||||
Troubled Debt Restructurings. As part of ongoing collection efforts, once an account, the receivable of which is included in our Credit and Other Investments segment, becomes 90 days or more past due, the related receivable 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 above referenced COVID-19 Guidance issued by federal bank regulatory agencies, in consultation with the FASB staff, concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were impacted by COVID-19 and who were less than 30 days past due as of the implementation date of a relief program are not TDRs. Although we are not a financial institution and therefore not directly subject to the COVID-19 Guidance, we believe this constitutes an interpretation of GAAP and therefore should be applied to our accounting circumstances. As a result, the below tables exclude accounts that are included under that guidance.
The following table details by class of receivable, the number and amount of modified loans, including TDRs that have been re-aged, as of March 31, 2021 and December 31, 2020:
|
As of |
||||||||||||||||
|
March 31, 2021 |
December 31, 2020 |
|||||||||||||||
|
Point-of-sale |
Direct-to-consumer |
Point-of-sale |
Direct-to-consumer |
|||||||||||||
|
Number of TDRs |
11,488 | 31,184 | 12,394 | 37,784 | ||||||||||||
|
Number of TDRs that have been re-aged |
2,528 | 7,453 | 2,788 | 7,846 | ||||||||||||
|
Amount of TDRs on non-accrual status (in thousands) |
$ | 13,539 | $ | 21,872 | $ | 14,537 | $ | 26,989 | ||||||||
|
Amount of TDRs on non-accrual status above that have been re-aged (in thousands) |
$ | 4,115 | $ | 6,387 | $ | 4,662 | $ | 6,890 | ||||||||
|
Carrying value of TDRs (in thousands) |
$ | 9,372 | $ | 12,607 | $ | 9,583 | $ | 14,287 | ||||||||
|
TDRs - Performing (carrying value, in thousands)* |
$ | 8,134 | $ | 11,500 | $ | 7,420 | $ | 11,855 | ||||||||
|
TDRs - Nonperforming (carrying value, in thousands)* |
$ | 1,238 | $ | 1,107 | $ | 2,163 | $ | 2,432 | ||||||||
*“TDRs - Performing” include accounts that are current on all amounts owed, while “TDRs - Nonperforming” include all accounts with past due amounts owed.
We do not separately reserve or impair these receivables outside of our general reserve process.
The Company modified 51,424 and 43,466 accounts in the amount of $59.2 million and $55.3 million during the three month periods ended March 31, 2021 and March 31, 2020, 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 |
||||||||||||||||
|
March 31, 2021 |
March 31, 2020 |
|||||||||||||||
|
Point-of-sale |
Direct-to-consumer |
Point-of-sale |
Direct-to-consumer |
|||||||||||||
|
Number of accounts |
2,448 | 6,304 | 3,310 | 4,740 | ||||||||||||
|
Loan balance at time of charge off (in thousands) |
$ | 3,364 | $ | 5,553 | $ | 4,965 | $ | 4,695 | ||||||||
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses reflect both the billed and unbilled amounts owed at the end of a period for services rendered. Commencing in July 2019, accounts payable and accrued expenses includes payments owed under a deferred payment program started with an unrelated third-party for a portion of our marketing expenditures. As a result of this agreement, we were able to extend the payment terms associated with our growing marketing spend between 10-37 months.
Income Taxes
We experienced an effective tax rate of 15.0% for the three months ended March 31, 2021, compared to 19.3% for the three months ended March 31, 2020.
Our effective tax rate for the three months ended March 31, 2021 is below the statutory rate due to (1) deductions associated with the exercise of stock options and the vesting of restricted stock at times when the fair value of our stock exceeded such share-based awards’ grant date values, (2) our deduction for income tax purposes of amounts characterized in our consolidated financial statements as dividends on a preferred stock issuance, such amounts constituting deductible interest expense on a debt issuance for tax purposes, and (3) our release of state tax valuation allowances. Partially offsetting such effects on our effective tax rate are (1) the effects of executive compensation deduction limits under Section 162(m) of the Internal Revenue Code of 1986, as amended, and (2) state and foreign income tax expense.
Our effective tax rate for the three months ended March 31, 2020 was below the statutory rate principally due to our deduction for income tax purposes of amounts characterized in our consolidated financial statements as dividends on a preferred stock issuance, such amounts constituting deductible interest expense on a debt issuance for tax purposes, the aforementioned being partially offset by state and foreign income tax expense during such period.
We report interest expense associated with our income tax liabilities (including accrued liabilities for uncertain tax positions) within our income tax line item on our consolidated statements of operations. We likewise report within such line item the reversal of interest expense associated with our accrual liabilities for uncertain tax positions to the extent we resolve such liabilities in a manner favorable to our accruals therefor. We had de minimis interest expense or reversals thereof during the three months ended March 31, 2021, and 2020.
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, discounts and merchant fees paid or received associated with installment or auto loans that are not included as part of our Fair Value Receivables are deferred and amortized over the average life of the related loans using the effective interest method. Premiums, discounts and merchant fees paid or received associated with Fair Value Receivables are recognized upon receivable acquisition. 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 fees associated with the credit products, including the receivables underlying our U.S. point-of-sale finance and direct-to-consumer platform, and our legacy credit card receivables which include the recognition of annual fee billings and cash advance fees among others.
Other revenue
Other revenue includes revenues associated with ancillary product offerings, interchange revenues and servicing income. We recognize these fees as income in the period earned.
Loss on repurchase of convertible senior notes
In periods where we repurchase outstanding convertible senior notes, we record any discount or premium paid for the repurchase (including accrued interest) relative to the amortized book value of the notes. In the three months ended March 31, 2021, we repurchased $14.7 million in face amount of our outstanding convertible senior notes for $18.6 million in cash (including accrued interest). The repurchase resulted in a loss of approximately $7.8 million (including the convertible senior notes’ applicable share of deferred costs, which were written off in connection with the repurchase). Upon acquisition, the notes were retired.
Other non-operating revenue
Other non-operating revenue includes revenues associated with investments in equity method investees and other revenues not associated with our ongoing business operations.
Revenue from Contracts with Customers
Components (in thousands) of our revenue from contracts with customers is as follows:
|
Credit and |
||||||||||||
|
For the Three Months Ended March 31, 2021 |
Other Investments |
Auto Finance |
Total |
|||||||||
|
Interchange revenues, net (1) |
$ | 2,622 | $ | — | $ | 2,622 | ||||||
|
Servicing income |
388 | 325 | 713 | |||||||||
|
Service charges and other customer related fees |
1,229 | 15 | 1,244 | |||||||||
|
Total revenue from contracts with customers |
$ | 4,239 | $ | 340 | $ | 4,579 | ||||||
(1) Interchange revenue is presented net of customer reward expense.
|
Credit and |
||||||||||||
|
For the Three Months Ended March 31, 2020 |
Other Investments |
Auto Finance |
Total |
|||||||||
|
Interchange revenues, net (1) |
$ | 1,980 | $ | — | $ | 1,980 | ||||||
|
Servicing income |
384 | 220 | 604 | |||||||||
|
Service charges and other customer related fees |
125 | 17 | 142 | |||||||||
|
Total revenue from contracts with customers |
$ | 2,489 | $ | 237 | $ | 2,726 | ||||||
(1) Interchange revenue is presented net of customer reward expense.
Recent Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13, Measurement of Credit Losses on Financial Instruments. The guidance requires an assessment of credit losses based on expected rather than incurred losses (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 FASB has added several technical amendments (ASU 2018-19, 2019-04, 2019-10 and 2019-11) to clarify technical aspects of the guidance and applicability to specific financial instruments or transactions. In May 2019, the FASB issued ASU 2019-05, which allows entities to measure assets in the scope of ASC 326-20, except held to maturity securities, using the fair value option when they adopt the new credit impairment standard. The election can be made on an instrument by instrument basis. 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 (and ASU 2019-05) was initially effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The FASB recently delayed the effective date of this standard until annual and interim periods beginning after December 15, 2022 for non-accelerated and smaller reporting company filers, with early adoption permitted for smaller reporting companies (among others). We are currently in the process of reviewing accounting interpretations, including the recently added fair value option, 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 for our amortized cost receivables given the change to expected losses for the estimated life of the financial asset. If the fair value option is elected for some or all of our eligible receivables, we would expect more potential volatility in the recorded value of the assets as these receivables are remeasured each period. The extent of the financial statement impact will depend on the asset quality of the portfolio, and economic conditions and forecasts at adoption.
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 March 31, 2021, and based on our evaluation we did not identify any recognized or nonrecognized subsequent events that would have required further adjustments to our consolidated financial statements.
|
3. |
Segment Reporting |
We operate primarily within one industry and manage our business through the following two reportable segments: Credit and Other Investments, and Auto Finance.
Summary operating segment information (in thousands) is as follows:
|
Three Months Ended March 31, 2021 |
Credit and Other Investments |
Auto Finance |
Total |
|||||||||
|
Revenue: |
||||||||||||
|
Consumer loans, including past due fees |
$ | 94,110 | $ | 8,186 | $ | 102,296 | ||||||
|
Fees and related income on earning assets |
37,003 | 17 | 37,020 | |||||||||
|
Other revenue |
4,238 | 341 | 4,579 | |||||||||
|
Other non-operating revenue |
835 | 5 | 840 | |||||||||
|
Total revenue |
136,186 | 8,549 | 144,735 | |||||||||
|
Interest expense |
(12,044 | ) | (254 | ) | (12,298 | ) | ||||||
|
Loss on repurchase of convertible senior notes |
(7,807 | ) | — | (7,807 | ) | |||||||
|
Provision for losses on loans, interest and fees receivable recorded at net realizable value |
(4,007 | ) | (128 | ) | (4,135 | ) | ||||||
|
Changes in fair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value |
(27,491 | ) | — | (27,491 | ) | |||||||
|
Net margin |
$ | 84,837 | $ | 8,167 | $ | 93,004 | ||||||
|
Income before income taxes |
$ | 49,304 | $ | 2,493 | $ | 51,797 | ||||||
|
Income tax expense |
$ | (7,163 | ) | $ | (607 | ) | $ | (7,770 | ) | |||
|
Total assets |
$ | 1,117,215 | $ | 82,280 | $ | 1,199,495 | ||||||
|
Three Months Ended March 31, 2020 |
Credit and Other Investments |
Auto Finance |
Total |
|||||||||
|
Revenue: |
||||||||||||
|
Consumer loans, including past due fees |
$ | 95,253 | $ | 7,894 | $ | 103,147 | ||||||
|
Fees and related income on earning assets |
34,627 | 18 | 34,645 | |||||||||
|
Other revenue |
2,489 | 237 | 2,726 | |||||||||
|
Other non-operating revenue |
(13 | ) | 3 | (10 | ) | |||||||
|
Total revenue |
132,356 | 8,152 | 140,508 | |||||||||
|
Interest expense |
(13,175 | ) | (409 | ) | (13,584 | ) | ||||||
|
Provision for losses on loans, interest and fees receivable recorded at net realizable value |
(66,530 | ) | (806 | ) | (67,336 | ) | ||||||
|
Changes in fair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value |
(15,191 | ) | — | (15,191 | ) | |||||||
|
Net margin |
$ | 37,460 | $ | 6,937 | $ | 44,397 | ||||||
|
Income before income taxes |
$ | 5,067 | $ | 1,580 | $ | 6,647 | ||||||
|
Income tax expense |
$ | (876 | ) | $ | (409 | ) | $ | (1,285 | ) | |||
|
Total assets |
$ | 891,748 | $ | 80,136 | $ | 971,884 | ||||||
|
4. |
Shareholders’ Equity and Preferred Stock |
On November 26, 2014, we and certain of our subsidiaries entered into a Loan and Security Agreement with Dove Ventures, LLC, a Nevada limited liability company (“Dove”). The agreement provided for a senior secured term loan facility in an amount of up to $40.0 million at any time outstanding. On December 27, 2019, the Company issued 400,000 shares (10,000,000 shares authorized, 400,000 shares outstanding) of its Series A Preferred Stock with an aggregate initial liquidation preference of $40.0 million, in exchange for full satisfaction of the $40.0 million that the Company owed Dove under the Loan and Security Agreement. Dividends on the preferred stock are 6% per annum (cumulative, non-compounding) and are payable as declared, and in preference to any common stock dividends, in cash. The Series A Preferred Stock is perpetual and has no maturity date. The Company may, at its option, redeem the shares of Series A Preferred Stock on or after January 1, 2025 at a redemption price equal to $100 per share, plus any accumulated and unpaid dividends. At the request of a majority of the holders of the Series A Preferred Stock, the Company shall offer to redeem all of the Series A Preferred Stock at a redemption price equal to $100 per share, plus any accumulated and unpaid dividends, at the option of the holders thereof, on or after January 1, 2024. Upon the election by the holders of a majority of the Series A Preferred Stock, each share of the Series A Preferred Stock is convertible into the number of shares of the Company’s common stock as is determined by dividing (i) the sum of (a) $100 and (b) any accumulated and unpaid dividends on such share by (ii) an initial conversion price equal to $10 per share, subject to certain adjustment in certain circumstances to prevent dilution. Given the redemption rights contained within the Series A Preferred Stock, we account for the outstanding preferred stock as temporary equity in the consolidated balance sheets. Dividends paid on the Series A Preferred Stock are deducted from Net income attributable to controlling interests to derive Net income attributable to common shareholders. The common stock issuable upon conversion of Series A Preferred Stock is included in our calculation of Net income attributable to common shareholders per share—diluted. See Note 12, “Net Income Attributable to Controlling Interests Per Common Share” for more information.
Dove is a limited liability company owned by three trusts. David G. Hanna is the sole shareholder and the President of the corporation that serves as the sole trustee of one of the trusts, and David G. Hanna and members of his immediate family are the beneficiaries of this trust. Frank J. Hanna, III is the sole shareholder and the President of the corporation that serves as the sole trustee of the other two trusts, and Frank J. Hanna, III and members of his immediate family are the beneficiaries of these other two trusts.
During the three months ended March 31, 2021 and 2020, we repurchased and contemporaneously retired 9,928 and 74,724 shares of our common stock at an aggregate cost of $297,000 and $559,000, 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 March 31, 2021 and December 31, 2020, 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.
On November 14, 2019, a wholly-owned subsidiary issued 50.5 million Class B preferred units at a purchase price of $1.00 per unit to an unrelated third party. The units carry a 16% preferred return to be paid quarterly, with up to 6 percentage points of the preferred return to be paid through the issuance of additional units or cash, at our election. The units have both call and put rights and are also subject to various covenants including a minimum book value, which if not satisfied, could allow for the securities to be put back to the subsidiary. On March 30, 2020, the subsidiary issued an additional 50.0 million Class B preferred units under the same terms. The proceeds from the transaction are being used for general corporate purposes. We have included the issuance of these Class B preferred units as temporary noncontrolling interest on the consolidated balance sheets. Dividends paid on the Class B preferred units are deducted from Net income attributable to controlling interests to derive Net income attributable to common shareholders. See Note 12, “Net Income Attributable to Controlling Interests Per Common Share” for more information.
|
5. |
Investment in Equity-Method Investee |
Our equity-method investment outstanding at March 31, 2021 consists of our 66.7% interest in a joint venture formed to purchase a credit card receivable portfolio.
In the following tables, we summarize (in thousands) balance sheet and results of operations data for our equity-method investee:
|
As of |
||||||||
|
March 31, 2021 |
December 31, 2020 | |||||||
|
Loans, interest and fees receivables, at fair value |
$ | 1,718 | $ | 1,994 | ||||
|
Total assets |
$ | 1,848 | $ | 2,105 | ||||
|
Total liabilities |
$ | 9 | $ | 10 | ||||
|
Members’ capital |
$ | 1,839 | $ | 2,095 | ||||
|
Three Months Ended March 31, |
||||||||
|
2021 |
2020 |
|||||||
|
Net margin |
$ | 55 | $ | (61 | ) | |||
|
Net income |
$ | 29 | $ | (99 | ) | |||
|
Net income attributable to our equity investment investee |
$ | 19 | $ | (66 | ) | |||
|
6. |
Fair Values of Assets and Liabilities |
As previously discussed, as of January 1, 2020, we elected the fair value option to account for certain loans receivable associated with our point-of-sale and direct-to-consumer platform that are acquired on or after January 1, 2020. We estimate the fair value of these receivables using a discounted cash flow model, and reevaluate the fair value of our Fair Value Receivables at the end of each quarter. Additionally, we may adjust our models to reflect macro events that we believe market participants would consider relevant. With the aforementioned market impacts of COVID-19 and related government stimulus and relief measures, we have included some expected market degradation in our model to reflect the possibility of delinquency rates increasing in the near term (and the corresponding increase in chargeoffs and decrease in payments) above the level that historical trends would suggest.
We previously elected the fair value option with respect to 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.
Fair value differs from amortized cost accounting in various ways. Under the fair value option credit losses are recognized through income as they are incurred rather than through the establishment of an allowance and provision for losses. We update our fair value analysis each quarter, with changes since the prior reporting period reflected as a component of "Changes in fair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value" in the consolidated statements of operations. Changes in interest rates, credit spreads, realized and projected credit losses and cash flow timing will lead to changes in the fair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value and therefore impact earnings.
Fair value differs from amortized cost accounting in the following ways:
| • | Receivables and notes are recorded at their fair value, not their principal and fee balance or cost basis; | |
| • | The fair value of the loans takes into consideration net charge-offs for the remaining life of the loans with no separate allowance for loan loss calculation; | |
| • | Certain fee billings (such as annual or merchant fees) and expenses of loans and notes are no longer deferred but recognized (when billed or incurred) in income or expense, respectively; | |
| • | Changes in the fair value of loans and notes impact recorded revenues; and | |
| • | Net charge-offs are recognized as they occur. |
For all of our other receivables and 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 these other items 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 March 31, 2021 and December 31, 2020 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 March 31, 2021 (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 | $ | — | $ | — | $ | 520,556 | $ | 453,058 | ||||||||
|
Loans, interest and fees receivable, at fair value |
$ | — | $ | — | $ | 481,434 | $ | 481,434 | ||||||||
|
Assets – As of December 31, 2020 (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 |
$ | — | $ | — | $ | 586,908 | $ | 503,139 | ||||||||
|
Loans, interest and fees receivable, at fair value |
$ | — | $ | — | $ | 417,098 | $ | 417,098 | ||||||||
|
(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 consolidated statements of operations as a component of "Changes in fair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value". 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 three months ended March 31, 2021 and 2020:
|
Loans, Interest and Fees Receivables, at Fair Value |
||||||||
|
2021 |
2020 |
|||||||
|
Balance at January 1, |
$ | 417,098 | $ | 4,386 | ||||
|
Total gains—realized/unrealized: |
||||||||
|
Net revaluations of loans, interest and fees receivable, at fair value |
(13,303 | ) | (15,487 | ) | ||||
| Chargeoffs, net of recoveries | (14,316 | ) | (266 | ) | ||||
| Purchases | 250,469 | 102,485 | ||||||
| Settlements | (211,065 | ) | (13,765 | ) | ||||
| Finance and fees | 52,551 | 12,041 | ||||||
| Balance at March 31, | $ | 481,434 | $ | 89,394 | ||||
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 Changes in fair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value category in our consolidated statements of operations. 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 Revenue - 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 March 31, 2021 and December 31, 2020:
Quantitative Information about Level 3 Fair Value Measurements
|
Fair Value Measurement |
Fair Value at March 31, 2021 (in thousands) |
Valuation Technique |
Unobservable Input |
Range (Weighted Average) |
|||||||
|
Loans, interest and fees receivable, at fair value |
$ | 481,434 |
Discounted cash flows |
Gross yield, net of finance charge charge-offs |
22.7% to 52.7% (40.7%) | ||||||
|
Payment rate |
4.6% to 11.9% (9.1%) | ||||||||||
|
Expected principal credit loss rate |
3.4% to 30.0% (25.5%) | ||||||||||
|
Servicing rate |
3.0% to 10.3% (4.1%) | ||||||||||
| Discount rate | 12.7% to 13.5% (13.2%) | ||||||||||
Quantitative Information about Level 3 Fair Value Measurements
|
Fair Value Measurement |
Fair Value at December 31, 2020 (in thousands) |
Valuation Technique |
Unobservable Input |
Range (Weighted Average) |
|||||||
|
Loans, interest and fees receivable, at fair value |
$ | 417,098 |
Discounted cash flows |
Gross yield, net of finance charge charge-offs |
22.7% to 56.5% (43.3%) | ||||||
|
Payment rate |
3.9% to 11.4% (8.5%) | ||||||||||
|
Expected principal credit loss rate |
6.9% to 31.4% (24.8%) | ||||||||||
|
Servicing rate |
2.9% to 14.2% (4.3%) | ||||||||||
|
Discount rate |
12.8% to 13.5% (13.3%) | ||||||||||
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 March 31, 2021 and December 31, 2020 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 March 31, 2021 |
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 |
$ | — | $ | — | $ | 814,940 | $ | 814,940 | ||||||||
| Amortizing debt facilities | $ | — | $ | — | $ | 24,311 | $ | 24,311 | ||||||||
| Convertible senior notes | $ | — | $ | 24,416 | $ | — | $ | 13,818 | ||||||||
|
Liabilities carried at fair value |
||||||||||||||||
|
Notes payable associated with structured financings, at fair value |
$ | — | $ | — | $ | 2,791 | $ | 2,791 | ||||||||
|
Liabilities – As of December 31, 2020 |
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 |
$ | — | $ | — | $ | 857,068 | $ | 857,068 | ||||||||
|
Amortizing debt facilities |
$ | — | $ | — | $ | 25,542 | $ | 25,542 | ||||||||
|
Convertible senior notes |
$ | — | $ | 41,284 | $ | — | $ | 24,386 | ||||||||
|
Liabilities carried at fair value |
||||||||||||||||
|
Notes payable associated with structured financings, at fair value |
$ | — | $ | — | $ | 2,919 | $ | 2,919 | ||||||||
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 consolidated statements of operations as a component of "Changes in fair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value". For our 5.875% convertible senior notes due 2035 (“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 three months ended March 31, 2021 and 2020.
| Notes Payable Associated with Structured Financings, at Fair Value | ||||||||
|
2021 |
2020 |
|||||||
|
Balance at January 1, |
$ | 2,919 | $ | 3,920 | ||||
|
Total (gains) losses—realized/unrealized: |
||||||||
|
Net revaluations of notes payable associated with structured financings, at fair value |
(128 | ) | (562 | ) | ||||
|
Repayments on outstanding notes payable, net |
— | — | ||||||
|
Balance at March 31, |
$ | 2,791 | $ | 3,358 | ||||
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 loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value on 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 gross yield, payment rates, expected credit loss rates, servicing costs, and discount 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 March 31, 2021 and December 31, 2020:
Quantitative Information about Level 3 Fair Value Measurements
|
Fair Value Measurement |
Fair Value at March 31, 2021 (in thousands) |
Valuation Technique |
Unobservable Input |
Weighted Average |
|||||||
|
Notes payable associated with structured financings, at fair value |
$ | 2,791 |
Discounted cash flows |
Gross yield, net of finance charge charge-offs |
25.0 | % | |||||
| Payment rate | 4.6 | % | |||||||||
| Expected principal credit loss rate | 7.5 | % | |||||||||
|
Discount rate |
13.2 | % | |||||||||
Quantitative Information about Level 3 Fair Value Measurements
|
Fair Value Measurement |
Fair Value at December 31, 2020 (in thousands) |
Valuation Technique |
Unobservable Input |
Weighted Average |
|||||||
|
Notes payable associated with structured financings, at fair value |
$ | 2,919 |
Discounted cash flows |
Gross yield, net of finance charge charge-offs |
23.7 | % | |||||
|
Payment rate |
3.9 | % | |||||||||
|
Expected principal credit loss rate |
7.9 | % | |||||||||
|
Discount rate |
13.2 | % | |||||||||
Other Relevant Data
Other relevant data (in thousands) as of March 31, 2021 and December 31, 2020 concerning certain assets and liabilities we carry at fair value are as follows:
|
As of March 31, 2021 |
Loans, Interest and Fees Receivable at Fair Value | Loans, Interest and Fees Receivable Pledged as Collateral under Structured Financings at Fair Value | ||||||
| Aggregate unpaid gross balance of loans, interest and fees receivable that are reported at fair value | $ | 574 | $ | 593,129 | ||||
| Aggregate unpaid principal balance included within loans, interest and fees receivable that are reported at fair value | $ | 538 | $ | 560,225 | ||||
|
Aggregate fair value of loans, interest and fees receivable that are reported at fair value |
$ | 494 | $ | 480,940 | ||||
| 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) | $ | — | $ | 2,023 | ||||
| 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 | $ | 9 | $ | 17,097 | ||||
|
As of December 31, 2020 |
Loans, Interest and Fees Receivable at Fair Value | Loans, Interest and Fees Receivable Pledged as Collateral under Structured Financings at Fair Value | ||||||
| Aggregate unpaid gross balance of loans, interest and fees receivable that are reported at fair value | $ | 630 | $ | 515,434 | ||||
|
Aggregate unpaid principal balance included within loans, interest and fees receivable that are reported at fair value |
$ | 589 | $ | 487,779 | ||||
|
Aggregate fair value of loans, interest and fees receivable that are reported at fair value |
$ | 540 | $ | 416,558 | ||||
|
Aggregate fair value of receivables carried at fair value that are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies) |
$ | 1 | $ | 1,847 | ||||
|
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 |
$ | 4 | $ | 12,972 | ||||
|
Notes Payable |
Notes Payable Associated with Structured Financings, at Fair Value as of March 31, 2021 |
Notes Payable Associated with Structured Financings, at Fair Value as of December 31, 2020 |
||||||
|
Aggregate unpaid principal balance of notes payable |
$ | 101,314 | $ | 101,314 | ||||
|
Aggregate fair value of notes payable |
$ | 2,791 | $ | 2,919 | ||||
|
7. |
Variable Interest Entities |
The following table presents a summary of VIEs in which we had continuing involvement or held a variable interest (in millions):
|
As of |
||||||||
|
March 31, 2021 |
December 31, 2020 |
|||||||
|
Unrestricted cash and cash equivalents |
$ | 131.7 | $ | 96.6 | ||||
|
Restricted cash and cash equivalents |
29.0 | 70.2 | ||||||
|
Loans, interest and fees receivable, at fair value |
424.5 | 374.2 | ||||||
|
Loans, interest and fees receivable, gross |
489.0 | 560.2 | ||||||
|
Allowances for uncollectible loans, interest and fees receivable |
(102.7 | ) | (120.9 | ) | ||||
|
Deferred revenue |
(7.4 | ) | (10.3 | ) | ||||
|
Total Assets held by VIEs |
$ | 964.1 | $ | 970.0 | ||||
|
Notes Payable, net held by VIEs |
$ | 781.0 | $ | 827.1 | ||||
|
Notes Payable, at fair value held by VIEs |
$ | 2.8 | $ | 2.9 | ||||
|
Maximum exposure to loss due to involvement with VIEs |
$ | 916.8 | $ | 864.4 | ||||
|
8. |
Leases |
We have operating leases primarily associated with our corporate offices and regional service centers as well as for certain equipment. Our leases have remaining lease terms of 1 to 5 years, some of which include options, at our discretion, to extend the leases for additional periods generally on one-year revolving periods. Other leases allow for us to terminate the lease based on appropriate notification periods. For certain of our leased offices, we sublease a portion of the unoccupied space. The terms of the sublease arrangement generally coincide with the underlying lease. The components of lease expense associated with our lease liabilities and supplemental cash flow information related to those leases were as follows (dollars in thousands):
|
For the Three Months Ended March 31, |
||||||||
|
2021 |
2020 |
|||||||
|
Operating lease cost, gross |
$ | 1,726 | $ | 1,720 | ||||
|
Sublease income |
(1,293 | ) | (1,285 | ) | ||||
|
Net Operating lease cost |
$ | 433 | $ | 435 | ||||
|
Cash paid under operating leases, gross |
$ | 2,584 | $ | 2,540 | ||||
|
Weighted average remaining lease term - months |
17 | |||||||
|
Weighted average discount rate |
6.7 | % | ||||||
As of March 31, 2021, maturities of lease liabilities were as follows (in thousands):
|
Gross Lease Payment |
Payments received from Sublease |
Net Lease Payment |
||||||||||
|
2021 (excluding the three months ended March 31, 2021) |
$ | 7,848 | $ | (5,499 | ) | $ | 2,349 | |||||
|
2022 |
4,632 | (3,112 | ) | 1,520 | ||||||||
|
2023 |
350 | — | 350 | |||||||||
|
2024 |
156 | — | 156 | |||||||||
|
2025 |
84 | — | 84 | |||||||||
|
Thereafter |
4 | — | 4 | |||||||||
|
Total lease payments |
13,074 | (8,611 | ) | 4,463 | ||||||||
| Less imputed interest | (1,377 | ) | ||||||||||
| Total | $ | 11,697 | ||||||||||
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 March 31, 2021, we had no material non-cancelable capital leases with initial or remaining terms of more than one year.
| 9. |
Notes Payable |
Notes Payable, at Face Value and Notes Payable to Related Parties
Other notes payable outstanding as of March 31, 2021 and December 31, 2020 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 |
||||||||
|
March 31, 2021 |
December 31, 2020 |
|||||||
|
Revolving credit facilities at a weighted average interest rate equal to 5.0% as of March 31, 2021 (4.8% as of December 31, 2020) secured by the financial and operating assets of CAR and/or certain receivables and restricted cash with a combined aggregate carrying amount of $903.5 million as of March 31, 2021 ($943.6 million as of December 31, 2020) |
||||||||
|
Revolving credit facility, not to exceed $55.0 million (expiring November 1, 2023) (1) (2) (3) |
$ | 37.6 | $ | 34.9 | ||||
|
Revolving credit facility, not to exceed $50.0 million (expiring October 30, 2022) (2) (3) (4) (5) |
— | 50.0 | ||||||
| Revolving credit facility, not to exceed $70.0 million (expiring February 8, 2022) (2) (3) (4) (5) (6) | 5.8 | 5.8 | ||||||
| Revolving credit facility, not to exceed $100.0 million (expiring October 15, 2022) (2) (3) (4) (5) (6) | 10.0 | 10.0 | ||||||
|
Revolving credit facility, not to exceed $15.0 million (expiring July 15, 2021) (2) (3) (4) (5) |
6.9 | 4.7 | ||||||
| Revolving credit facility, not to exceed $100.0 million (expiring August 15, 2022) (2) (3) (4) (5) (6) | 2.5 | 2.5 | ||||||
| Revolving credit facility, not to exceed $200.0 million (expiring December 15, 2022) (3) (4) (5) (6) | 200.0 | 200.0 | ||||||
| Revolving credit facility, not to exceed $200.0 million (expiring May 15, 2024) (3) (4) (5) (6) | 200.0 | 200.0 | ||||||
|
Revolving credit facility, not to exceed $25.0 million (expiring April 21, 2023) (2) (3) (4) (5) |
— | 7.8 | ||||||
| Revolving credit facility, not to exceed $100.0 million (expiring January 15, 2025) (3) (4) (5) (6) | 100.0 | 100.0 | ||||||
|
Revolving credit facility, not to exceed $250.0 million (expiring October 15, 2025) (3) (4) (5) (6) |
250.0 | 250.0 | ||||||
| Revolving credit facility, not to exceed $15.0 million (expiring February 15, 2024) (3) (4) (5) | 10.0 | — | ||||||
|
Other facilities |
||||||||
|
Other debt with a weighted average interest rate equal to 2.7% |
3.2 | 3.2 | ||||||
| Unsecured term debt (expiring August 26, 2024) with a weighted average interest rate equal to 8.0% (3) | 17.4 | 17.4 | ||||||
| Amortizing debt facility (expiring September 30, 2021) with a weighted average interest rate equal to 4.6% (2) (3) (4) (5) | 3.7 | 5.0 | ||||||
|
Total notes payable before unamortized debt issuance costs and discounts |
847.1 | 891.3 | ||||||
|
Unamortized debt issuance costs and discounts |
(7.8 | ) | (8.7 | ) | ||||
| Total notes payable outstanding, net | $ | 839.3 | $ | 882.6 | ||||
|
(1) |
Loan is subject to certain affirmative covenants, including a coverage ratio, a leverage ratio and a collateral performance test, the failure of which could result in required early repayment of all or a portion of the outstanding balance by our CAR Auto Finance operations. |
|
(2) |
These notes reflect modifications to either extend the maturity date, increase the loan amount or both, and are treated as accounting modifications. |
|
(3) |
See below for additional information. |
| (4) | Loans are subject to certain affirmative covenants tied to default rates and other performance metrics the failure of which could result in required early repayment of the remaining unamortized balances of the notes. |
|
(5) |
Loans are associated with VIEs. |
|
(6) |
Creditors do not have recourse against the general assets of the Company but only to the collateral within the VIEs. |
| * | As of March 31, 2021, the LIBOR rate was 0.11% and the prime rate was 3.25%. |
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 $0.0 million was drawn as of March 31, 2021). This facility is secured by the loans, interest and fees receivable and related restricted cash and accrues interest at an annual rate equal to LIBOR plus 3.0%. The facility matures on October 30, 2022 and is subject to certain affirmative covenants, including a liquidity test and an eligibility test, the failure of which could result in required early repayment of all or a portion of the outstanding balance. The facility is guaranteed by Atlanticus, which is required to maintain certain minimum liquidity levels.
In October 2016, we (through a wholly owned subsidiary) entered a revolving credit facility with an initial $40.0 million borrowing limit available to the extent of outstanding eligible principal receivables of our CAR subsidiary (of which $37.6 million was drawn as of March 31, 2021). This facility is secured by the financial and operating assets of CAR and accrues interest at an annual rate equal to LIBOR plus a range between 2.4% and 3.0% based on certain ratios. The loan is subject to certain affirmative covenants, including a coverage ratio, a leverage ratio and a collateral performance test, the failure of which could result in required early repayment of all or a portion of the outstanding balance. In periods subsequent to October 2016, we amended the original agreement to either extend the maturity date and/or expand the capacity of this revolving credit facility. As of March 31, 2021, the borrowing limit was $55.0 million and the facility matures on November 1, 2023. There were no other material changes to the existing terms or conditions as a result of these amendments and the new maturity date and borrowing limit are reflected in the table above.
In February 2017, we (through a wholly owned subsidiary) established a program under which we sell certain receivables to a consolidated trust in exchange for notes issued by the trust. The notes are secured by the receivables and other assets of the trust. Simultaneously with the establishment of the program, the trust issued a series of variable funding notes and sold an aggregate amount of up to $90.0 million (subsequently reduced to $70.0 million) of such notes (of which $5.8 million was outstanding as of March 31, 2021) to an unaffiliated third party pursuant to a facility that can be drawn upon to the extent of outstanding eligible receivables. The interest rate on the notes is fixed at 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 $12.5 million was outstanding as of March 31, 2021) to separate unaffiliated third parties pursuant to facilities that can be drawn upon to the extent of outstanding eligible receivables. Interest rates on the notes are based on commercial paper rates plus 3.15% and LIBOR plus 4.875%, respectively. The facilities mature on October 15, 2022 and August 15, 2022, 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 December 2017, we (through a wholly owned subsidiary) entered a revolving credit facility with a (as subsequently amended) $25.0 million revolving borrowing limit that is available to the extent of outstanding eligible principal receivables (of which $0.0 million was drawn as of March 31, 2021). This facility is secured by the loans, interest and fees receivable and related restricted cash and accrues interest at an annual rate equal to LIBOR plus 3.5%. The facility matures on April 21, 2023 and is subject to certain affirmative covenants, including payment, delinquency and charge-off tests, the failure of which could result in required early repayment of all or a portion of the outstanding balance. The note is guaranteed by Atlanticus.
In June 2019, we (through a wholly owned subsidiary) entered a revolving credit facility with a $15.0 million revolving borrowing limit that is available to the extent of outstanding eligible principal receivables (of which $6.9 million was drawn as of March 31, 2021). This facility is secured by the loans, interest and fees receivable and related restricted cash and accrues interest at an annual rate equal to the prime rate. The note is guaranteed by Atlanticus.
In June 2019, we sold $200.0 million of ABS secured by certain credit card receivables (expiring December 15, 2022). A portion of the proceeds from the sale was used to pay-down our existing facilities associated with our credit card receivables. The terms of the ABS allow for a two-year revolving structure with a subsequent 12-month to 18-month amortization period. The weighted average interest rate on the securities is fixed at 5.37%.
In August 2019, we repurchased $54.4 million in face amount of our outstanding convertible senior notes for $16.3 million in cash (including accrued interest) and the issuance of a $17.4 million term note, which bears interest at a fixed rate of 8.0% and is due in August 2024. See Note 10, "Convertible Senior Notes" for additional information.
In September 2019, we (through a wholly owned subsidiary) entered a term facility with a $30.0 million revolving borrowing limit (of which $3.7 million was drawn as of March 31, 2021) that is available to the extent of outstanding eligible principal receivables. This facility is secured by the loans, interest and fees receivable and related restricted cash and accrues interest at an annual rate equal to LIBOR plus 4.5%. The facility matures on September 30, 2021 and is subject to certain affirmative covenants, including a liquidity test and an eligibility test, the failure of which could result in required early repayment of all or a portion of the outstanding balance. The note is guaranteed by Atlanticus, which is required to maintain certain minimum liquidity levels.
In November 2019, we sold $200.0 million of ABS secured by certain credit card receivables (expiring May 15, 2024). A portion of the proceeds from the sale was used to pay-down our existing facilities associated with our credit card receivables and the remaining proceeds were available to fund the acquisition of future receivables. The terms of the ABS allow for a three-year revolving structure with a subsequent 12-month to 18-month amortization period. The weighted average interest rate on the securities is fixed at 4.91%.
In July 2020, we sold $100.0 million of ABS secured by certain retail point-of-sale receivables. A portion of the proceeds from the sale were used to pay-down some of our existing revolving facilities associated with our point-of-sale receivables, and the remaining proceeds were used to fund the acquisition of receivables. The terms of the ABS allow for a three-year revolving structure with a subsequent 18-month amortization period. The weighted average interest rate on the securities is fixed at 5.47%.
In October 2020, we sold $250.0 million of 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 ABS associated with our point-of-sale receivables, noted above, and the remaining proceeds have been invested in the acquisition of receivables. The terms of the ABS allow for a 41 month revolving structure with an 18-month amortization period and the securities mature between August 2025 and October 2025. The weighted average interest rate on the securities is fixed at 4.1%.
In January 2021, we (through a wholly owned subsidiary) entered a term facility with a $15.0 million revolving borrowing limit (of which $10.0 million was drawn as of March 31, 2021) that is available to the extent of outstanding eligible principal receivables. This facility is secured by the loans, interest and fees receivable and related restricted cash and accrues interest at an annual rate equal to the prime rate. The facility matures on February 15, 2024 and is subject to certain affirmative covenants, including a liquidity test and an eligibility test, the failure of which could result in required early repayment of all or a portion of the outstanding balance. The note is guaranteed by Atlanticus, which is required to maintain certain minimum liquidity levels.
As of March 31, 2021, we were in compliance with the covenants underlying our various notes payable.
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 March 31, 2021 and December 31, 2020, (2) the outstanding face amount of our structured financing note secured by certain credit card receivables and reported at fair value as of March 31, 2021 and December 31, 2020, 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 March 31, 2021 and December 31, 2020.
|
Carrying Amounts at Fair Value as of |
||||||||
|
March 31, 2021 |
December 31, 2020 |
|||||||
|
Securitization facility (stated maturity of December 2021), outstanding face amount of $101.3 million as of March 31, 2021 ($101.3 million as of December 31, 2020) bearing interest at a weighted average 5.6% interest rate, based upon LIBOR, at March 31, 2021 (5.7% at December 31, 2020), which is secured by credit card receivables and restricted cash aggregating $2.8 million as of March 31, 2021 ($2.9 million as of December 31, 2020) in carrying amount |
$ | 2.8 | $ | 2.9 | ||||
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 $2.8 million in fair value of the structured financing facility indicated in the above table is $2.8 million, which means that we have no aggregate exposure to pre-tax equity loss associated with the above structured financing arrangement at March 31, 2021.
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.
|
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 date) are reflected within convertible senior notes on our consolidated balance sheets. No put rights exist under our convertible senior notes.
In the three months ended March 31, 2021, we repurchased $14.7 million in face amount of our outstanding convertible senior notes for $18.6 million in cash (including accrued interest). The repurchase resulted in a loss of approximately $7.8 million (including the convertible senior notes’ applicable share of deferred costs, which were written off in connection with the repurchase). Upon acquisition, the notes were retired.
The following summarizes (in thousands) components of our consolidated balance sheets associated with our convertible senior notes:
|
As of |
||||||||
|
March 31, 2021 |
December 31, 2020 |
|||||||
| Face amount of convertible senior notes | $ | 19,113 | $ | 33,839 | ||||
| Discount | (5,295 | ) | (9,453 | ) | ||||
| Net carrying value | $ | 13,818 | $ | 24,386 | ||||
|
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 $19.1 million of outstanding convertible senior notes as of March 31, 2021 (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 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. 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 falls below A/A2, it would be required to post collateral for the market value of the lent shares ($44.3 million based on the 1,459,233 shares remaining outstanding under the share lending arrangement as of March 31, 2021). 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 exclude the loaned shares from earnings per share computations.
|
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 $1.8 billion at March 31, 2021. 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 March 31, 2021, CAR had unfunded outstanding floor-plan financing commitments totaling $11.6 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 $11.4 million remains pledged as of March 31, 2021 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 March 31, 2021, 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.
Under the account terms, consumers have the option of enrolling in a credit protection program with our lending partner which would make the minimum payments owed on their accounts for a period of up to six months upon the occurrence of an eligible event. Eligible events typically include loss of life, job loss, disability, or hospitalization. As an acquirer of receivables, our potential exposure under this program was $23.4 million as of March 31, 2021 (of which we have accrued $0.7 million as of March 31, 2021 based on current claims). We have never experienced a situation in which all eligible participants have applied for this benefit at any given point in time, nor do we anticipate this will ever occur in the future.
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.
|
12. |
Net Income Attributable to Controlling Interests Per Common Share |
The following table sets forth the computations of net income attributable to controlling interests per share of common stock (in thousands, except per share data):
|
For the Three Months Ended |
||||||||
|
March 31, |
||||||||
|
2021 |
2020 |
|||||||
|
Numerator: |
||||||||
|
Net income attributable to controlling interests |
$ | 44,075 | $ | 5,425 | ||||
|
Preferred stock and preferred unit dividends and accretion |
(4,687 | ) | (2,759 | ) | ||||
|
Net income attributable to common shareholders—basic |
39,388 | 2,666 | ||||||
|
Effect of dilutive preferred stock dividends and accretion |
592 | 597 | ||||||
|
Net income attributable to common shareholders—diluted |
$ | 39,980 | $ | 3,263 | ||||
|
Denominator: |
||||||||
|
Basic (including unvested share-based payment awards) (1) |
15,013 | 14,436 | ||||||
|
Effect of dilutive stock compensation arrangements and exchange of preferred stock |
5,921 | 4,999 | ||||||
|
Diluted (including unvested share-based payment awards) (1) |
20,934 | 19,435 | ||||||
|
Net income attributable to common shareholders per share—basic |
$ | 2.62 | $ | 0.18 | ||||
|
Net income attributable to common shareholders per share—diluted |
$ | 1.91 | $ | 0.17 | ||||
|
(1) |
Shares related to unvested share-based payment awards included in our basic and diluted share counts were 421,639 for the three months ended March 31, 2021, compared to 473,887 for the three months ended March 31, 2020. |
As their effects were anti-dilutive, we excluded stock options to purchase 0.1 million shares and 0.0 million shares from our net income attributable to controlling interests per share of common stock calculations for the three months ended March 31, 2021 and 2020, respectively.
For the three months ended March 31, 2021 and 2020, we included 4,000,000 shares and 3,175,474 shares, respectively, in our outstanding diluted share counts associated with our Series A Preferred Stock. See Note 4, "Shareholders' Equity and Preferred Stock", for a further discussion of these convertible securities.
For the three months ended March 31, 2021 and 2020, we included 0.1 million and 0.0 dilutive shares, respectively, in the diluted net income attributable to controlling interests per share of common stock calculations pursuant to our convertible senior notes. 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 0.8 million shares, which could be included in diluted share counts in net income per share of common stock calculations. See Note 10, “Convertible Senior Notes,” for a further discussion of these convertible securities.
|
13. |
Stock-Based Compensation |
We currently have two stock-based compensation plans, the Second Amended and Restated Employee Stock Purchase Plan (the “ESPP”) and the Fourth Amended and Restated 2014 Equity Incentive Plan (the “Fourth Amended 2014 Plan”). Our Fourth Amended 2014 Plan provides that we may grant options on or shares of our common stock (and other types of equity awards) to members of our Board of Directors, employees, consultants and advisors. The Fourth Amended 2014 Plan was approved by our shareholders in May 2019. Among other things, the Fourth Amended 2014 Plan (i) increased the number of shares of Common Stock available for issuance under the plan by 2,000,000 shares and (ii) extended the term of the plan by approximately two years. As of March 31, 2021, 55,700 shares remained available for issuance under the ESPP and 1,598,878 shares remained available for issuance under the Fourth Amended 2014 Plan.
Exercises and vestings under our stock-based compensation plans resulted in no income tax-related charges to paid-in capital during the three months ended March 31, 2021 and 2020.
Restricted Stock and Restricted Stock Units
During the three months ended March 31, 2021 and 2020, we granted 33,276 and 58,248 shares of restricted stock and restricted stock units (net of any forfeitures), respectively, with aggregate grant date fair values of $0.9 million and $0.6 million, respectively. We incurred expenses of $0.2 million and $0.3 million during the three months ended March 31, 2021 and 2020, respectively, related to restricted stock awards. When we grant restricted stock and restricted stock units, we defer the grant date value of the restricted stock and restricted stock unit 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 March 31, 2021, our unamortized deferred compensation costs associated with non-vested restricted stock awards were $1.2 million with a weighted-average remaining amortization period of 1.4 years. No forfeitures have been included in our compensation cost estimates based on historical forfeiture rates.
Stock Options
The exercise price per share of the options awarded under the Fourth Amended 2014 Plan 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. Options granted during 2021 were valued using the Black-Scholes-Merton option pricing model with the following assumptions: a dividend yield of zero, years to maturity of 5 years (which equals the expected term), volatility of 80.3% (based on the average of daily historical volatility using the expected term), and a risk-free rate of 0.80% (based on 5 year US Treasury securities). We had expense of $0.3 million and $0.1 million related to stock option-related compensation costs during the three months ended March 31, 2021 and 2020, 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, 2020 |
2,423,466 | $ | 4.41 | |||||||||||||
|
Issued |
50,000 | $ | 31.54 | |||||||||||||
|
Exercised |
(494,900 | ) | $ | 3.43 | ||||||||||||
|
Expired/Forfeited |
(2,000 | ) | $ | 15.30 | ||||||||||||
|
Outstanding at March 31, 2021 |
1,976,566 | $ | 5.34 | 1.7 | $ | 49,461,967 | ||||||||||
|
Exercisable at March 31, 2021 |
1,542,234 | $ | 3.49 | 1.3 | $ | 41,386,369 | ||||||||||
We had $2.1 million and $1.4 million of unamortized deferred compensation costs associated with unvested stock options as of March 31, 2021 and December 31, 2020, respectively.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be read in conjunction with our consolidated financial statements and the related notes included therein and our Annual Report on Form 10-K for the year ended December 31, 2020, where certain terms have been defined.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements. We base these forward-looking statements on our current plans, expectations and beliefs about future events. There are risks, including the factors discussed in “Risk Factors” in Part II, Item 1A and elsewhere in this Report, that our actual experience will differ materially from these expectations. For more information, see “Forward-Looking Information” below.
In this Report, except as the context suggests otherwise, the words “Company,” “Atlanticus Holdings Corporation,” “Atlanticus,” “we,” “our,” “ours,” and “us” refer to Atlanticus Holdings Corporation and its subsidiaries and predecessors.
OVERVIEW
We utilize proprietary analytics and a flexible technology platform to enable financial institutions to provide various credit and related financial services and products to everyday Americans. According to data published by Experian, 41% of Americans had FICO® scores of less than 700 as of the second quarter of 2019. A recent survey conducted by Highland Solutions found that 63% of Americans lived “paycheck to paycheck” and 82% of people do not have access to an emergency fund. We believe this equates to a population of over 100 million everyday Americans in need of additional access to credit. These consumers often have financial needs that are not effectively met by larger financial institutions. By facilitating fairly priced consumer credit and financial service alternatives with value added features and benefits specifically curated for the unique needs of these consumers, we endeavor to empower everyday Americans 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 $26 billion in consumer loans over our 24-year operating history to support lenders who originate a range of consumer loan products. These products include private label and general purpose credit cards originated by lenders through multiple channels, including retail and healthcare point-of-sale (collectively "point-of-sale"), direct mail solicitation, online and partnerships with third parties. In the point-of-sale channel, we partner with retailers and service providers in various industries across the U.S. to allow them to provide credit to their customers for the purchase of a variety of goods and services including consumer electronics, furniture, elective medical procedures, healthcare, educational services and home-improvements. The services of our bank partners are often extended to consumers who may not have access to financing options with larger financial institutions. We specialize in supporting this “second-look” credit service. Our flexible technology platform allows our bank partners to integrate our paperless process and instant decisioning platform with the technology infrastructure of participating retailers and service providers. Using this technology platform and proprietary analytics, lenders can make instant credit decisions utilizing hundreds of inputs from multiple sources and thereby offer credit to consumers overlooked by many providers of financing who focus exclusively on consumers with higher FICO scores. By supporting 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.
We are principally engaged in providing products and services to lenders in the U.S. and, 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” or “loans” typically refer to receivables we have purchased from our bank 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. 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. We will continue to carry the investments on our books at cost minus impairment, if any, plus or minus changes resulting from observable price changes.
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 (such as those associated with our legacy credit card operations).
Subject to potential disruptions caused by COVID-19, we believe that our point-of-sale and direct-to-consumer receivables are generating, and will continue to generate, attractive returns on assets, thereby facilitating debt financing under terms and conditions (including advance rates and pricing) that will support attractive returns on equity, and we continue to pursue growth in this area.
Within our Auto Finance segment, our CAR subsidiary operations principally purchase and/or service loans secured by automobiles from or for, and also provide floor plan financing for, a pre-qualified network of independent automotive dealers and automotive finance companies in the buy-here, pay-here, used car business. We purchase auto loans at a discount and with dealer retentions or holdbacks that provide risk protection. Also within our Auto Finance segment, we are providing certain installment lending products in addition to our traditional loans secured by automobiles.
Beyond these activities within our Credit and Other Investments segment, we invest in and service portfolios of credit card receivables.
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 and our outstanding common stock.
We elected the fair value option to account for certain loans receivable associated with our point-of-sale and direct-to-consumer platform that are acquired on or after January 1, 2020. We believe the use of fair value for these receivables more closely approximates the true economics of these receivables, better matching the yields and corresponding charge-offs. We believe the fair value option also enables us to report GAAP net income that provides increased transparency into our profitability and asset quality. Receivables arising in accounts originated prior to January 1, 2020 will continue to be accounted for in our 2020 and subsequent financial statements at amortized cost, net. We estimate the Fair Value Receivables using a discounted cash flow model, which considers various factors such as expected yields on consumer receivables, the timing of expected payments, customer default rates, estimated costs to service the portfolio, interest rates, and valuations of comparable portfolios. As a result of this fair value adoption, our loans, interest and fees receivable arising in accounts originated subsequent to January 1, 2020 will be carried at fair value with changes in fair value recognized directly in earnings, and certain fee billings (such as annual membership fees and merchant fees) and origination costs associated with these receivables will no longer be deferred. We reevaluate the fair value of our Fair Value Receivables at the end of each quarter.
COVID-19 Pandemic
On March 13, 2020, a national emergency was declared under the National Emergencies Act due to the COVID-19 pandemic. As of the date of filing this Quarterly Report on Form 10-Q, the duration and severity of the effects of the COVID-19 pandemic remain unknown. Likewise, we do not know the duration and severity of the impact of the COVID-19 pandemic on all members of the Company’s ecosystem – our bank partner, merchants and consumers – as well as our employees. In addition to instituting a Company-wide remote work program to ensure the safety of all employees and their families, we are communicating to employees on a regular basis regarding such efforts as planning for contingencies related to the COVID-19 pandemic, providing updated information and policies related to the safety and health of employees, and monitoring the ongoing pandemic for new developments that may impact the Company, our work locations or our employees and are taking reasonable measures.
The following are anticipated key impacts on our business and response initiatives taken by the Company, in coordination with our partners, to mitigate such impacts:
Consumer spending behavior has been significantly impacted by the COVID-19 pandemic, principally due to restrictions on “non-essential” businesses, issuances of stay-at-home orders, and uncertainties about the extent and duration of the pandemic. Additionally, government stimulus programs have decreased consumer need for credit products and generally led to an increase in customer payments. While we have seen some improvements in this area, to the extent this change in consumer spending behavior continues, receivables purchases could decline relative to the prior year. The extent to which our merchants have remained open for business has varied across merchant category and geographic location within the U.S.
Borrowers impacted by COVID-19 requesting hardship assistance have been receiving temporary relief from payments. While we expect these measures to mitigate credit losses, we anticipate that the elevated unemployment rate, while partially mitigated by the effects of government stimulus and relief measures (such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the American Rescue Plan), may result in increased portfolio credit losses in the future.
As the impact of COVID-19 continues to evolve, the Company remains committed to serving our bank partner, merchants and consumers, while caring for the safety of our employees and their families. The potential impact that COVID-19 and related government stimulus and relief measures could have on our financial condition and results of operations remains highly uncertain. For more information, refer to Part II, Item 1A “Risk Factors” and, in particular, “– The global outbreak of COVID-19 has caused severe disruptions in the U.S. economy, and may have an adverse impact on our performance, results of operations and access to capital.”
CONSOLIDATED RESULTS OF OPERATIONS
|
Income |
||||||||||||
|
For the Three Months Ended March 31, |
Increases (Decreases) |
|||||||||||
|
(In Thousands) |
2021 |
2020 |
from 2020 to 2021 |
|||||||||
|
Total operating revenue |
$ | 143,895 | $ | 140,518 | $ | 3,377 | ||||||
|
Other non-operating revenue |
840 | (10 | ) | 850 | ||||||||
|
Interest expense |
(12,298 | ) | (13,584 | ) | 1,286 | |||||||
| Loss on repurchase of convertible senior notes | (7,807 | ) | — | (7,807 | ) | |||||||
| Provision for losses on loans, interest and fees receivable recorded at net realizable value | (4,135 | ) | (67,336 | ) | 63,201 | |||||||
|
Changes in fair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value |
(27,491 | ) | (15,191 | ) | (12,300 | ) | ||||||
| Net margin | 93,004 | 44,397 | 48,607 | |||||||||
|
Operating expenses: |
||||||||||||
|
Salaries and benefits |
8,239 | 7,510 | (729 | ) | ||||||||
|
Card and loan servicing |
17,387 | 15,837 | (1,550 | ) | ||||||||
|
Marketing and solicitation |
10,301 | 9,317 | (984 | ) | ||||||||
|
Depreciation |
312 | 285 | (27 | ) | ||||||||
|
Other |
4,968 | 4,801 | (167 | ) | ||||||||
| Total operating expenses: | 41,207 | 37,750 | 3,457 | |||||||||
| Net income | 44,027 | 5,362 | 38,665 | |||||||||
|
Net loss attributable to noncontrolling interests |
48 | 63 | (15 | ) | ||||||||
| Net income attributable to controlling interests | 44,075 | 5,425 | 38,650 | |||||||||
| Net income attributable to controlling interests to common shareholders | 39,388 | 2,666 | 36,722 | |||||||||
Three Months Ended March 31, 2021, Compared to Three Months Ended March 31, 2020
Total operating revenue. Total operating revenue consists of: 1) interest income, finance charges and late fees on consumer loans, 2) other fees on credit products including annual and merchant fees and 3) ancillary, interchange and servicing income on loan portfolios.
Period-over-period results primarily relate to growth in point-of-sale finance and direct-to-consumer products, the receivables of which increased from $911.7 million as of March 31, 2020 to $1,088.5 million as of March 31, 2021. While we noted some disruptions in consumer spending behavior due to the COVID-19 pandemic and the related economic impacts, 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 and related fees for these operations throughout 2021. 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-consumer receivables. As discussed elsewhere in this Report, we have elected the fair value option to account for certain loan receivables associated with our point-of-sale and direct-to-consumer platform that are originated on or after January 1, 2020. As a result, annual fees and merchant fees that are charged upon the acquisition of the receivable will no longer be deferred and will be recognized in the loan acquisition period. This difference in recognition also served to increase our other fees on credit products (included as a component of "Fees and related income on earning assets" on our Consolidated Statements of Operations). Other revenue on our Consolidated Statements of Operations consists of ancillary, interchange and servicing income. Ancillary and interchange revenues are largely impacted by growth in our receivables as discussed above. These fees are earned when our customer's cards are used over established card networks. We earn a portion of the interchange fee the card networks charge merchants for the transaction. We earn servicing income by servicing loan portfolios for third parties (including our equity-method investee). Unless and/or until we grow the number of contractual servicing relationships we have with third parties or our current relationships grow their loan portfolios, we will not experience significant growth and income within this category, and we currently expect to experience continued declines in this category of revenue relative to revenue earned in prior periods. The above discussions on expectations for finance, fee and other income are based on our current expectations. The unknown impacts COVID-19 and related government stimulus and relief measures may have on our ability to acquire new receivables or the impact they may have on consumers' ability to make payments on outstanding loans and fees receivable could result in changes in these assumptions in the near term.
Loss on repurchase of convertible senior notes. In the three months ended March 31, 2021, we repurchased $14.7 million in face amount of our outstanding convertible senior notes for $18.6 million in cash (including accrued interest). The repurchase resulted in a loss of approximately $7.8 million (including the convertible senior notes’ applicable share of deferred costs, which were written off in connection with the repurchase). Upon acquisition, the notes were retired. We will continue to seek opportunities to repurchase our convertible senior notes.
Other non-operating revenue. Included within our Other non-operating income category is income (or loss) associated with investments in non-core businesses or other items not directly associated with our ongoing operations. In the three months ended March 31, 2021 we liquidated one of these investments, resulting in income of approximately $560,000. As previously discussed, 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. We will continue to carry the investments on our books at cost minus impairment, if any, plus or minus changes resulting from observable price changes.
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 9, “Notes Payable,” to our consolidated financial statements offset by our debt facilities being repaid commensurate with net liquidations of the underlying credit card, auto finance and installment loan receivables that serve as collateral for the facilities. Outstanding notes payable, net of unamortized debt issuance costs and discounts, associated with our point-of-sale and direct-to-consumer platform increased from $682.1 million as of March 31, 2020 to $781.0 million as of March 31, 2021. Despite, this increase, an overall decrease in the weighted average cost of funds, coupled with repurchases of our convertible senior notes, resulted in a year over year decline in interest expense. We anticipate additional debt financing over the next few quarters as we continue to grow, and as such, we expect our quarterly interest expense to be above that experienced in the prior periods for these operations.
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. Recoveries of charged off receivables, consist of amounts received from the efforts of third-party collectors we employ and through the sale of charged-off accounts to unrelated third-parties. All proceeds received associated with charged-off accounts, 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.
We have experienced a period-over-period decrease in this category between the years ended March 31, 2020 and March 31, 2021 primarily reflecting: 1) the effects of our adoption of the fair value option to account for certain loans receivable that are acquired on or after January 1, 2020 which has resulted in a decline in the outstanding receivables subject to this provision and 2) the overall reduction in delinquencies associated with these receivables in part due to recent government stimulus programs, which have served to increase payments on outstanding receivables. This reduction in provision has been offset somewhat due to additional reserves associated with accounts that have been impacted due to COVID-19. 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. Given our adoption of fair value accounting for certain receivables acquired on or after January 1, 2020, and absent the unknown impacts COVID-19 and related government stimulus and relief measures may have on our ability to acquire new receivables or the impact they may have on our customers' ability to make payments on outstanding loans and fees receivable, we expect that our provision for losses on loans will continue to diminish, relative to levels experienced in prior periods, as the underlying receivables that continue to be recorded at net realizable value liquidate.
Changes in fair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value. For credit card receivables for which we use fair value accounting (including those that we elected the fair value option for on January 1, 2020), we expect our change in fair value of credit card receivables recorded at fair value to increase throughout 2021 commensurate with growth in these receivables. Inversely (and to a lesser degree), we expect our change in fair value of notes payable associated with structured financings for our legacy credit card receivables recorded at fair value amounts to gradually diminish (absent significant changes in the assumptions used to determine these fair values) in the future. We may adjust our models to reflect macro events that we believe market participants would consider relevant. With the aforementioned market impacts of COVID-19 and related government stimulus and relief measures, we have included some expected market degradation in our model to reflect the possibility of delinquency rates increasing in the near term (and the corresponding increase in chargeoffs and decrease in payments) above the level that historical trends would suggest. 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.
Total operating expense. Total operating expense variances for the three months ended March 31, 2020, relative to the three months ended March 31, 2021, reflect the following:
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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 2021 when compared to 2020 as we expect our receivables to continue to grow and as a result we expect to modestly increase our number of employees; |
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• |
increases in card and loan servicing expenses in the three months ended March 31, 2021 when compared to the three months ended March 31, 2020 due to growth in receivables associated with our investments in point-of-sale and direct-to-consumer receivables, which grew from $911.7 million outstanding to $1,088.5 million outstanding at March 31, 2020 and March 31, 2021, respectively. As many of the expenses associated with our card and loan servicing efforts are now variable based on the amount of underlying receivables, we would expect this number to continue to grow throughout 2021. As our receivables have grown, we have significantly reduced our servicing costs per account, realizing greater economies of scale. |
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• |
increases in marketing and solicitation costs for the three months ended March 31, 2021 primarily due to receivables growth associated with our direct-to-consumer and 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 2021 although the frequency and timing of marketing efforts could result in reductions in quarter-over-quarter marketing costs; and |
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other expenses primarily relate to fixed costs associated with occupancy or other third party expenses that are largely fixed in nature. While we expect some increase in these costs as we continue to grow our receivable portfolios, we do not anticipate the increases to be meaningful. |
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. 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 over the past two years 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.
Notwithstanding our cost-management efforts, 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. The above referenced unknown potential impacts related to COVID-19 could result in more variability in these expenses and could impair our ability to acquire new receivables, resulting in increased costs despite our efforts to manage costs effectively.
Noncontrolling interests. We reflect the ownership interests of noncontrolling holders of equity in our majority-owned subsidiaries as noncontrolling interests in our consolidated statements of operations. Unless we enter into significant new majority-owned subsidiary ventures with noncontrolling interest holders in the future, we expect to have negligible noncontrolling interests in our majority-owned subsidiaries and negligible allocations of income or loss to noncontrolling interest holders in future quarters.
On November 14, 2019, a wholly-owned subsidiary issued 50.5 million Class B preferred units at a purchase price of $1.00 per unit to an unrelated third party. The units carry a 16% preferred return to be paid quarterly, with up to 6 percentage points of the preferred return to be paid through the issuance of additional units or cash, at our election. The units have both call and put rights and are also subject to various covenants including a minimum book value, which if not satisfied, could allow for the securities to be put back to the subsidiary. On March 30, 2020, the subsidiary issued an additional 50.0 million Class B preferred units under the same terms. The proceeds from the transaction are being used for general corporate purposes. We have included the issuance of these Class B preferred units as temporary noncontrolling interests on the consolidated balance sheets and the associated dividends are included as a reduction of our net income attributable to common shareholders on the consolidated statements of operations.
Income Taxes. We experienced an effective tax rate of 15.0% for the three months ended March 31, 2021, compared to 19.3% for the three months ended March 31, 2020.
Our effective tax rate for the three months ended March 31, 2021 is below the statutory rate due to (1) deductions associated with the exercise of stock options and the vesting of restricted stock at times when the fair value of our stock exceeded such share-based awards’ grant date values, (2) our deduction for income tax purposes of amounts characterized in our consolidated financial statements as dividends on a preferred stock issuance, such amounts constituting deductible interest expense on a debt issuance for tax purposes, and (3) our release of state tax valuation allowances. Partially offsetting such effects on our effective tax rate are (1) the effects of executive compensation deduction limits under Section 162(m) of the Internal Revenue Code of 1986, as amended, and (2) state and foreign income tax expense.
Our effective tax rate for the three months ended March 31, 2020, was below the statutory rate principally due to our deduction for income tax purposes of amounts characterized in our consolidated financial statements as dividends on a preferred stock issuance, such amounts constituting deductible interest expense on a debt issuance for tax purposes, the aforementioned being partially offset by state and foreign income tax expense during such period.
We report interest expense associated with our income tax liabilities (including accrued liabilities for uncertain tax positions) within our income tax line item on our consolidated statements of operations. We likewise report within such line item the reversal of interest expense associated with our accrual liabilities for uncertain tax positions to the extent we resolve such liabilities in a manner favorable to our accruals therefor. We have de minimis interest expense or reversals thereof during the three months ended March 31, 2021, and 2020.
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 and direct-to-consumer 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 fees and finance charges, merchant fees or annual fees associated with the point-of-sale and direct-to-consumer receivables.
We record (i) the finance charges, merchant fees and late fees assessed on our Credit and Other Investments segment receivables in the Revenue - Consumer loans, including past due fees category on our consolidated statements of operations, (ii) the annual, monthly maintenance, returned-check, cash advance and other fees in the Revenue - 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 Changes in fair value of loans, interest and fees receivable and notes payable 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 Changes in fair value of loans, interest and fees receivable and notes payable associated with structured financings recorded at fair value 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.
Non-GAAP Financial Measures
In addition to financial measures presented in accordance with GAAP, we present managed receivables, total managed yield, total managed yield ratio, combined net charge-off ratio, percent of managed receivables 30 or more days past due, percent of managed receivables 60 or more days past due and percent of managed receivables 90 or more days past due, all of which are non-GAAP financial measures. These non-GAAP financial measures aid in the evaluation of the performance of our credit portfolios, including our risk management, servicing and collection activities and our valuation of purchased receivables. The credit performance of our managed receivables provides information concerning the quality of loan originations and the related credit risks inherent with the portfolios. Management relies heavily upon financial data and results prepared on the “managed basis” in order to manage our business, make planning decisions, evaluate our performance and allocate resources.
These non-GAAP financial measures are presented for supplemental informational purposes only. These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation from, or as a substitute for, GAAP financial measures. These non-GAAP financial measures may differ from the non-GAAP financial measures used by other companies. A reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP financial measure is provided below for each of the fiscal periods indicated.
These non-GAAP financial measures include only the performance of those receivables underlying consolidated subsidiaries (for receivables carried at amortized cost basis and fair value) and exclude the performance of receivables held by our equity method investee. As the receivables underlying our equity method investee reflect a small and diminishing portion of our overall receivables base, we do not believe their inclusion or exclusion in the overall results is material. Additionally, we calculate average managed receivables based on the quarter-end balances.
The comparison of non-GAAP managed receivables to our GAAP financial statements requires an understanding that managed receivables reflect the face value of loans, interest and fees receivable without any consideration for potential loan losses or other adjustments to reflect fair value.
Below are (i) the reconciliation of Loans, interest and fees receivable, at fair value to Loans, interest and fees receivable, at face value and (ii) the calculation of managed receivables:
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At or for the Three Months Ended |
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| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||
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(in Millions) |
Mar. 31 (1) |
Dec. 31 (1) |
Sept. 30 (1) |
Jun. 30 (1) |
Mar. 31 (1) |
Dec. 31 |
Sept. 30 |
Jun. 30 |
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Loans, interest and fees receivable, at fair value |
$ | 481.4 | $ | 417.1 | $ | 310.8 | $ | 177.9 | $ | 89.4 | $ | 4.4 | $ | 4.5 | $ | 4.9 | ||||||||||||||||
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Fair value mark against receivable (2) |
$ | 112.3 | $ | 99.0 | $ | 71.8 | $ | 42.7 | $ | 17.5 | $ | 2.0 | $ | 2.6 | $ | 2.9 | ||||||||||||||||
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Loans, interest and fees receivable, at face value |
$ | 593.7 | $ | 516.1 | $ | 382.6 | $ | 220.6 | $ | 106.9 | $ | 6.4 | $ | 7.1 | $ | 7.8 | ||||||||||||||||
(1) As discussed in more detail above in "—Overview," we elected the fair value option to account for certain loans receivable associated with our point-of-sale and direct-to-consumer platform that are acquired on or after January 1, 2020.
(2) The fair value mark against receivables reflects the difference between the face value of a receivable and the net present value of the expected cash flows associated with that receivable. See Note 6, “Fair Value of Assets and Liabilities” to our consolidated financial statements included herein for further discussion on assumptions underlying this calculation.
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At or for the Three Months Ended |
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| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||
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(in Millions) |
Mar. 31 |
Dec. 31 |
Sept. 30 |
Jun. 30 |
Mar. 31 |
Dec. 31 |
Sept. 30 |
Jun. 30 |
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Loans, interest and fees receivable, gross |
$ | 498.8 | $ | 574.3 | $ | 604.8 | $ | 679.6 | $ | 810.6 | $ | 908.4 | $ | 769.0 | $ | 602.3 | ||||||||||||||||
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Loans, interest and fees receivable, gross from fair value reconciliation above |
593.7 | 516.1 | 382.6 | 220.6 | 106.9 | 6.4 | 7.1 | 7.8 | ||||||||||||||||||||||||
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Total managed receivables |
$ | 1,092.5 | $ | 1,090.4 | $ | 987.4 | $ | 900.2 | $ | 917.5 | $ | 914.8 | $ | 776.1 | $ | 610.1 | ||||||||||||||||
As discussed above, our managed receivables data differ in certain aspects from our GAAP data in certain areas. First, 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. Second, for managed receivables data, we amortize certain fees (such as annual and merchant fees) associated with our Fair Value Receivables over the expected life of the corresponding receivable and recognize certain costs, such as claims made under credit deferral programs, when paid. Under fair value accounting, these fees are recognized when billed or upon receivable acquisition. Third, managed receivables data excludes the impacts of equity in income of equity method investees. A reconciliation of our operating revenues to comparable amounts used in our calculation of Total managed yield ratios are as follows (in millions):
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At or for the Three Months Ended |
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| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||
|
Mar. 31 |
Dec. 31 |
Sept. 30 |
Jun. 30 |
Mar. 31 |
Dec. 31 |
Sept. 30 |
Jun. 30 |
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Consumer loans, including past due fees |
$ | 94.1 | $ | 95.7 | $ | 95.6 | $ | 92.2 | $ | 95.3 | $ | 77.1 | $ | 62.7 | $ | 47.3 | ||||||||||||||||
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Fees and related income on earning assets |
37.0 | 31.4 | 35.5 | 32.4 | 34.6 | 24.2 | 19.7 | 14.3 | ||||||||||||||||||||||||
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Other revenue |
4.2 | 4.8 | 4.5 | 2.6 | 2.5 | 4.4 | 3.9 | 2.7 | ||||||||||||||||||||||||
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Adjustments due to acceleration of merchant fee discount amortization under fair value accounting |
(5.5 | ) | (6.6 | ) | (19.2 | ) | (16.7 | ) | (10.5 | ) | — | — | — | |||||||||||||||||||
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Adjustments due to acceleration of annual fees recognition under fair value accounting |
(4.6 | ) | (1.1 | ) | (7.8 | ) | (6.2 | ) | (8.6 | ) | — | — | — | |||||||||||||||||||
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Removal of expense accruals under GAAP |
0.2 | (0.1 | ) | (0.7 | ) | (0.1 | ) | 1.4 | — | — | — | |||||||||||||||||||||
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Total managed yield |
$ | 125.4 | $ | 124.1 | $ | 107.9 | $ | 104.2 | $ | 114.7 | $ | 105.7 | $ | 86.3 | $ | 64.3 | ||||||||||||||||
The calculation of Combined net charge offs used in our Combined net charge-off ratio, annualized is as follows (in millions):
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At or for the Three Months Ended |
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| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||
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Mar. 31 |
Dec. 31 |
Sept. 30 |
Jun. 30 |
Mar. 31 |
Dec. 31 |
Sept. 30 |
Jun. 30 |
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Net losses on impairment of loans, interest and fees receivable recorded at fair value |
$ | 14.3 | $ | 8.6 | $ | 3.3 | $ | 0.4 | $ | 0.3 | $ | 0.2 | $ | 0.2 | $ | 0.2 | ||||||||||||||||
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Gross charge offs on non fair value accounts |
26.3 | 30.6 | 54.3 | 71.8 | 70.5 | 49.9 | 34.8 | 34.2 | ||||||||||||||||||||||||
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Recoveries on non fair value accounts |
(3.4 | ) | (4.3 | ) | (5.4 | ) | (11.0 | ) | (4.4 | ) | (2.6 | ) | (4.3 | ) | (1.8 | ) | ||||||||||||||||
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Combined net charge-offs |
$ | 37.2 | $ | 34.9 | $ | 52.2 | $ | 61.2 | $ | 66.4 | $ | 47.5 | $ | 30.7 | $ | 32.6 | ||||||||||||||||
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 and size 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 strategy under “Collection Strategy” in Item 1, “Business” of our Annual Report on Form 10K for the year ended December 31, 2020.
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 non-GAAP managed receivables statistics (in thousands; percentages of total):
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At or for the Three Months Ended |
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| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31 |
Dec. 31 |
Sept. 30 |
Jun. 30 |
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Fair Value Receivables |
Amortized Cost Receivables |
Total |
% of Period-end managed receivables |
Fair Value Receivables |
Amortized Cost Receivables |
Total |
% of Period-end managed receivables |
Fair Value Receivables |
Amortized Cost Receivables |
Total |
% of Period-end managed receivables |
Fair Value Receivables |
Amortized Cost Receivables |
Total |
% of Period-end managed receivables |
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|
Period-end managed receivables |
$ | 593,703 | $ | 498,806 | $ | 1,092,509 | $ | 516,064 | $ | 574,309 | $ | 1,090,373 | $ | 382,580 | $ | 604,805 | $ | 987,385 | $ | 220,603 | $ | 679,593 | $ | 900,196 | ||||||||||||||||||||||||||||||||||||||||
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30 or more days past due |
$ | 46,150 | $ | 46,083 | $ | 92,233 | 8.4 | % | $ | 43,881 | $ | 58,744 | $ | 102,625 | 9.4 | % | $ | 20,238 | $ | 55,393 | $ | 75,631 | 7.7 | % | $ | 8,974 | $ | 87,214 | $ | 96,188 | 10.7 | % | ||||||||||||||||||||||||||||||||
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60 or more days past due |
$ | 35,132 | $ | 35,224 | $ | 70,356 | 6.4 | % | $ | 29,794 | $ | 41,214 | $ | 71,008 | 6.5 | % | $ | 12,844 | $ | 42,096 | $ | 54,940 | 5.6 | % | $ | 5,913 | $ | 74,443 | $ | 80,356 | 8.9 | % | ||||||||||||||||||||||||||||||||
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90 or more days past due |
$ | 25,732 | $ | 28,011 | $ | 53,743 | 4.9 | % | $ | 19,498 | $ | 29,382 | $ | 48,880 | 4.5 | % | $ | 8,355 | $ | 30,718 | $ | 39,073 | 4.0 | % | $ | 3,029 | $ | 58,821 | $ | 61,850 | 6.9 | % | ||||||||||||||||||||||||||||||||
|
Averaged managed receivables |
$ | 1,091,441 | $ | 1,038,879 | $ | 943,791 | $ | 908,839 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total managed yield ratio, annualized (1) |
46.0 | % | 47.8 | % | 45.7 | % | 45.9 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Combined net charge-off ratio, annualized (2) |
13.6 | % | 13.4 | % | 22.1 | % | 26.9 | % |
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At or for the Three Months Ended |
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2020 |
2019 |
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Mar. 31 |
Dec. 31 |
Sept. 30 |
Jun. 30 |
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|
Fair Value Receivables |
Amortized Cost Receivables |
Total |
% of Period-end managed receivables |
Fair Value Receivables |
Amortized Cost Receivables |
Total |
% of Period-end managed receivables |
Fair Value Receivables |
Amortized Cost Receivables |
Total |
% of Period-end managed receivables |
Fair Value Receivables |
Amortized Cost Receivables |
Total |
% of Period-end managed receivables |
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|
Period-end managed receivables |
$ | 106,899 | $ | 810,582 | $ | 917,481 | $ | 6,404 | $ | 908,424 | $ | 914,828 | $ | 7,070 | $ | 769,032 | $ | 776,102 | $ | 7,805 | $ | 602,326 | $ | 610,131 | ||||||||||||||||||||||||||||||||||||||||
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30 or more days past due |
$ | 1,322 | $ | 145,260 | $ | 146,582 | 16.0 | % | $ | 427 | $ | 139,661 | $ | 140,088 | 15.3 | % | $ | 419 | $ | 99,524 | $ | 99,943 | 12.9 | % | $ | 380 | $ | 69,686 | $ | 70,066 | 11.5 | % | ||||||||||||||||||||||||||||||||
|
60 or more days past due |
$ | 221 | $ | 113,536 | $ | 113,757 | 12.4 | % | $ | 314 | $ | 103,870 | $ | 104,184 | 11.4 | % | $ | 281 | $ | 71,374 | $ | 71,655 | 9.2 | % | $ | 260 | $ | 49,649 | $ | 49,909 | 8.2 | % | ||||||||||||||||||||||||||||||||
|
90 or more days past due |
$ | 155 | $ | 82,501 | $ | 82,656 | 9.0 | % | $ | 221 | $ | 73,868 | $ | 74,089 | 8.1 | % | $ | 185 | $ | 47,358 | $ | 47,543 | 6.1 | % | $ | 186 | $ | 35,147 | $ | 35,333 | 5.8 | % | ||||||||||||||||||||||||||||||||
|
Averaged managed receivables |
$ | 916,155 | $ | 845,465 | $ | 693,117 | $ | 545,529 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Total managed yield ratio, annualized (1) |
50.1 | % | 50.0 | % | 49.8 | % | 47.1 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Combined net charge-off ratio, annualized (2) |
29.0 | % | 22.5 | % | 17.7 | % | 23.9 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1) The Total managed yield ratio, annualized is calculated using the annualized total managed yield as the numerator and period-end average managed receivables as the denominator.
(2) The Combined net charge-off ratio, annualized is calculated using the annualized combined net chargeoffs as the numerator and period-end average managed receivables as the denominator.
The following table presents additional trends and data with respect to our point-of-sale (“Retail”) and direct-to-consumer (“Direct”) receivables (dollars in thousands). Results of our legacy credit card receivables portfolios are excluded:
|
Retail - At or for the Three Months Ended |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Mar. 31 |
Dec. 31 |
Sept. 30 |
Jun. 30 |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Fair Value Receivables |
Amortized Cost Receivables |
Total |
% of Period-end managed receivables |
Fair Value Receivables |
Amortized Cost Receivables |
Total |
% of Period-end managed receivables |
Fair Value Receivables |
Amortized Cost Receivables |
Total |
% of Period-end managed receivables |
Fair Value Receivables |
Amortized Cost Receivables |
Total |
% of Period-end managed receivables |
|||||||||||||||||||||||||||||||||||||||||||||||||
|
Period-end managed receivables |
$ | 384,220 | $ | 175,786 | $ | 560,006 | $ | 334,342 | $ | 209,878 | $ | 544,220 | $ | 260,338 | $ | 233,605 | $ | 493,943 | $ | 156,466 | $ | 274,652 | $ | 431,118 | ||||||||||||||||||||||||||||||||||||||||
|
30 or more days past due |
$ | 23,254 | $ | 12,396 | $ | 35,650 | 6.4 | % | $ | 24,151 | $ | 18,400 | $ | 42,551 | 7.8 | % | $ | 12,339 | $ | 18,282 | $ | 30,621 | 6.2 | % | $ | 5,394 | $ | 26,795 | $ | 32,189 | 7.5 | % | ||||||||||||||||||||||||||||||||
|
60 or more days past due |
$ | 17,317 | $ | 9,010 | $ | 26,327 | 4.7 | % | $ | 16,102 | $ | 13,290 | $ | 29,392 | 5.4 | % | $ | 7,299 | $ | 13,312 | $ | 20,611 | 4.2 | % | $ | 3,705 | $ | 21,918 | $ | 25,623 | 5.9 | % | ||||||||||||||||||||||||||||||||
|
90 or more days past due |
$ | 12,681 | $ | 6,810 | $ | 19,491 | 3.5 | % | $ | 10,807 | $ | 9,490 | $ | 20,297 | 3.7 | % | $ | 4,517 | $ | 9,478 | $ | 13,995 | 2.8 | % | $ | 2,014 | $ | 17,176 | $ | 19,190 | 4.5 | % | ||||||||||||||||||||||||||||||||
|
Average APR |
19.7 | % | 19.7 | % | 19.0 | % | 19.8 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Receivables purchased during period |
$ | 157,607 | $ | 152,855 | $ | 170,232 | $ | 141,094 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Retail - At or for the Three Months Ended |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
2020 |
2019 |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Mar. 31 |
Dec. 31 |
Sept. 30 |
Jun. 30 |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Fair Value Receivables |
Amortized Cost Receivables |
Total |
% of Period-end managed receivables |
Fair Value Receivables |
Amortized Cost Receivables |
Total |
% of Period-end managed receivables |
Fair Value Receivables |
Amortized Cost Receivables |
Total |
% of Period-end managed receivables |
Fair Value Receivables |
Amortized Cost Receivables |
Total |
% of Period-end managed receivables |
|||||||||||||||||||||||||||||||||||||||||||||||||
|
Period-end managed receivables |
$ | 72,803 | $ | 333,299 | $ | 406,102 | $ | — | $ | 397,691 | $ | 397,691 | $ | — | $ | 365,652 | $ | 365,652 | $ | — | $ | 308,382 | $ | 308,382 | ||||||||||||||||||||||||||||||||||||||||
|
30 or more days past due |
$ | 962 | $ | 48,395 | $ | 49,357 | 12.2 | % | $ | — | $ | 52,777 | $ | 52,777 | 13.3 | % | $ | — | $ | 42,318 | $ | 42,318 | 11.6 | % | $ | — | $ | 31,988 | $ | 31,988 | 10.4 | % | ||||||||||||||||||||||||||||||||
|
60 or more days past due |
$ | - | $ | 37,657 | $ | 37,657 | 9.3 | % | $ | — | $ | 38,728 | $ | 38,728 | 9.7 | % | $ | — | $ | 29,980 | $ | 29,980 | 8.2 | % | $ | — | $ | 22,375 | $ | 22,375 | 7.3 | % | ||||||||||||||||||||||||||||||||
|
90 or more days past due |
$ | - | $ | 27,674 | $ | 27,674 | 6.8 | % | $ | — | $ | 27,225 | $ | 27,225 | 6.8 | % | $ | — | $ | 20,307 | $ | 20,307 | 5.6 | % | $ | — | $ | 15,444 | $ | 15,444 | 5.0 | % | ||||||||||||||||||||||||||||||||
|
Average APR |
21.3 | % | 22.1 | % | 22.5 | % | 24.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Receivables purchased during period |
$ | 110,479 | $ | 116,327 | $ | 133,528 | $ | 123,533 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Direct - At or for the Three Months Ended |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Mar. 31 |
Dec. 31 |
Sept. 30 |
Jun. 30 |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Fair Value Receivables |
Amortized Cost Receivables |
Total |
% of Period-end managed receivables |
Fair Value Receivables |
Amortized Cost Receivables |
Total |
% of Period-end managed receivables |
Fair Value Receivables |
Amortized Cost Receivables |
Total |
% of Period-end managed receivables |
Fair Value Receivables |
Amortized Cost Receivables |
Total |
% of Period-end managed receivables |
|||||||||||||||||||||||||||||||||||||||||||||||||
|
Period-end managed receivables |
$ | 205,474 | $ | 323,020 | $ | 528,494 | $ | 177,281 | $ | 364,431 | $ | 541,712 | $ | 117,379 | $ | 371,200 | $ | 488,579 | $ | 59,026 | $ | 404,941 | $ | 463,967 | ||||||||||||||||||||||||||||||||||||||||
|
30 or more days past due |
$ | 22,743 | $ | 33,687 | $ | 56,430 | 10.7 | % | $ | 19,556 | $ | 40,344 | $ | 59,900 | 11.1 | % | $ | 7,730 | $ | 37,111 | $ | 44,841 | 9.2 | % | $ | 3,351 | $ | 60,419 | $ | 63,770 | 13.7 | % | ||||||||||||||||||||||||||||||||
|
60 or more days past due |
$ | 17,713 | $ | 26,214 | $ | 43,927 | 8.3 | % | $ | 13,571 | $ | 27,924 | $ | 41,495 | 7.7 | % | $ | 5,429 | $ | 28,784 | $ | 34,213 | 7.0 | % | $ | 2,023 | $ | 52,525 | $ | 54,548 | 11.8 | % | ||||||||||||||||||||||||||||||||
|
90 or more days past due |
$ | 12,988 | $ | 21,201 | $ | 34,189 | 6.5 | % | $ | 8,616 | $ | 19,892 | $ | 28,508 | 5.3 | % | $ | 3,756 | $ | 21,240 | $ | 24,996 | 5.1 | % | $ | 889 | $ | 41,645 | $ | 42,534 | 9.2 | % | ||||||||||||||||||||||||||||||||
|
Average APR |
26.3 | % | 26.6 | % | 26.1 | % | 24.6 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Receivables purchased during period |
$ | 174,792 | $ | 190,596 | $ | 174,768 | $ | 117,367 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Direct - At or for the Three Months Ended |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
2020 |
2019 |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Mar. 31 |
Dec. 31 |
Sept. 30 |
Jun. 30 |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Fair Value Receivables |
Amortized Cost Receivables |
Total |
% of Period-end managed receivables |
Fair Value Receivables |
Amortized Cost Receivables |
Total |
% of Period-end managed receivables |
Fair Value Receivables |
Amortized Cost Receivables |
Total |
% of Period-end managed receivables |
Fair Value Receivables |
Amortized Cost Receivables |
Total |
% of Period-end managed receivables |
|||||||||||||||||||||||||||||||||||||||||||||||||
|
Period-end managed receivables |
$ | 28,332 | $ | 477,283 | $ | 505,615 | $ | — | $ | 510,733 | $ | 510,733 | $ | — | $ | 403,380 | $ | 403,380 | $ | — | $ | 293,944 | $ | 293,944 | ||||||||||||||||||||||||||||||||||||||||
|
30 or more days past due |
$ | 31 | $ | 96,865 | $ | 96,896 | 19.2 | % | $ | — | $ | 86,884 | $ | 86,884 | 17.0 | % | $ | — | $ | 57,206 | $ | 57,206 | 14.2 | % | $ | — | $ | 37,698 | $ | 37,698 | 12.8 | % | ||||||||||||||||||||||||||||||||
|
60 or more days past due |
$ | — | $ | 75,879 | $ | 75,879 | 15.0 | % | $ | — | $ | 65,142 | $ | 65,142 | 12.8 | % | $ | — | $ | 41,394 | $ | 41,394 | 10.3 | % | $ | — | $ | 27,274 | $ | 27,274 | 9.3 | % | ||||||||||||||||||||||||||||||||
|
90 or more days past due |
$ | — | $ | 54,827 | $ | 54,827 | 10.8 | % | $ | — | $ | 46,643 | $ | 46,643 | 9.1 | % | $ | — | $ | 27,051 | $ | 27,051 | 6.7 | % | $ | — | $ | 19,703 | $ | 19,703 | 6.7 | % | ||||||||||||||||||||||||||||||||
|
Average APR |
26.1 | % | 27.0 | % | 28.2 | % | 28.5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Receivables purchased during period |
$ | 127,825 | $ | 195,243 | $ | 174,026 | $ | 123,776 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The following discussion relates to the tables above.
Managed receivables levels. We have continued to experience overall period-over-period quarterly receivables growth with over $176.8 million in net receivables growth associated with the point-of-sale and direct-to-consumer products offered by our bank partners between March 2020 and March 2021. The addition of large point-of-sale retail partners and ongoing purchases of receivables arising in accounts issued by our bank partners to customers of our existing retail partners helped grow our point-of-sale receivables by $153.9 million and $150.2 million in the three months ended March 31, 2021 and 2020, respectively. Our direct-to-consumer acquisitions grew by over $22.9 million and $289.3 million, net during the three months ended March 31, 2021 and 2020, respectively. Declines in the pace of receivables growth for our direct-to-consumer receivables were largely driven by reduced consumer demand for general-purpose card products coupled with higher payments on outstanding amounts largely as a result of the various government stimulus programs in effect. We have noted recent recoveries in consumer spending behavior and increased demand for general-purpose credit products, that have helped to increase the overall combined managed receivables levels, and we currently expect this trend to continue through the remainder of the year (absent further unknown impacts COVID-19 and related government stimulus and relief measures may have on our ability to acquire new receivables or the impact they may have on consumers' ability to make payments on outstanding loans and fees receivable). Growth in future periods largely is dependent on the addition of new retail partners to the point-of-sale origination platform, the timing and size of solicitations within the direct-to-consumer platform by our bank partner, as well as purchase activity of consumers. Further, the loss of existing retail partner relationships could adversely affect new loan acquisition levels. Our top five retail partnerships accounted for over 60% of the above referenced Retail period-end managed receivables outstanding as of March 31, 2021.
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 receivables in our managed portfolio. These management strategies include conservative credit line management 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 acquire newer point-of-sale and direct-to-consumer receivables, we expect our delinquency rates to increase when compared to the same periods in prior years. 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 as well as recent government stimulus efforts. The aforementioned positive impacts related to recent government stimulus programs have served to increase consumer payment rates beyond expectations. The impact due to growth in the receivable base 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 moderate, with no further government stimulus programs or other interventions, we expect increased overall delinquency rates when compared to prior periods, as the existing receivables mature through their peak charge-off periods. Additionally, in accordance with prescribed guidance discussed elsewhere in this Report, certain consumers negatively impacted by COVID-19 have been offered short-term payment deferrals and fee waivers. Receivables enrolled in these short-term payment deferrals continue to accrue interest and their delinquency status will not change through the deferment period. As of March 31, 2021 we continue to actively work with consumers that indicate hardship as a result of COVID-19, however, the number of impacted consumers continues to be a diminishing part of our overall receivable base. In order to establish appropriate reserves for this population we considered various factors such as subsequent payment behavior and additional requests by the consumer for further deferrals or hardship claims. Nearly all of these customers are considered current and thus not included as delinquent receivables. The exclusion of these accounts has resulted in lower delinquency rates than we would otherwise expect. Given this, and absent the unknown impacts COVID-19 and related government stimulus and relief measures may have on our ability to acquire new receivables or the impact they may have on consumers' ability to make payments on outstanding loans and fees receivable and the corresponding impact on our delinquency rates, we expect to continue to see seasonal payment patterns on these receivables that impact our delinquencies in line with prior periods. 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 managed yield ratio, annualized. We continue to experience growth in newer, higher yielding receivables, including direct-to-consumer receivables and our point-of-sale receivables. While this growth has contributed to consistently higher total managed yield ratios, we expect this growth also will continue to (absent the beneficial impacts of recent government stimulus programs discussed elsewhere) result in higher charge-off and delinquency rates than those experienced historically. Direct-to-consumer receivables tend to have higher total yields than point-of-sale receivables, so declines in the growth of our managed receivables that includes direct-to-consumer receivables has contributed to slightly lower total managed yield ratios for 2021 and 2020 when compared to comparable periods in 2019. Additionally, lower delinquencies (and thus associated fee billings) noted during 2020 (and continuing in the first quarter of 2021), in addition to reductions in the prime rate that corresponds to lower yields charged on credit card receivables, contributed to an overall lower total managed yield ratio. Our fourth, third, and second quarter 2019 total managed yield ratios exclude the impacts of $37.8 million, $26.7 million and $26.0 million, respectively, associated with reductions in reserves associated with one of our portfolios.
Absent the unknown impacts COVID-19 may have on our ability to acquire new receivables or the impact it may have on consumers' ability to make payments on outstanding loans and fees receivable, we expect total managed yield ratios to continue to fluctuate somewhat based on the relative mix of growth in point-of-sale receivables and higher yielding direct-to-consumer credit card receivables.
Combined net charge-off ratio, annualized. 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 our direct-to-consumer receivables (as a percent of outstanding receivables) has resulted in increases in our charge-off rates over time. The combined net charge-off ratio in the third quarter of 2019 reflects the positive impacts of a bulk sale of charged off receivables. Absent this sale, the combined net charge-off ratio would have been 18.6%. The first and second quarters 2020 combined net charge-off ratios reflect receivable growth during 2019 reaching peak charge-off during those periods. Slightly offsetting the combined net charge-off ratio in the second quarter of 2020 are the positive impacts of a bulk sale of charged off receivables in that period. Absent this sale, the combined net charge-off ratio would have been 29.1%. Improvements in our delinquency rates throughout 2020 as a result of the increases in customer payments noted during 2020 were fully realized in the fourth quarter of 2020 and continue in the first quarter of 2021. As we continue to experience lower than expected delinquency rates, we expect these improvements will continue to result in lower combined net charge-off rates, when compared to comparable prior periods for the first few quarters of 2021.
Notwithstanding the improvements we will see in the next few quarters due to recent improvements in delinquency rates, we expect the growth in point-of-sale and direct-to-consumer receivables to continue to result in higher charge-offs than those experienced historically. This expectation is based on the following: (1) higher expected charge off rates on the point-of-sale and direct-to-consumer receivables corresponding with higher yields on these receivables, (2) continued testing of receivables with higher risk profiles, which could lead to periodic increases in combined net charge-offs, (3) recent vintages reaching peak charge-off periods, (4) our current expectation for receivables growth during 2021 and (5) negative impacts on some consumers' ability to make payments on outstanding loans and fees receivable as a result of COVID-19. Further impacting our charge-off rates are the timing and size of solicitations that serve to minimize charge off rates in periods of high receivable acquisitions but also exacerbate charge-off rates in periods of lower receivable acquisitions. The unknown impacts COVID-19 and related government stimulus and relief measures may have on our ability to acquire new receivables or the impact they may have on consumers' ability to make payments on outstanding loans and fees receivable could lead to changes in these expectations.
We previously referred to this financial measure as "combined gross charge-off ratio." We have renamed this financial measure to more accurately describe its content and have not changed the calculation of this measure.
Average APR. Our average annual percentage rate (“APR”) charged to customers varies by receivable type, credit history and other factors. The APR for receivables originated through our point-of-sale platform range from 0% to 36.0%. For direct-to-consumer receivables, 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 2021 to remain consistent with average APRs 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 lending partner and the availability of capital to fund new purchases. Nonetheless, absent the unknown impacts COVID-19 may have on our ability to acquire new receivables or the impact it may have on consumers' ability to make payments on outstanding loans and fees receivable, we expect continued growth in the acquisition of these receivables throughout 2021.
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 March 31, 2021, we served more than 600 dealers through our Auto Finance segment in 33 states, the District of Columbia and two U.S. territories.
Non-GAAP Financial Measures
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 GAAP data 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 calculation above, the average managed receivables used in the ratios below is calculated based on the quarter ending balances of consolidated receivables.
A reconciliation of our operating revenues to comparable amounts used in our calculation of Total managed yield ratios follows (in millions):
|
At or for the Three Months Ended |
||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||
|
Mar. 31 |
Dec. 31 |
Sept. 30 |
Jun. 30 |
Mar. 31 |
Dec. 31 |
Sept. 30 |
Jun. 30 |
|||||||||||||||||||||||||
|
Consumer loans, including past due fees |
$ | 8.2 | $ | 8.0 | $ | 8.0 | $ | 7.9 | $ | 7.9 | $ | 7.9 | $ | 7.9 | $ | 7.9 | ||||||||||||||||
|
Other revenue |
0.3 | 0.3 | 0.3 | 0.3 | 0.2 | 0.2 | 0.2 | 0.3 | ||||||||||||||||||||||||
|
Total managed yield |
$ | 8.5 | $ | 8.3 | $ | 8.3 | $ | 8.2 | $ | 8.1 | $ | 8.1 | $ | 8.1 | $ | 8.2 | ||||||||||||||||
The calculation of Combined net charge offs used in our Combined net charge-off ratio follows (in millions):
|
At or for the Three Months Ended |
||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||
|
Mar. 31 |
Dec. 31 |
Sept. 30 |
Jun. 30 |
Mar. 31 |
Dec. 31 |
Sept. 30 |
Jun. 30 |
|||||||||||||||||||||||||
|
Gross charge offs |
$ | 0.6 | $ | 0.7 | $ | 0.6 | $ | 0.8 | $ | 0.9 | $ | 1.2 | $ | 1.0 | $ | 1.5 | ||||||||||||||||
|
Recoveries |
(0.3 | ) | (0.3 | ) | (0.3 | ) | (0.2 | ) | (0.3 | ) | (0.3 | ) | (0.4 | ) | (0.4 | ) | ||||||||||||||||
|
Combined net charge-offs |
$ | 0.3 | $ | 0.4 | $ | 0.3 | $ | 0.6 | $ | 0.6 | $ | 0.9 | $ | 0.6 | $ | 1.1 | ||||||||||||||||
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 |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
2021 |
2020 |
2019 |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Mar. 31 |
% of Period-end managed receivables |
Dec. 31 |
% of Period-end managed receivables |
Sept. 30 |
% of Period-end managed receivables |
Jun. 30 |
% of Period-end managed receivables |
Mar. 31 |
% of Period-end managed receivables |
Dec. 31 |
% of Period-end managed receivables |
Sept. 30 |
% of Period-end managed receivables |
Jun. 30 |
% of Period-end managed receivables |
|||||||||||||||||||||||||||||||||||||||||||||||||
|
Period-end managed receivables |
$ | 94,128 | $ | 93,247 | $ | 90,514 | $ | 89,637 | $ | 90,226 | $ | 89,785 | $ | 89,451 | $ | 89,490 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
30 or more days past due |
$ | 8,088 | 8.6 | % | $ | 12,580 | 13.5 | % | $ | 10,120 | 11.2 | % | $ | 9,866 | 11.0 | % | $ | 11,261 | 12.5 | % | $ | 13,647 | 15.2 | % | $ | 12,984 | 14.5 | % | $ | 11,930 | 13.3 | % | ||||||||||||||||||||||||||||||||
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60 or more days past due |
$ | 3,529 | 3.7 | % | $ | 4,942 | 5.3 | % | $ | 4,101 | 4.5 | % | $ | 3,959 | 4.4 | % | $ | 4,519 | 5.0 | % | $ | 5,581 | 6.2 | % | $ | 5,322 | 5.9 | % | $ | 4,796 | 5.4 | % | ||||||||||||||||||||||||||||||||
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90 or more days past due |
$ | 1,693 | 1.8 | % | $ | 2,141 | 2.3 | % | $ | 1,865 | 2.1 | % | $ | 2,029 | 2.3 | % | $ | 2,452 | 2.7 | % | $ | 2,573 | 2.9 | % | $ | 2,814 | 3.1 | % | $ | 2,306 | 2.6 | % | ||||||||||||||||||||||||||||||||
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Average managed receivables |
$ | 93,688 | $ | 91,881 | $ | 90,076 | $ | 89,932 | $ | 90,006 | $ | 89,618 | $ | 89,471 | $ | 89,849 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Total managed yield ratio, annualized (1) |
36.3 | % | 36.1 | % | 36.9 | % | 36.5 | % | 36.0 | % | 36.2 | % | 36.2 | % | 36.5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
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Combined net charge-off ratio, annualized (2) |
1.3 | % | 1.7 | % | 1.3 | % | 2.7 | % | 2.7 | % | 4.0 | % | 2.7 | % | 4.9 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
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Recovery ratio, annualized (3) |
1.3 | % | 1.3 | % | 1.3 | % | 0.9 | % | 1.3 | % | 1.3 | % | 1.8 | % | 1.8 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
(1) The total managed yield ratio, annualized is calculated using the annualized Total managed yield as the numerator and Period-end average managed receivables as the denominator.
(2) The Combined net charge-off ratio, annualized is calculated using the annualized Combined net chargeoffs as the numerator and Period-end average managed receivables as the denominator.
(3) The Recovery ratio, annualized is calculated using annualized Recoveries as the numerator and Period-end average managed receivables as the denominator.
Managed receivables. Absent the unknown impacts COVID-19 and related government stimulus and relief measures may have on our ability to acquire new receivables or the impact they may have on consumers' ability to make payments on outstanding loans and fees receivable, we expect modest growth in the level of our managed receivables for 2021 when compared to the same periods in prior years in both the U.S. and U.S. territories as CAR expands within its current geographic footprint 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 other franchise dealerships for consumers interested in purchasing automobiles. Included in the fourth quarter of 2020 was an unplanned bulk purchase of receivables that increased our period over period growth and kept receivables levels higher in the first quarter of 2021 when compared to the first quarter of 2020. While we continually evaluate bulk purchases of receivables, the timing and size of the purchases are difficult to predict. Although receivable levels in each period of 2020 were roughly equal to those in 2019 (with the exception of the fourth quarter of 2020), this primarily reflects strong customer payments throughout 2020 offsetting receivables growth when compared to the same periods of 2019.
Delinquencies. Current delinquency levels are consistent with our expectations for levels in the near term with some improvement noted in the first quarter of 2021 and in 2020 periods (when compared to the same periods in 2019) due to stronger than anticipated customer payment behavior. 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. As discussed, elsewhere in this Report, recent delinquency rates have benefitted from government stimulus programs that have resulted in customer payments in excess of historical experience. 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 managed yield ratio, annualized. We have experienced modest fluctuations in our total managed 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 managed 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, growth in that region also will serve to slightly depress our overall total managed yield ratio, yet we expect growth in that region to continue to generate attractive returns on assets.
Combined net charge-off ratio, annualized and recovery ratio, annualized. 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 net 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 net charge-off ratio. This is evidenced by the slightly elevated combined net charge-off rate we 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. We also expect our recovery rate to fluctuate modestly from quarter to quarter due to the timing of the sale of repossessed autos. Given the unknown impacts COVID-19 and related government stimulus and relief measures may have on our ability to acquire new receivables or the impact they may have on consumers' ability to make payments on outstanding loans and fees receivable we could experience variation in these expectations.
Definitions of Certain Non-GAAP Financial Measures
Total managed yield ratio, annualized. 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 merchant fees, 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 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 net charge-off ratio, annualized. Represents an annualized fraction, the numerator of which is the aggregate consolidated amounts of finance charge, fee and principal losses from consumers unwilling or unable to pay their receivables balances, as well as from bankrupt and deceased consumers, less current-period recoveries (including recoveries from dealer reserve offsets for our CAR operations) and the related portion of unamortized fees and discounts, as reflected in Note 2 “Significant Accounting Policies and Consolidated Financial 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. We previously referred to this financial measure as "combined gross charge-off ratio."
We have renamed this financial measure to more accurately describe its content and have not changed the calculation of this measure.
LIQUIDITY, FUNDING AND CAPITAL RESOURCES
As discussed elsewhere in this Report, we are closely monitoring the impacts of the COVID-19 pandemic across our business, including the resulting uncertainties around consumer spending, credit quality and levels of liquidity. The ultimate impact of COVID-19 on our business, financial condition, liquidity and results of operations is dependent on future developments, which are highly uncertain.
We believe that our actions taken to date, future cash provided by operating activities, availability under our debt facilities, and access to the capital markets will provide adequate resources to fund our operating and financing needs.
Our primary focus is growing the point-of-sale and direct-to-consumer credit card receivables so that our revenues from these investments will help us maintain consistent profitability. Increases in new and existing retail partnerships and the expansion of our investments in direct-to-consumer finance products have resulted in year-over-year growth of total managed receivables levels, and we expect growth to continue in the coming quarters.
Accordingly, we will continue to focus on (i) obtaining the funding necessary to meet capital needs required by the growth of our receivables, (ii) adding new retail partners to our platform to continue growth of the point-of-sale receivables, (iii) continuing growth in direct-to-consumer credit card receivables and (iv) effectively managing 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 sheets. Facilities that could represent near-term significant refunding or refinancing needs (within the next 24 months) as of March 31, 2021 are those associated with the following notes payable in the amounts indicated (in millions):
| Revolving credit facility (expiring February 8, 2022) that is secured by certain receivables and restricted cash | $ | 5.8 | ||
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Revolving credit facility (expiring July 15, 2021) that is secured by certain receivables and restricted cash |
6.9 | |||
| Revolving credit facility (expiring August 15, 2022) that is secured by certain receivables and restricted cash | 2.5 | |||
| Amortizing debt facility (expiring September 30, 2021) that is secured by certain receivables and restricted cash | 3.7 | |||
|
Revolving credit facility (expiring October 15, 2022) that is secured by certain receivables and restricted cash |
10.0 | |||
| Total | $ | 28.9 |
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. Further details concerning the above debt facilities and our convertible senior notes are provided in Note 9, “Notes Payable,” and Note 10, “Convertible Senior Notes,” to our consolidated financial statements included herein.
In the first quarter of 2021, we repurchased $14.7 million in face amount of convertible senior notes. The remaining $19.1 million of outstanding convertible senior notes mature on November 30, 2035. During certain periods and subject to certain conditions, the convertible senior notes are convertible by holders into cash and, if applicable, shares of our 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.
In February 2017, we (through a wholly owned subsidiary) established a program under which we sell certain receivables to a consolidated trust in exchange for notes issued by the trust. The notes are secured by the receivables and other assets of the trust. Simultaneously with the establishment of the program, the trust issued a series of variable funding notes and sold an aggregate amount of up to $90.0 million (subsequently reduced to $70.0 million) of such notes (of which $5.8 million was outstanding as of March 31, 2021) 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 at 14.0%.
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 $12.5 million was outstanding as of March 31, 2021) to separate unaffiliated third parties pursuant to facilities that can be drawn upon to the extent of outstanding eligible receivables. Interest rates on the notes are based on commercial paper rates plus 3.15% and LIBOR plus 4.875%, respectively.
In June 2019, we sold $200.0 million of ABS secured by certain credit card receivables. A portion of the proceeds from the sale was used to pay-down our existing facilities associated with our credit card receivables. The terms of the ABS allow for a two-year revolving structure with a subsequent 12-month to 18-month amortization period. The weighted average interest rate on the securities is fixed at 5.37%.
In December 2020, we extended the maturity date of the revolving credit facility secured by the financial and operating assets of CAR to November 1, 2023, and, in October 2019, we expanded the borrowing capacity to $55.0 million. All other material terms remain unchanged.
In November 2019, we sold $200.0 million of ABS secured by certain credit card receivables. A portion of the proceeds from the sale was used to pay-down our existing facilities associated with our credit card receivables and the remaining proceeds were available to fund the acquisition of future receivables. The terms of the ABS allow for a three-year revolving structure with a subsequent 12-month to 18-month amortization period. The weighted average interest rate on the securities is fixed at 4.91%.
In July 2020, we sold $100.0 million of ABS secured by certain retail point-of-sale receivables. A portion of the proceeds from the sale was used to pay-down some of our existing revolving facilities associated with our point-of-sale receivables, and the remaining proceeds were used to fund the acquisition of receivables. The terms of the ABS allow for a three-year revolving structure with a subsequent 18-month amortization period. The weighted average interest rate on the securities is fixed at 5.47%.
In October 2020, we sold $250.0 million of ABS secured by certain retail point-of-sale receivables. A portion of the proceeds from the sale was used to paydown our existing term ABS associated with our point-of-sale receivables, noted above, and the remaining proceeds have been invested in the acquisition of receivables. The terms of the ABS allow for a 41 month revolving structure with an 18-month amortization period and the securities mature between August 2025 and October 2025. The weighted average interest rate on the securities is fixed at 4.1%.
On November 26, 2014, we and certain of our subsidiaries entered into a Loan and Security Agreement with Dove Ventures, LLC, a Nevada limited liability company (“Dove”). The agreement provided for a senior secured term loan facility in an amount of up to $40.0 million at any time outstanding. On December 27, 2019, the Company issued 400,000 shares of its Series A Preferred Stock (10,000,000 shares authorized, 400,000 shares outstanding) with an aggregate initial liquidation preference of $40.0 million, in exchange for full satisfaction of the $40.0 million that the Company owed Dove under the Loan and Security Agreement. Dividends on the preferred stock are 6% per annum (cumulative, non-compounding) and are payable as declared, and in preference to any common stock dividends, in cash. The Series A Preferred Stock is perpetual and has no maturity date. The Company may, at its option, redeem the shares of Series A Preferred Stock on or after January 1, 2025 at a redemption price equal to $100 per share, plus any accumulated and unpaid dividends. At the request of a majority of the holders of the Series A Preferred Stock, the Company is required to offer to redeem all of the Series A Preferred Stock at a redemption price equal to $100 per share, plus any accumulated and unpaid dividends, at the option of the holders thereof, on or after January 1, 2024. Upon the election by the holders of a majority of the Series A Preferred Stock, each share of the Series A Preferred Stock is convertible into the number of shares of the Company’s common stock as is determined by dividing (i) the sum of (a) $100 and (b) any accumulated and unpaid dividends on such share by (ii) an initial conversion price equal to $10 per share, subject to adjustment in certain circumstances to prevent dilution.
The use of the London Interbank Offered Rate (“LIBOR”) is expected to be phased out by mid-2023. Currently, LIBOR is used as a reference rate for certain of our financial instruments. In any event, the majority of 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; however, we continue to monitor the efforts of various parties, including government agencies, seeking to identify an alternative rate to replace LIBOR. 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 March 31 2021, we had $203.1 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 three months ended March 31, 2021 and 2020 are as follows:
|
• |
During the three months ended March 31, 2021, we generated $52.8 million of cash flows from operations compared to our generating $34.9 million of cash flows from operations during the three months ended March 31, 2020. The increase in cash provided by operating activities was principally related to increases in finance and fee collections associated with growing point-of-sale and direct-to-consumer receivables. |
|
• |
During the three months ended March 31, 2021, we used $2.2 million of cash in our investing activities, compared to use of $44.7 million of cash in investing activities during the three months ended March 31, 2020. This decrease in cash used is primarily due to significant decreases in the level of net investments in the point-of-sale and direct-to-consumer receivables relative to the same period in 2020 primarily due to strong customer payments noted in the first quarter of 2021. While we are seeing some increases in consumer spending behavior offset by strong consumer payments, the impacts COVID-19 and related government stimulus and relief measures may have on our ability to acquire new receivables or the impact they may have on consumers' ability to make payments on outstanding loans and fees receivable are unknown. |
|
• |
During the three months ended March 31, 2021, we used $66.1 million of cash in financing activities, compared to our generating $36.3 million of cash in financing activities during the three months ended March 31, 2020. 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. Also included in cash used for financing activities for 2021, is the repurchase of $14.7 million in face amount of our outstanding convertible senior notes for $18.6 million in cash (including accrued interest). The repurchase resulted in a loss of approximately $7.8 million (including the convertible senior notes’ applicable share of deferred costs, which were written off in connection with the repurchase). Further, on March 30, 2020, a wholly-owned subsidiary issued 50.0 million Class B preferred units at a purchase price of $1.00 per unit. |
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) additional investments in point-of-sale and direct-to-consumer finance receivables 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 7, 2020, we are authorized to repurchase up to 5,000,000 shares of our common stock through June 30, 2022. As of March 31, 2021, we were authorized to repurchase a remaining 4,919,827 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, 2020.
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; we refer to these arrangements as contingent commitments. We do not currently expect that these contingent commitments will result in any material amounts being paid by us. See Note 11, “Commitments and Contingencies,” to our consolidated financial statements included herein for further discussion of these matters. .
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2, “Significant Accounting Policies and Consolidated Financial Statement Components,” to our consolidated financial statements included herein for a discussion of recent accounting pronouncements.
CRITICAL ACCOUNTING ESTIMATES
We have prepared our financial statements in accordance with GAAP. These principles are numerous and complex. We have summarized our significant accounting policies in the notes to our consolidated financial statements. In many instances, the application of GAAP requires management to make estimates or to apply subjective principles to particular facts and circumstances. A variance in the estimates used or a variance in the application or interpretation of GAAP could yield a materially different accounting result. It is impracticable for us to summarize every accounting principle that requires us to use judgment or estimates in our application. Nevertheless, we describe below the areas for which we believe that the estimations, judgments or interpretations that we have made, if different, would have yielded the most significant differences in our consolidated financial statements.
On a quarterly basis, we review our significant accounting policies and the related assumptions, in particular, those mentioned below, with the audit committee of the Board of Directors.
Revenue Recognition
Consumer Loans, Including Past Due Fees
Consumer loans, including past due fees reflect interest income, including finance charges, and late fees on loans in accordance with the terms of the related customer agreements. Premiums, discounts and merchant fees paid or received associated with installment or auto loans that are not included as part of our Fair Value Receivables are deferred and amortized over the average life of the related loans using the effective interest method. Premiums, discounts and merchant fees paid or received associated with Fair Value Receivables are recognized upon receivable acquisition. 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 fees associated with the credit products, including the receivables underlying our U.S. point-of-sale finance and direct-to-consumer platform, and our legacy credit card receivables which include the recognition of annual fee billings and cash advance fees among others.
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 for amortized cost receivables, and when billed for Fair Value Receivables. Similarly, fees on our other credit products are recognized when earned, which coincides with the time they are charged to the customers' accounts. 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.
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 gross yield, payment rates, expected credit loss rates, servicing costs, and discount rates. 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 gross yield, payment rates, expected credit loss rates, servicing costs, and discount rates.
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 (and changes thereon) 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 sheets and 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 consumers; 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 adjusted to 600 square feet) of excess office space at our Atlanta headquarters with HBR Capital, Ltd. (“HBR”), a company co-owned by David G. Hanna and his brother Frank J. Hanna, III. The sublease rate per square foot is the same as the rate that we pay under the prime lease. Under the sublease, HBR paid us $16,960 and $16,627 for 2020 and 2019, respectively. The aggregate amount of payments required under the sublease from January 1, 2021 to the expiration of the sublease in May 2022 is $24,567.
In January 2013, HBR began leasing the services of four employees from us. HBR reimburses us for the full cost of the employees, based on the amount of time devoted to HBR. In the three months ended March 31, 2021 and 2020, we received $96,781 and $73,224, 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. The agreement provided for a senior secured term loan facility in an amount of up to $40.0 million at any time outstanding. On December 27, 2019, the Company issued 400,000 shares (aggregate initial liquidation preference of $40 million) of its Series A Preferred Stock in exchange for full satisfaction of the $40.0 million that the Company owed Dove under the Loan and Security Agreement. Dividends on the preferred stock are 6% per annum (cumulative, non-compounding) and are payable in preference to any common stock dividends, in cash. The Series A Preferred Stock is perpetual and has no maturity date. The Company may, at its option, redeem the shares of Series A Preferred Stock on or after January 1, 2025 at a redemption price equal to $100 per share, plus any accumulated and unpaid dividends. At the request of a majority of the holders of the Series A Preferred Stock, the Company shall offer to redeem all of the Series A Preferred Stock at a redemption price equal to $100 per share, plus any accumulated and unpaid dividends, at the option of the holders thereof, on or after January 1, 2024. Upon the election by the holders of a majority of the Series A Preferred Stock, each share of the Series A Preferred Stock is convertible into the number of shares of the Company’s common stock as is determined by dividing (i) the sum of (a) $100 and (b) any accumulated and unpaid dividends on such share by (ii) an initial conversion price equal to $10 per share, subject to certain adjustment in certain circumstances to prevent dilution. Given the redemption rights contained within the Series A Preferred Stock, we account for the outstanding preferred stock as temporary equity in the consolidated balance sheets. Dove is a limited liability company owned by three trusts. David G. Hanna is the sole shareholder and the President of the corporation that serves as the sole trustee of one of the trusts, and David G. Hanna and members of his immediate family are the beneficiaries of this trust. Frank J. Hanna, III is the sole shareholder and the President of the corporation that serves as the sole trustee of the other two trusts, and Frank J. Hanna, III and members of his immediate family are the beneficiaries of these other two trusts.
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 the macroeconomic environment; expected revenue; income; receivables; income ratios; net interest margins; long-term shareholder returns; acquisitions of financial assets and other growth opportunities; divestitures and discontinuations of businesses; loss exposure and loss provisions; delinquency and charge-off rates; the extent and duration of the COVID-19 pandemic and its impact on the Company, our bank partners, merchant network, financing sources, borrowers, loan demand, legal and regulatory matters, borrower payment patterns, information security and consumer privacy, the capital markets, the economy in general and changes in the U.S. economy that could materially impact consumer spending behavior, unemployment and demand for our products; 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 retail and healthcare point-of-sale (collectively "point-of-sale") finance operations; account growth; the performance of investments that we have made; operating expenses; 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, share issuances or dividends; debt retirement; the results associated with our equity-method investee; our servicing income levels; gains and losses from investments in securities; experimentation with new products and other statements of our plans, beliefs or expectations are forward-looking statements. These and other statements using words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and similar expressions also are forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement. The forward-looking statements we make are not guarantees of future performance, and we have based these statements on our assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or historical earnings levels.
Although it is not possible to identify all factors, we continue to face many risks and uncertainties. Among the factors that could cause actual future results to differ materially from our expectations are the risks and uncertainties described under “Risk Factors” set forth in Part II, Item 1A, and the risk factors and other cautionary statements in other documents we file with the SEC, including the following:
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the availability of adequate financing to support growth; |
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the extent to which federal, state and local 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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impacts due to delays or interruptions associated with ongoing system conversions; |
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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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the duration and magnitude of the impact of the COVID-19 pandemic on credit usage, payment patterns and the capital markets; |
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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 banks that issue credit cards and provide certain other credit products utilizing our technology platform and related services; and |
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theft and employee errors. |
Most of these factors are beyond our ability to predict or control. Any of these factors, or a combination of these factors, could materially affect our future financial condition or results of operations and the ultimate accuracy of our forward-looking statements. There also are other factors that we may not describe (because we currently do not perceive them to be material) that could cause actual results to differ materially from our expectations.
We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not required to provide this information.
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CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Act) was carried out on behalf of Atlanticus Holdings Corporation and our subsidiaries by our management and with the participation of our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer). Based upon the evaluation, our principal executive officer and principal financial officer concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
During the quarter ended March 31, 2021, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Act) occurred that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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LEGAL PROCEEDINGS |
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.
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RISK FACTORS |
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.
The impact of COVID-19 on global commercial activity and the corresponding volatility in financial markets is evolving. The global impact of the outbreak has led to many countries instituting quarantines and restrictions on travel. Such actions are creating disruption in global supply chains, and adversely impacting a number of industries, such as transportation, hospitality and entertainment. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19. Nevertheless, COVID-19 presents material uncertainty and risk with respect to our performance and financial results.
For additional information, see "—Other Risks to Our Business—The global outbreak of COVID-19 has caused severe disruptions in the U.S. economy, and may have an adverse impact on our performance, results of operations and access to capital".
Our Cash Flows and Net Income Are Dependent Upon Payments from Our Investments in Receivables
The collectability 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 collectability, 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 less than 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 borrowers represented by credit risks that regulators classify as less than prime. Our reliance on these receivables may in the future negatively impact our performance.
Economic slowdowns increase our credit losses. During periods of economic slowdown or recession, we generally 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.
Because a significant portion of our reported income is based on management’s estimates of the future performance of receivables, differences between actual and expected performance of the receivables may cause fluctuations in net income. Significant portions of our reported income (or losses) are based on management’s estimates of cash flows we expect to receive on receivables, particularly for such assets that we report based on fair value. The expected cash flows are based on management’s estimates of interest rates, default rates, payment rates, cardholder purchases, servicing costs, and discount rates. These estimates are based on a variety of factors, many of which are not within our control. Substantial differences between actual and expected performance of the receivables will occur and cause fluctuations in our net income. For instance, higher than expected rates of delinquencies and losses could cause our net income to be lower than expected. Similarly, levels of loss and delinquency can result in our being required to repay lenders earlier than expected, thereby reducing funds available to us for future growth.
Due to our lack of significant experience with Internet consumers, we may not be able to evaluate their creditworthiness. We do not have significant experience with the credit performance of receivables owed by consumers acquired over the Internet and other digital channels. As a result, we may not be able to evaluate successfully the creditworthiness of these potential consumers. Therefore, we may encounter difficulties managing the expected delinquencies and losses.
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 overall 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, we will not be able to purchase additional receivables and those receivables may contract in size.
Capital markets may experience periods of disruption and instability, which could limit our ability to grow our receivables. From time-to-time, capital markets may experience periods of disruption and instability. For example, from 2008 to 2009, the global capital markets were unstable as evidenced by the lack of liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of major financial institutions. Despite actions of the U.S. federal government and various foreign governments, these events contributed to worsening general economic conditions that materially and adversely impacted the broader financial and credit markets and reduced the availability of debt and equity capital for the market as a whole and financial services firms in particular. If similar adverse and volatile market conditions repeat in the future, we and other companies in the financial services sector may have to access, if available, alternative markets for debt and equity capital in order to grow our receivables.
Moreover, the re-appearance of market conditions similar to those experienced from 2008 through 2009 for any substantial length of time or worsened market conditions could make it difficult for us to borrow money or to extend the maturity of or refinance any indebtedness we may have under similar terms and any failure to do so could have a material adverse effect on our business. Unfavorable economic and political conditions, including future recessions, political instability, geopolitical turmoil and foreign hostilities, and disease, pandemics and other serious health events, also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us.
The outbreak of COVID-19 in many countries continues to adversely impact global commercial activity and has contributed to significant volatility in financial markets. The global impact of the outbreak has been rapidly evolving, and many national, state and local governments have instituted quarantines, restrictions on travel and closures or limitations on non-essential businesses. Such actions are creating disruption in global supply chains, and adversely impacting a number of industries, such as transportation, hospitality and entertainment. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any accurate prediction as to the ultimate adverse impact of the coronavirus. Nevertheless, the coronavirus presents material uncertainty and risk with respect to our performance and financial results.
We may in the future have difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may cause us to reduce the volume of receivables we purchase or otherwise have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our Financial Performance Is, in Part, a Function of the Aggregate Amount of Receivables That Are Outstanding
The aggregate amount of outstanding receivables is a function of many factors including purchase rates, payment rates, interest rates, seasonality, general economic conditions, competition from credit card issuers and other sources of consumer financing, access to funding, and the timing and extent of our receivable purchases.
The recent growth of our investments in point-of-sale finance and direct-to-consumer receivables may not be indicative of our ability to grow such receivables in the future. Our period-end managed receivables balance for point-of-sale finance and direct-to-consumer receivables grew to $1,088.5 million at Match 31, 2021 from $911.7 million March 31, 2020. The amount of such receivables has fluctuated significantly over the course of our operating history. Furthermore, even if such receivables continue to increase, the rate of such growth could decline. If we cannot manage the growth in receivables effectively, it could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
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 60% of our outstanding point-of-sale receivables as of December 31, 2020. 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. 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 select 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.
The regulatory landscape in which we operate is continually changing due to new rules, regulations and interpretations, as well as various legal actions that have been brought against others that have sought to re-characterize certain loans made by federally insured banks as loans made by third parties. If litigation on similar theories were brought against us when we work with a federally insured bank that makes loans and were such an action successful, we could be subject to state usury limits and/or state licensing requirements, loans in such states could be deemed void and unenforceable, and we could be subject to substantial penalties in connection with such loans.
The case law involving whether an originating lender, on the one hand, or third-parties, on the other hand, are the “true lenders” of a loan is still developing and courts have come to different conclusions and applied different analyses. The determination of whether a third-party service provider is the “true lender” is significant because third-parties risk having the loans they service becoming subject to a consumer’s state usury limits. A number of federal courts that have opined on the “true lender” issue have looked to who is the lender identified on the borrower’s loan documents. A number of state courts and at least one federal district court have considered a number of other factors when analyzing whether the originating lender or a third party is the “true lender,” including looking at the economics of the transaction to determine, among other things, who has the predominant economic interest in the loan being made. If we were re-characterized as a “true lender” with respect to the receivables originated by the bank that utilizes our technology platform and other services, such receivables could be deemed to be void and unenforceable in some states, the right to collect finance charges could be affected, and we could be subject to fines and penalties from state and federal regulatory agencies as well as claims by borrowers, including class actions by private plaintiffs. Even if we were not required to change our business practices to comply with applicable state laws and regulations or cease doing business in some states, we could be required to register or obtain lending licenses or other regulatory approvals that could impose a substantial cost on us. If the bank that originates loans utilizing our technology platform were subject to such a lawsuit, it may elect to terminate its relationship with us voluntarily or at the direction of its regulators, and if it lost the lawsuit, it could be forced to modify or terminate such relationship.
In addition to true lender challenges, a question regarding the applicability of state usury rates may arise when a loan is sold from a bank to a non-bank entity. In Madden v. Midland Funding, LLC, the U.S. Court of Appeals for the Second Circuit held that the federal preemption of state usury laws did not extend to the purchaser of a loan issued by a national bank. In its brief urging the U.S. Supreme Court to deny certiorari, the U.S. Solicitor General, joined by the Office of the Comptroller of the Currency (“OCC”), noted that the Second Circuit (Connecticut, New York and Vermont) analysis was incorrect. On remand, the U.S. District Court for the Southern District of New York concluded on February 27, 2017 that New York’s state usury law, not Delaware’s state usury law, was applicable and that the plaintiff’s claims under the FDCPA and state unfair and deceptive acts and practices could proceed. To that end, the court granted Madden’s motion for class certification. At this time, it is unknown whether Madden will be applied outside of the defaulted debt context in which it arose. The facts in Madden are not directly applicable to our business, as we do not engage in practices similar to those at issue in Madden. However, to the extent that the holding in Madden was broadened to cover circumstances applicable to our business, or if other litigation on related theories were brought against us and were successful, or we were otherwise found to be the “true lender,” we could become subject to state usury limits and state licensing laws, in addition to the state consumer protection laws to which we are already subject, in a greater number of states, loans in such states could be deemed void and unenforceable, and we could be subject to substantial penalties in connection with such loans.
In response to the uncertainty Madden created as to the validity of interest rates of bank-originated loans sold in the secondary market, in May 2020 and June 2020, the OCC and the FDIC, respectively, issued final rules that reaffirmed the “valid when made” doctrine and clarified that when a bank sells, assigns, or otherwise transfers a loan, the interest rates permissible prior to the transfer continue to be permissible following the transfer. In the summer of 2020, a number of states filed suits against the OCC and the FDIC, challenging these "valid when made" rules.
We support a single bank that markets general purpose credit cards and certain other credit products directly to consumers. We acquire interests in and service the receivables originated by that bank. The bank could determine not to continue the relationship for various business reasons, or its regulators could limit its ability to issue credit cards utilizing our technology platform or to originate some or all of the other products that we service or require the bank to modify those products significantly and could do either with little or no notice. Any significant interruption or change of our bank relationship would result in our being unable to acquire new receivables or develop certain other credit products. Unless we were able to timely replace our bank relationship, such an interruption would prevent us from acquiring newly originated credit card receivables and growing our investments in point-of-sale and direct-to-consumer receivables. In turn, it would materially adversely impact our business.
The FDIC has issued examination guidance affecting the bank that utilizes our technology platform to market general purpose credit cards and certain other credit products and these or subsequent new rules and regulations could have a significant impact on such credit products. The bank that utilizes our technology platform and other services to market general purpose credit cards and certain other credit products is supervised and examined by both the state that charters it and the FDIC. If the FDIC or a state supervisory body considers any aspect of the products originated utilizing our technology platform to be inconsistent with its guidance, the bank may be required to alter or terminate some or all of these products.
On July 29, 2016, the board of directors of the FDIC released examination guidance relating to third-party lending as part of a package of materials designed to “improve the transparency and clarity of the FDIC’s supervisory policies and practices” and consumer compliance measures that FDIC-supervised institutions should follow when lending through a business relationship with a third party. The proposed guidance, if finalized, would apply to all FDIC-supervised institutions that engage in third-party lending programs, including the bank that utilizes our technology platform and other services to market general purpose credit cards and certain other credit products.
The proposed guidance elaborates on previously issued agency guidance on managing third-party risks and specifically addresses third-party lending arrangements where an FDIC-supervised institution relies on a third party to perform a significant aspect of the lending process. The types of relationships that would be covered by the guidance include (but are not limited to) relationships for originating loans on behalf of, through or jointly with third parties, or using platforms developed by third parties. If adopted as proposed, the guidance would result in increased supervisory attention of institutions that engage in significant lending activities through third parties, including at least one examination every 12 months, as well as supervisory expectations for a third-party lending risk management program and third-party lending policies that contain certain minimum requirements, such as self-imposed limits as a percentage of total capital for each third-party lending relationship and for the overall loan program, relative to origination volumes, credit exposures (including pipeline risk), growth, loan types, and acceptable credit quality. While the guidance has never formally been adopted, it is our understanding that the FDIC has relied upon it in its examination of third-party lending arrangements.
Changes to consumer protection laws or changes in their interpretation may impede collection efforts or otherwise adversely impact our business practices. Federal and state consumer protection laws regulate the creation and enforcement of consumer credit card receivables and other loans. Many of these laws (and the related regulations) are focused on non-prime lenders and are intended to prohibit or curtail industry-standard practices as well as non-standard practices. For instance, Congress enacted legislation that regulates loans to military personnel through imposing interest rate and other limitations and requiring new disclosures, all as regulated by the Department of Defense. Similarly, in 2009 Congress enacted legislation that required changes to a variety of marketing, billing and collection practices, and the Federal Reserve adopted significant changes to a number of practices through its issuance of regulations. While our practices are in compliance with these changes, some of the changes (e.g., limitations on the ability to assess up-front fees) have significantly affected the viability of certain credit products within the U.S. Changes in the consumer protection laws could result in the following:
| • | receivables not originated in compliance with law (or revised interpretations) could become unenforceable and uncollectible under their terms against the obligors; | |
| • | we may be required to credit or refund previously collected amounts; | |
| • | certain fees and finance charges could be limited, prohibited or restricted, reducing the profitability of certain investments in receivables; | |
| • | certain collection methods could be prohibited, forcing us to revise our practices or adopt more costly or less effective practices; | |
| • | limitations on our ability to recover on charged-off receivables regardless of any act or omission on our part; | |
| • | some credit products and services could be banned in certain states or at the federal level; | |
| • | federal or state bankruptcy or debtor relief laws could offer additional protections to consumers seeking bankruptcy protection, providing a court greater leeway to reduce or discharge amounts owed to us; and | |
| • | a reduction in our ability or willingness to invest in receivables arising under loans to certain consumers, such as military personnel. |
Material regulatory developments may adversely impact our business and results from operations.
Our Automobile Lending Activities Involve Risks in Addition to Others Described Herein
Automobile lending exposes us not only to most of the risks described above but also to additional risks, including the regulatory scheme that governs installment loans and those attendant to relying upon automobiles and their repossession and liquidation value as collateral. In addition, our Auto Finance segment operation acquires loans on a wholesale basis from used car dealers, for which we rely upon the legal compliance and credit determinations by those dealers.
Funding for automobile lending may become difficult to obtain and expensive. In the event we are unable to renew or replace any Auto Finance segment facilities that bear refunding or refinancing risks when they become due, our Auto Finance segment could experience significant constraints and diminution in reported asset values as lenders retain significant cash flows within underlying structured financings or otherwise under security arrangements for repayment of their loans. If we cannot renew or replace future facilities or otherwise are unduly constrained from a liquidity perspective, we may choose to sell part or all of our auto loan portfolios, possibly at less than favorable prices.
Our automobile lending business is dependent upon referrals from dealers. Currently we provide substantially all of our automobile loans only to or through used car dealers. Providers of automobile financing have traditionally competed based on the interest rate charged, the quality of credit accepted and the flexibility of loan terms offered. In order to be successful, we not only need to be competitive in these areas, but also need to establish and maintain good relations with dealers and provide them with a level of service greater than what they can obtain from our competitors.
The financial performance of our automobile loan portfolio is in part dependent upon the liquidation of repossessed automobiles. In the event of certain defaults, we may repossess automobiles and sell repossessed automobiles at wholesale auction markets located throughout the U.S. Auction proceeds from these types of sales and other recoveries rarely are sufficient to cover the outstanding balances of the contracts; where we experience these shortfalls, we will experience credit losses. Decreased auction proceeds resulting from depressed prices at which used automobiles may be sold would result in higher credit losses for us.
Repossession of automobiles entails the risk of litigation and other claims. Although we have contracted with reputable repossession firms to repossess automobiles on defaulted loans, it is not uncommon for consumers to assert that we were not entitled to repossess an automobile or that the repossession was not conducted in accordance with applicable law. These claims increase the cost of our collection efforts and, if successful, 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
The global outbreak of COVID-19, has caused severe disruptions in the U.S. economy, and may have an adverse impact on our performance, results of operations and access to capital. On March 13, 2020, a national emergency was declared under the National Emergencies Act due to a new strain of coronavirus ("COVID-19"). Measures taken across the U.S. and worldwide to mitigate the spread of the virus have significantly impacted the macroeconomic environment, including consumer confidence, unemployment and other economic indicators that contribute to consumer spending behavior and demand for credit. Our results of operations are impacted by the relative strength of the overall economy. As general economic conditions improve or deteriorate, the amount of consumer disposable income tends to fluctuate, which, in turn, impacts consumer spending levels and the willingness of consumers to finance purchases.
The extent to which COVID-19 will impact our business, results of operations and financial condition is dependent on many factors, which are highly uncertain, including, but not limited to, the duration and severity of the outbreak, the actions to contain the virus or mitigate its impact, and how quickly and to what extent normal economic and operating conditions will resume. If we experience a prolonged decline in purchases of receivables or increase in delinquencies, our results of operations and financial condition could be materially adversely affected.
We routinely engage in discussions with customers, some of whom have indicated that they have experienced economic hardship due to the COVID-19 pandemic and have requested payment deferral or forbearance or other modifications of their accounts. While we are addressing requests for relief, we may still experience higher instances of default. Additionally, the COVID-19 pandemic could adversely affect our liquidity position and could limit our ability to grow our business or fully execute on our business strategy. Furthermore, the COVID-19 pandemic could negatively impact our access to capital.
The COVID-19 pandemic also resulted in us modifying certain business practices, such as minimizing employee travel and executing on a company-wide remote work program. We may take further actions as required by government authorities or as we determine to be in the best interests of our employees and consumers. We may experience disruptions due to a number of operational factors, including, but not limited to:
| • | increased cyber and payment fraud risk related to COVID-19, as cybercriminals attempt to profit from the disruption, given increased e-commerce and other online activity; | |
| • | challenges to the security, availability and reliability of our information technology platform due to changes to normal operations, including the possibility of one or more clusters of COVID-19 cases affecting our employees or affecting the systems or employees of our partners; and | |
| • | an increased volume of borrower and regulatory requests for information and support, or new regulatory requirements, which could require additional resources and costs to address. |
Even after the COVID-19 pandemic has subsided, our business may continue to be unfavorably impacted by the economic turmoil caused by the pandemic. There are no recent comparable events that could serve to indicate the ultimate effect the COVID-19 pandemic may have and, as such, we do not at this time know what the extent of the impact of the COVID-19 pandemic will be on our business. To the extent the COVID-19 pandemic adversely affects our business and financial results, it also may heighten other risks described in this Part II, Item 1A.
For additional discussion of the impact of COVID-19 on our business, see additional risk factors included in this Part II, Item 1A, as well as Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
We are a holding company with no operations of our own. As a result, our cash flow and ability to service our debt is dependent upon distributions from our subsidiaries. The distribution of subsidiary earnings, or advances or other distributions of funds by subsidiaries to us, all of which are subject to statutory and could be subject to contractual restrictions, are contingent upon the subsidiaries’ cash flows and earnings and are subject to various business and debt covenant considerations.
We are party to litigation. We 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 may be unable to use some or all of our net operating loss (“NOL”) carryforwards. At December 31, 2020, we had U.S. federal NOL carryforwards of $51.0 million the deferred tax assets on which were not offset by valuation allowances. Our NOLs have resulted from prior period losses and are available to offset future taxable income. If not used, $1.3 million of the NOLs will expire in 2030, $24.8 million will expire in 2033, and $24.9 million will expire in 2037. Additionally, we had $2.5 million of U.S. state and local and foreign deferred tax assets which were not offset by valuation allowances. Such NOLs exist in a variety of jurisdictions with a variety of expiration dates. Under Section 382 of the Internal Revenue Code, our ability to use NOLs in any taxable year may be limited if we experience an "ownership change." A section 382 "ownership change" generally occurs if one or more shareholders or groups of shareholders, who own at least 5% of our stock, increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. We have not completed a Section 382 analysis through December 31, 2020. If we have previously had, or have in the future, one or more Section 382 “ownership changes,” or if we do not generate sufficient taxable income, we may not be able to use a material portion of the NOLs. If we are limited in our ability to use the NOLs in future years in which we have taxable income, we will pay more taxes than if we were able to fully use our NOLs. This could materially and adversely affect our results of operations.
Because we outsource account-processing functions that are integral to our business, any disruption or termination of these outsourcing relationships 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 alternative providers. There is a risk that we would not be able to enter into similar outsourcing arrangements with alternate providers on terms that we consider favorable or in a timely manner without disruption of our business. Furthermore, we are currently transitioning to a new system provider. This conversion could cause service disruptions or other operational challenges.
Failure to keep up with the rapid technological changes in financial services and e-commerce could harm our business. The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial and lending institutions to better serve customers and reduce costs. Our future success will depend, in part, upon our ability to address the needs of consumers by using technology to support products and services that will satisfy consumer demands for convenience, as well as to create additional efficiencies in our operations. We may not be able to effectively implement new technology-driven products and services as quickly as some of our competitors. Failure to successfully keep pace with technological change affecting the financial services industry could harm our ability to compete with our competitors. Any such failure to adapt to changes could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
If we are unable to protect our information systems against service interruption, our operations could be disrupted and our reputation may be damaged. We rely heavily on networks and information systems and other technology, that are largely hosted by third-parties to support our business processes and activities, including processes integral to the origination and collection of loans and other financial products, and information systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting and legal and tax requirements. Because information systems are critical to many of our operating activities, our business may be impacted by hosted system shutdowns, service disruptions or security breaches. These incidents may be caused by failures during routine operations such as system upgrades or user errors, as well as network or hardware failures, malicious or disruptive software, computer hackers, rogue employees or contractors, cyber-attacks by criminal groups, geopolitical events, natural disasters, pandemics, 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.
The California Consumer Privacy Act (the “CCPA”) became effective on January 1, 2020. The CCPA requires, among other things, covered companies to provide new disclosures to California consumers and afford such consumers with expanded protections and control over the collection, maintenance, use and sharing of personal information. The CCPA continues to be subject to new regulations and legislative amendments. Although we have implemented a compliance program designed to address obligations under the CCPA, it remains unclear what future modifications will be made or how the CCPA will be interpreted in the future. The CCPA provides for civil penalties for violations and a private right of action for data breaches.
In addition, on November 3, 2020, California voters approved the California Privacy Rights Act of 2020 (the “CPRA”) ballot initiative. Although the CPRA will not take effect until January 1, 2023, it will establish a privacy regulator before that date. We anticipate that CPRA will apply to our business and we will work to ensure compliance with the CPRA by its effective date.
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, operating system failures, or system conversion will reduce our revenues and profits. Any unscheduled interruption in our services results in an immediate, and possibly substantial, reduction in our ability to serve our customers, thereby resulting in a 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, pandemic, 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. Furthermore, we are currently transitioning to a new system provider. This conversion could cause service disruptions or other operational challenges.
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. We are uncertain of the ultimate impact, either directionally or quantitatively, of climate change and related regulatory responses on our business. 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.
We elected the fair value option effective as of January 1, 2020, and we use estimates in determining the fair value of our loans. If our estimates prove incorrect, we may be required to write down the value of these assets, adversely affecting our results of operations. Our ability to measure and report our financial position and results of operations is influenced by the need to estimate the impact or outcome of future events on the basis of information available at the time of the issuance of the financial statements. Further, most of these estimates are determined using Level 3 inputs for which changes could significantly impact our fair value measurements. A variety of factors including, but not limited to, estimated yields on consumer receivables, customer default rates, the timing of expected payments, estimated costs to service the portfolio, interest rates, and valuations of comparable portfolios may ultimately affect the fair values of our loans and finance receivables. If actual results differ from our judgments and assumptions, then it may have an adverse impact on the results of operations and cash flows. Management has processes in place to monitor these judgments and assumptions, but these processes may not ensure that our judgments and assumptions are correct.
Our allowance for uncollectible loans is determined based upon both objective and subjective factors and may not be adequate to absorb loan losses. We face the risk that customers will fail to repay their loans in full. Through our analysis of loan performance, delinquency data, charge-off data, economic trends and the potential effects of those economic trends on consumers, we establish an allowance for uncollectible loans, interest and fees receivable as an estimate of the probable losses inherent within those loans, interest and fees receivable that we do not report at fair value. We determine the necessary allowance for uncollectible loans, interest and fees receivable by analyzing some or all of the following unique to each type of receivable pool: historical loss rates; current delinquency and roll-rate trends; vintage analyses based on the number of months an account has been in existence; the effects of changes in the economy on consumers; changes in underwriting criteria; and estimated recoveries. These inputs are considered in conjunction with (and potentially reduced by) any unearned fees and discounts that may be applicable for an outstanding loan receivable. Actual losses are difficult to forecast, especially if such losses are due to factors beyond our historical experience or control. As a result, our allowance for uncollectible loans may not be adequate to absorb incurred losses or prevent a material adverse effect on our business, financial condition and results of operations. Losses are the largest cost as a percentage of revenues across all of our products. Fraud and customers not being able to repay their loans are both significant drivers of loss rates. If we experienced rising credit or fraud losses this would significantly reduce our earnings and profit margins and could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
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:
| • | actual or anticipated fluctuations in our operating results; | |
| • | changes in expectations as to our future financial performance, including financial estimates and projections by Atlanticus, securities analysts and investors; | |
| • | the overall financing environment, which is critical to our value; | |
| • | the operating and stock performance of our competitors; | |
| • | announcements by us or our competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; | |
| • | changes in interest rates; | |
| • | the announcement of enforcement actions or investigations against us or our competitors or other negative publicity relating to us or our industry; | |
| • | changes in generally accepted accounting principles in the U.S. ("GAAP"), laws, regulations or the interpretations thereof that affect our various business activities and segments; | |
| • | general domestic or international economic, market and political conditions; | |
| • | changes in ownership by executive officers, directors and parties related to them who control a majority of our common stock; | |
| • | additions or departures of key personnel; and | |
| • | future sales of our common stock and the transfer or cancellation of shares of common stock pursuant to a share lending agreement. |
In addition, the stock markets from time to time experience extreme price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies. These broad fluctuations may adversely affect the trading price of our common stock, regardless of our actual operating performance.
Future sales of our common stock or equity-related securities in the public market, including sales of our common stock pursuant to share lending agreements or short sale transactions by holders 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 holders of our convertible senior notes, may have a material adverse effect on the trading price of our common stock.
The shares of Series A Convertible Preferred Stock are senior obligations, rank prior to our common stock with respect to dividends, distributions and payments upon liquidation and have other terms, such as a redemption right, that could negatively impact the value of shares of our common stock. In December 2019, we issued 400,000 shares of Series A Convertible Preferred Stock. The rights of the holders of our Series A Convertible Preferred Stock with respect to dividends, distributions and payments upon liquidation rank senior to similar obligations to our holders of common stock. Holders of the Series A Convertible Preferred Stock are entitled to receive dividends on each share of such stock equal to 6% per annum on the liquidation preference of $100. The dividends on the Series A Convertible Preferred Stock are cumulative and non-compounding and must be paid before we pay any dividends on the common stock.
In the event of our liquidation, dissolution or the winding up of our affairs, the holders of our Series A Convertible Preferred Stock have the right to receive a liquidation preference entitling them to be paid out of our assets generally available for distribution to our equity holders and before any payment may be made to holders of our common stock in an amount equal to $100 per share of Series A Convertible Preferred Stock plus any accrued but unpaid dividends.
Further, on and after January 1, 2024, the holders of the Series A Convertible Preferred Stock will have the right to require us to purchase outstanding shares of Series A Convertible Preferred Stock for an amount equal to $100 per share plus any accrued but unpaid dividends. This redemption right could expose us to a liquidity risk if we do not have sufficient cash resources at hand or are not able to find financing on sufficiently attractive terms to comply with our obligations to repurchase the Series A Convertible Preferred Stock upon exercise of such redemption right.
Our obligations to the holders of Series A Convertible Preferred Stock also could limit our ability to obtain additional financing or increase our borrowing costs, which could have an adverse effect on our financial condition and the value of our common stock.
Our outstanding Series A Convertible Preferred Stock has anti-dilution protection that, if triggered, could cause substantial dilution to our then-existing holders of common stock, which could adversely affect our stock price. The document governing the terms of our outstanding Series A Convertible Preferred Stock contains anti-dilution provisions to benefit the holders of such stock. As a result, if we, in the future, issue common stock or other derivative securities, subject to specified exceptions, for a per share price less than the then existing conversion price of the Series A Convertible Preferred Stock, an adjustment to the then current conversion price would occur. This reduction in the conversion price could result in substantial dilution to our then-existing holders of common stock, which could adversely affect the price of our common stock.
In the past, we have not paid cash dividends on our common stock on a regular basis, and an increase in the market price of our common stock, if any, may be the sole source of gain on your investment. With the exception of dividends payable on our Series A Convertible Preferred Stock, we currently plan to retain any future earnings for use in the operation and expansion of our business and may not pay any dividends on our common stock in the foreseeable future. The declaration and payment of all future dividends on our common stock, if any, will be at the sole discretion of our board of directors, which retains the right to change our dividend policy at any time. Any decision by our board of directors to declare and pay dividends in the future will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions, restrictions on dividends imposed by the document governing the terms of the Series A Convertible Preferred Stock and other factors that our board of directors may deem relevant. Consequently, appreciation in the market price of our common stock, if any, may be the sole source of gain on your investment for the foreseeable future.
Holders of the Series A Convertible Preferred Stock are entitled to receive dividends on each share of such stock equal to 6% per annum on the liquidation preference of $100. The dividends on the Series A Convertible Preferred Stock are cumulative and non-compounding and must be paid before we pay any dividends on the common stock.
We have the ability to issue additional preferred stock, warrants, convertible debt and other securities without shareholder approval. Our common stock may be subordinate to additional classes of preferred stock issued in the future in the payment of dividends and other distributions made with respect to common stock, including distributions upon liquidation or dissolution. Our articles of incorporation permit our Board of Directors to issue preferred stock without first obtaining shareholder approval, which we did in December 2019 when we issued the Series A Convertible Preferred Stock. If we issue additional classes of preferred stock, these additional securities may have dividend or liquidation preferences senior to the common stock. If we issue additional classes of convertible preferred stock, a subsequent conversion may dilute the current common shareholders’ interest. We have similar abilities to issue convertible debt, warrants and other equity securities.
Our executive officers, directors and parties related to them, in the aggregate, control a majority of our common stock and may have the ability to control matters requiring shareholder approval. Our executive officers, directors and parties related to them own a large enough share of our common stock to have an influence on, if not control of, the matters presented to shareholders. As a result, these shareholders may have the ability to control matters requiring shareholder approval, including the election and removal of directors, the approval of significant corporate transactions, such as any reclassification, reorganization, merger, consolidation or sale of all or substantially all of our assets and the control of our management and affairs. Accordingly, this concentration of ownership may have the effect of delaying, deferring or preventing a change of control of us, impede a merger, consolidation, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could have an adverse effect on the market price of our common stock.
The right to receive payments on our convertible senior notes is subordinate to the rights of our existing and future secured creditors. Our convertible senior notes are unsecured and are subordinate to existing and future secured obligations to the extent of the value of the assets securing such obligations. As a result, in the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding of our company, our assets generally would be available to satisfy obligations of our secured debt before any payment may be made on the convertible senior notes. To the extent that such assets cannot satisfy 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 March 31, 2021, Atlanticus Holdings Corporation had outstanding: $830.6 million of secured indebtedness, which would rank senior in right of payment to the convertible senior notes; $63.5 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 March 31, 2021, our subsidiaries had total liabilities of approximately $874.1 million (including the $830.6 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.
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
ISSUER PURCHASES OF EQUITY SECURITIES
The following table sets forth information with respect to our repurchases of common stock during the three months ended March 31, 2021.
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Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) |
Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs (2) |
|||||||||||||
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January 1 - January 31 |
2,359 | $ | 23.94 | — | 4,919,827 | |||||||||||
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February 1 - February 28 |
594 | $ | 32.38 | — | 4,919,827 | |||||||||||
|
March 1 - March 31 |
6,975 | $ | 31.79 | — | 4,919,827 | |||||||||||
|
Total |
9,928 | $ | 29.96 | — | 4,919,827 | |||||||||||
| (1) | Because withholding tax-related stock repurchases are permitted outside the scope of our 5,000,000 share Board-authorized repurchase plan, these amounts exclude shares of stock returned to us by employees in satisfaction of withholding tax requirements on vested stock grants. There were 9,928 such shares returned to us during the three months ended March 31, 2021. | |
|
(2) |
Pursuant to a share repurchase plan authorized by our Board of Directors on May 7, 2020, we are authorized to repurchase 5,000,000 shares of our common stock through June 30, 2022. |
We will continue to evaluate our stock price relative to other investment opportunities and, to the extent we believe that the repurchase of our stock represents an appropriate return of capital, we will repurchase shares of our stock.
Dividends
In the past, we have occasionally returned cash to holders of our common stock through repurchases and have not paid cash dividends to holders of our common stock on a regular basis. As we continue to pursue our growth strategy, we will assess our cash flow, the long-term capital needs of our business and other uses of cash, such as repurchases of our convertible senior notes. Payment of any cash dividends in the future will depend upon, among other things, our results of operations, financial condition, cash requirements and contractual restrictions. Furthermore, dividends on our Series A Convertible Preferred Stock are payable in preference to any common stock dividends. For additional information, see Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity, Funding and Capital Resources.”
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DEFAULTS UPON SENIOR SECURITIES |
None.
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MINE SAFETY DISCLOSURES |
None.
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OTHER INFORMATION |
None.
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EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
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Exhibit Number |
|
Description of Exhibit |
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Incorporated by Reference from Atlanticus’ SEC Filings Unless Otherwise Indicated |
| 10.1 | Amended and Restated Employment Agreement, dated March 18, 2021, between Atlanticus Holdings Corporation and David G. Hanna | Filed herewith | ||
| 10.2 | Amended and Restated Employment Agreement, dated March 18, 2021, between Atlanticus Holdings Corporation and Jeffrey A. Howard | Filed herewith | ||
| 10.3 | Outside Director Compensation Package | Filed herewith | ||
| 10.4 | Amended and Restated Consultant Agreement, dated May 1, 2020, between Atlanticus Services Corporation and Denise M. Harrod | Filed herewith | ||
| 31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) | Filed herewith | ||
| 31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) | Filed herewith | ||
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32.1 |
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Filed herewith |
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101.INS |
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XBRL Instance Document |
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Filed herewith |
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101.SCH |
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XBRL Taxonomy Extension Schema Document |
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Filed herewith |
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101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase Document |
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Filed herewith |
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101.LAB |
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XBRL Taxonomy Extension Label Linkbase Document |
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Filed herewith |
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101.PRE |
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XBRL Taxonomy Presentation Linkbase Document |
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Filed herewith |
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101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document |
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Filed herewith |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Atlanticus Holdings Corporation |
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| May 14, 2021 |
By: |
/s/ William R. McCamey |
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William R. McCamey Chief Financial Officer (duly authorized officer and principal financial officer) |
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Exhibit 10.1
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into this the 18th day of March, 2021 by and between ATLANTICUS HOLDINGS CORPORATION, a Georgia corporation (“Atlanticus”), and DAVID G. HANNA, an individual resident of the State of Georgia (“Employee”).
W I T N E S S E T H:
WHEREAS, CompuCredit Corporation (“CompuCredit”) and the Employee entered into an Employment Agreement, effective as of March 15, 2001 (the “Original Employment Agreement”);
WHEREAS, CompuCredit and the Employee entered into the Amended and Restated Employment Agreement on December 23, 2008 (the “Amended Employment Agreement”) to amend the Original Employment Agreement;
WHEREAS, on June 30, 2009, CompuCredit completed a reorganization, pursuant to which CompuCredit became a wholly owned subsidiary of Atlanticus (the “Reorganization”);
WHEREAS, in connection with the Reorganization, CompuCredit transferred to Atlanticus, and Atlanticus assumed, the Amended Employment Agreement; and
WHEREAS, the parties hereto desire to replace and supersede all prior employment arrangements, including the Amended Employment Agreement, between Atlanticus and any of its related affiliates and Employee in their entirety and set forth herein the terms and conditions of Employee’s employment as Executive Chairman of Atlanticus.
NOW, THEREFORE, for and in consideration of the premises and the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Atlanticus and Employee agree as follows:
1. RELATIONSHIP ESTABLISHED. Upon the terms and subject to the conditions of this Agreement, Atlanticus hereby employs Employee to perform services (the “Services”) for Atlanticus as its Executive Chairman and as delegated to him from time to time by the Board of Directors of Atlanticus consistent with those generally associated with that position. Employee hereby agrees to devote appropriate business efforts toward performing the Services. In his performance of the Services, Employee shall comply with applicable Atlanticus policies and procedures. If there is any conflict between such policies and procedures and this Agreement, this Agreement shall control.
2. TERM; TERMINATION.
2.1 TERM OF EMPLOYMENT. The term of Employee’s employment under this Agreement shall commence on the date hereof and shall continue indefinitely on an at will basis, subject to termination at any time by either party on not less than thirty (30) days prior written notice by either party, or as otherwise provided pursuant to Section 2.2 of this Agreement. The period of time Employee is employed by Atlanticus shall be referred to as the “Term.”
2.2 TERMINATION OF EMPLOYMENT.
(a) This Agreement shall automatically and immediately terminate upon the death of Employee.
(b) Either party may terminate this Agreement upon the Complete Disability of Employee. “Complete Disability”, as used herein, shall mean the inability of Employee by reason of any physical or mental impairment to perform fully and effectively, as determined in the reasonable judgment of a competent physician selected in good faith by Atlanticus, the Services on a full time basis for an aggregate of 90 days in any period of 180 consecutive days.
(c) In addition to any other rights or remedies available to Atlanticus, Atlanticus may, in its sole discretion, terminate this Agreement for Cause effective immediately upon delivery of written notice to Employee. In this Agreement, “Cause” means the reasonable, good faith determination of a majority of the Board of Directors of Atlanticus that:
(i) (A) Employee has committed an act constituting fraud, moral turpitude, deceit or intentional material misrepresentation with respect to Atlanticus or any client, customer or supplier of Atlanticus; (B) Employee has embezzled funds or assets from Atlanticus or any client, customer or supplier of Atlanticus; or (C) Employee has engaged in willful misconduct or gross negligence in the performance of the Services;
(ii) Employee has breached or defaulted in the performance of any material provision of this Agreement and has not cured such breach or default to Atlanticus’ reasonable satisfaction within thirty (30) days after receiving notice thereof (provided that any breach by Employee of any obligation under Section 9 will be grounds for immediate termination for “Cause” without any notice or right to cure); or
(iii) Employee’s conduct is materially detrimental to the reputation of Atlanticus which Employee has not cured (if such conduct is curable in Atlanticus’ reasonable opinion) to Atlanticus’ reasonable satisfaction within ten (10) days after receiving notice thereof.
(d) The date on which this Agreement expires or terminates for any reason is referred to herein as the “Termination Date.”
(e) Employee may terminate this Agreement following a Change of Control (as defined below), by providing Atlanticus at least thirty (30) days prior written notice of termination. For purposes of this Agreement, “Change of Control” shall mean the acquisition by any single person or entity or related persons or entities of either substantially all the assets of Atlanticus or more than fifty percent (50%) of the outstanding and issued common stock of Atlanticus.
3. COMPENSATION.
(a) During the Term, Atlanticus shall pay Employee as compensation for the Services an annual salary equal to $600,000. Such compensation shall be payable in substantially equal semi-monthly installments or in such other installments or at such other intervals as may be the policy of Atlanticus from time to time, but no less frequently than monthly, and shall be subject to such deductions and withholdings as are required by law or policies of Atlanticus in effect from time to time. Employee’s salary per annum may from time to time be adjusted as agreed in writing by both Atlanticus and Employee. During the Term, Employee also shall be eligible for bonus and equity compensation as determined by the Compensation Committee of the Board of Directors from time to time. The terms of any equity award shall be provided in the related award agreement.
(b) Notwithstanding anything to the contrary herein, if this Agreement is terminated for any of the reasons set forth in Section 2 hereof (i) Atlanticus shall be released of its obligation to pay further compensation or benefits to Employee as set forth in this Agreement except for salary already earned under Section 3(a) hereof and payable as set forth therein, and Employee will not be entitled to any severance or other benefits upon any termination of his employment hereunder and (ii) any outstanding equity award will continue to be governed by the related award agreement.
4. VACATION. During the Term of this Agreement, Employee shall be entitled to such number of weeks of paid vacation in each calendar year of the Term as is provided in, and in accordance with, Atlanticus’ policies in effect from time to time for management employees.
5. BENEFITS. During the Term of this Agreement, Employee shall be entitled to participate in executive employee benefit plans generally provided by Atlanticus to its executives, but only if and to the extent provided from time to time in such executive benefits plans and for so long as Atlanticus provides or offers such benefit plans.
6. REIMBURSEMENT FOR EXPENSES. Atlanticus shall reimburse Employee for reasonable out-of-pocket expenses incurred by Employee in connection with the performance of the Services hereunder for travel, entertainment and other miscellaneous expenses to the extent such expenses are consistent with Atlanticus’ reimbursement policy as the same shall be in effect from time to time. Reimbursement shall be made only against an itemized list of such expenses submitted to Atlanticus by Employee within thirty (30) days after being incurred, and, to the extent requested by Atlanticus, receipts and invoices evidencing such expenses. In no event shall any such reimbursement be made later than thirty (30) days after the period for submitting such itemized list expires.
7. CONFIDENTIALITY.
(a) PROPRIETARY INFORMATION. Employee acknowledges that as an employee of Atlanticus, he may from time to time have access to and be provided with trade secrets (as defined under applicable law), and other confidential, secret and proprietary information including without limitation, financial statements or information, technical or nontechnical data, formulae, compilations, programs, methods, data, financial plans, models, product plans, marketing or sales strategies, portfolio information, or lists of actual or potential borrowers, loan program participants or other customers not generally available to the public concerning any aspect of the products, services or businesses of Atlanticus, its affiliates, or its and their officers, directors, employees, advisers, agents or other personnel (collectively, “Proprietary Information”). Employee agrees that he will not, directly or indirectly, disclose, publish, disseminate or use any Proprietary Information except as authorized herein. Employee may use Proprietary Information to perform the Services but in doing so will only allow dissemination of Proprietary Information to any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, government agency, trust, trustee, entity, unincorporated organization or any other entity on a strict need-to-know basis (provided such persons are first informed of the confidential nature of such Proprietary Information and directed to use or disclose it only as permitted herein). If disclosure of any Proprietary Information is required by law, a court or agency of the government, then Employee may make such disclosure after providing Atlanticus with reasonable notice, to the extent that providing such notice to Atlanticus is legally permissible, so that Atlanticus may seek protective relief.
(b) NON-PROPRIETARY INFORMATION. Notwithstanding the provisions of Section 7(a) above, the following shall not be considered to be Proprietary Information: (i) any information that was in the public domain through no fault or act of Employee prior to the disclosure thereof to Employee; (ii) any information that comes into the public domain through no fault or act of Employee; (iii) any information that is disclosed without restriction to Employee by a third party (which term shall not include any equity holder, affiliate, or counsel, accountants and other non-employee representatives of affiliated entities, or of any of their respective equity holders, affiliates or related persons) having the legal right to make such disclosure, and (iv) any confidential business information that is not a trade secret on the three (3) year anniversary of the Termination Date; PROVIDED, HOWEVER, that the limited duration of the confidentiality obligation with regard to Proprietary Information not constituting a trade secret shall not operate or be construed as affording Employee any right or license thereafter to use Proprietary Information, or as a waiver by Atlanticus of the rights and benefits otherwise available to Atlanticus under the laws governing the protection and enforceability of patents, trade secret and other intellectual property.
(c) RETURN OF MATERIALS. On or before the Termination Date, or when otherwise requested by Atlanticus, Employee will deliver promptly to Atlanticus all Proprietary Information and all other files, customer lists, management reports, drawings, memoranda, forms, financial data and reports and other materials or documents and equipment provided to, or obtained or created by Employee in connection with the Services (including all copies of the foregoing, and including all notes, records and other materials of or relating to Atlanticus or its customers) in his possession or control.
8. TRANSFER AND ASSIGNMENT TO ATLANTICUS.
(a) TRANSFER AND ASSIGNMENT OF WORK PRODUCT. To the greatest extent possible, any Work Product will be “work made for hire” (as defined in the Copyright Act, 17 U.S.C.A. Section 101 ET SEQ., as amended) and owned exclusively by Atlanticus. In this Agreement, “Work Product” means work product, property, data, documentation, “know-how,” concepts, plans, inventions, improvements, techniques, processes or information of any kind, prepared, conceived, discovered, developed or created by Employee in connection with the performance of the Services. Employee hereby unconditionally and irrevocably transfers and assigns to Atlanticus all right, title and interest Employee has or will have, by operation of law or otherwise, in or to any Work Product, including, without limitation, all patents, copyrights, trademarks, service marks, trade secrets and other intellectual property rights. Employee agrees to execute and deliver to Atlanticus any transfers or other instruments which Atlanticus may deem necessary or appropriate to vest complete title and ownership of any Work Product, and all rights therein, exclusively in Atlanticus.
(b) POWER OF ATTORNEY. Employee hereby irrevocably constitutes and appoints Atlanticus as his agent and attorney-in-fact, with full power of substitution, in the name, place and stead of Employee, to execute and deliver any and all assignments or other instruments described in Section 8(a) above that Employee fails or refuses promptly to execute and deliver. The foregoing power and agency are coupled with an interest and are irrevocable.
9. COVENANT AGAINST COMPETITION.
(a) Employee acknowledges that the Proprietary Information that he has acquired and will acquire, prior to and during the Term, includes and will include information that could be used by Employee on behalf of a Competitor (as hereinafter defined), its affiliates or others to the substantial detriment of Atlanticus. Moreover, the parties recognize that Employee during the course of his employment with Atlanticus will develop important relationships with customers and others having valuable business relationships with Atlanticus. In view of the foregoing, Employee acknowledges and agrees that the restrictive covenants contained in this Agreement are reasonably necessary to protect Atlanticus’ legitimate business interests and goodwill. If this Agreement is terminated by Atlanticus otherwise than in accordance with Section 2.2 hereof, Employee will only be bound by the covenant against competition if he is paid at his then current salary for the one (1) year period of time from and after the Termination Date. Any such payments to be made during such one (1) year period shall be made in the same manner as Employee’s annual salary as of the Termination Date, subject to Section 19 below.
(b) DEFINITIONS.
(i) “COMPETITIVE POSITION” - (A) the direct or indirect equity ownership (excluding ownership of less than 2% of the equity of an entity listed on a national securities exchange) or control of all or any portion of a Competitor, or (B) any employment, consulting, partnership, advisory, directorship, agency, promotional or independent contractor arrangement between Employee and any Competitor whereby Employee is required to perform services substantially similar to the Services.
(ii) “COMPETITOR” - Any person or entity who provides products or services substantially similar to Company Services (as hereinafter defined), except Axiom Bancshares Inc. (“Axiom”) and any affiliate thereof or successor thereto.
(iii) “CUSTOMERS” - All persons or entities within the Territory (as hereinafter defined) during the one-year period prior to the Termination Date (A) to whom Employee offered or sold any of Atlanticus’ products or services (including, without limitation, any opportunity to participate in any loan program established by Atlanticus), (B) to whom were offered or sold any of Atlanticus’ products or services or about whom Employee had Proprietary Information, (C) who were approached by Atlanticus with regard to products or services, or (D) who were identified as potential customers by Atlanticus’ models or processes.
(iv) “COMPANY SERVICES” - (A) point-of-sale financing to provide credit to customers for the purchase of goods and services, (B) loan servicing activities including underwriting, marketing, customer service and collections operations for third parties, (C) acquisition and collection of portfolios of credit card receivables underlying credit card accounts, (D) origination and marketing of credit cards, (E) purchase and servicing of loans secured by automobiles, and (F) management of portfolios of auto finance receivables and additional lending products such as floor plan financing and installment lending products.
(v) “TERRITORY” - The United States, which is the territory within which customers and accounts of Atlanticus will be located and where Employee will provide Services during the term of his employment under this Agreement.
(c) COVENANTS OF EMPLOYEE. Subject to Section 9(e), in consideration of Employee’s employment by Atlanticus and Atlanticus’ providing to Employee the consideration described in Section 3 above, and based on and subject to the provisions set forth in Section 9(a) above, Employee agrees that, during the Term and for a period of one (1) year from and after the termination of this Agreement for any reason, Employee will not, without the prior written consent of Atlanticus, directly or indirectly for or on behalf of any person or entity other than Atlanticus, as principal, agent or otherwise:
(i) take any action in furtherance of a Competitive Position, including, without limitation, entering into a Competitive Position; or
(ii) solicit, entice or induce Customers for the purpose of providing services competitive with any of the Company Services; or
(iii) solicit, entice or induce (or attempt to do so) to leave employment with Atlanticus anyone who is or was, during the last year of Employee’s relationship with Atlanticus, an employee of Atlanticus or an affiliate who would provide similar services to a Competitor.
(d) Employee hereby represents and warrants to Atlanticus that he is not now a party to any agreement, court order, decree or other restriction which restricts him from using or disclosing to any party any information deemed to be proprietary or confidential or deemed to be a trade secret, of which in any way restricts Employee from engaging in or rendering any of the Services.
(e) Atlanticus acknowledges that Employee serves as a director of Axiom, which is owned by members of Employee’s family and is a holding company for Axiom Bank, N.A. (“Axiom Bank”). Axiom, through Axiom Bank, may at times provide services competitive with the Company Services. Nothing in this Agreement shall prohibit Employee from fulfilling his obligations to Axiom.
10. INTERPRETATION; SEVERABILITY. All rights and restrictions contained in this Agreement may be exercised and shall be applicable and binding only to the extent that they do not violate any applicable laws and are intended to be limited to the extent necessary so that they will not render this Agreement illegal, invalid or unenforceable. It is understood and agreed that the provisions hereof are severable; if such provisions shall be deemed invalid or unenforceable as to any period of time, territory, or business activity, such provisions shall be deemed limited to the extent necessary to render it valid and enforceable, and the unenforceability of any provisions hereof shall not in any event cause any other provision hereof to be unenforceable. No provision of this Agreement shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured or dictated such provision.
11. RELIEF. In the event of any threatened or actual breach of the provisions of this Agreement by either party, including, without limitation, the provisions of Section 9, the other party shall be entitled to specific performance and injunctive relief in addition to any other remedies it may have at law or in equity.
12. NONWAIVER. Failure of either party to insist, in one or more instances, on performance by the other in strict accordance with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of any right granted hereunder or of the future performance of any such term or condition or of any other term or condition of this Agreement, unless such waiver is contained in a writing signed by or on behalf of both parties.
13. NOTICES. Any notice or other communication required or permitted hereunder shall be deemed sufficiently given if delivered by hand or sent by registered or certified mail, return receipt requested, postage and fees prepaid, addressed to the party to be notified as follows:
(a) If to Atlanticus: Atlanticus Holdings Corporation
Five Concourse Parkway
Suite 300
Atlanta, Georgia 30328
Attn: General Counsel
With a cc to: Troutman Pepper Hamilton Sanders LLP
Bank of America Plaza
600 Peachtree Street, N.E.
Suite 3000
Atlanta, Georgia 30308
Attn: Brink Dickerson
(b) If to Employee: David G. Hanna
or in each case to such other address as either party may from time to time designate in writing to the other. Such notice or communication shall be deemed to have been given as of the date so delivered or five (5) days after the date so mailed.
14. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Georgia.
15. ENTIRE AGREEMENT; AMENDMENT. This Agreement contains the sole and entire agreement between the parties hereto with respect to Atlanticus’ employment of Employee and supersedes all prior discussions and agreements between the parties relating to such employment, and any such prior agreements shall, from and after the date hereof, be null and void. Employee is a sophisticated businessperson and has received such documents and other information as he has deemed necessary to make his own independent judgment as to the merits of this Agreement and the remuneration that he will receive as a result hereof; further, it is hereby agreed by Employee that neither Atlanticus nor its affiliates have made any representation to Employee other than those specifically set forth in this Agreement. This Agreement shall not be modified or amended except by an instrument in writing signed by or on behalf of all of the parties hereto.
16. PARTIES BENEFITED. This Agreement shall inure to the benefit of, and be binding upon Employee, Atlanticus, and their respective heirs, legal representatives, successors and assigns; provided that, as to Employee, this is a personal service contract and Employee may not assign this Agreement or any part hereof.
17. TAX CONSEQUENCES. Atlanticus shall have no obligation to Employee with respect to any tax obligation Employee incurs as a result of or attributable to this Agreement, including all supplemental agreements and employee benefit plans, if any, in which Employee may hereafter participate, or arising from any payments made or to be made hereunder or thereunder.
18. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall for all purposes be deemed an original, and all of such counterparts shall together constitute one and the same agreement.
19. NONQUALIFIED DEFERRED COMPENSATION OMNIBUS PROVISION. It is intended that any payment or benefit which is provided pursuant to or in connection with this Agreement which is considered to be deferred compensation subject to Section 409A of the Internal Revenue Code shall be paid and provided in a manner, and at such time, including without limitation, payment and provision of benefits only in connection with the occurrence of a permissible payment event contained in Section 409A (e.g., death, disability, separation from service from Atlanticus and its affiliates as defined for purposes of Section 409A of the Internal Revenue Code), and in such form, as complies with the applicable requirements of Section 409A of the Internal Revenue Code to avoid the unfavorable tax consequences provided therein for non-compliance. In connection with effecting such compliance with Section 409A of the Internal Revenue Code, the following shall apply:
(a) Neither Employee nor Atlanticus shall take any action to accelerate or delay the payment of any monies and/or provision of any benefits in any manner which would not be in compliance with Section 409A of the Internal Revenue Code (including any transition or grandfather rules thereunder).
(b) If Employee is a specified employee for purposes of Section 409A(a)(2)(B)(i) of the Internal Revenue Code, any payment or provision of benefits in connection with a separation from service event (as determined for purposes of Section 409A of the Internal Revenue Code) shall not be made until the earlier of (i) Employee’s death or (ii) six (6) months after Employee’s separation from service (the “409A Deferral Period”). In the event such payments are otherwise due to be made in installments or periodically during the 409A Deferral Period, the payments which would otherwise have been made in the 409A Deferral Period shall be accumulated and paid in a lump sum as soon as the 409A Deferral Period ends, and the balance of the payments shall be made as otherwise scheduled. In the event benefits are required to be deferred, any such benefits may be provided during the 409A Deferral Period at Employee’s expense, with Employee having a right to reimbursement from Atlanticus once the 409A Deferral Period ends, and the balance of the benefits shall be provided as otherwise scheduled.
(c) For purposes of this Agreement, all rights to payments and benefits hereunder shall be treated as rights to receive a series of separate payments and benefits to the fullest extent allowed by Section 409A of the Internal Revenue Code.
(d) For purposes of determining time of (but not entitlement to) payment or provision of deferred compensation under this Agreement under Section 409A of the Internal Revenue Code in connection with a termination of employment, termination of employment will be read to mean a “separation from service” within the meaning of Section 409A of the Internal Revenue Code where it is reasonably anticipated that no further services would be performed after that date or that the level of bona fide services Employee would perform after that date (whether as an employee or independent contractor) would permanently decrease to no more than twenty percent (20%) of the average level of bona fide services performed over the immediately preceding thirty-six (36) month period.
(e) For purposes of this Agreement, a specified employee for purposes of Section 409A(a)(2)(B)(i) of the Internal Revenue Code shall be determined on the basis of the applicable 12-month period ending on the specified employee identification date designated by Atlanticus consistently for purposes of this Agreement and similar agreements or, if no such designation is made, based on the default rules and regulations under Section 409A(a)(2)(B)(i) of the Internal Revenue Code.
(f) Notwithstanding any other provision of this Agreement, Atlanticus shall not be liable to Employee if any payment or benefit which is to be provided pursuant to this Agreement and which is considered deferred compensation subject to Section 409A of the Internal Revenue Code otherwise fails to comply with, or be exempt from, the requirements of Section 409A of the Internal Revenue Code.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.
ATLANTICUS HOLDINGS CORPORATION
By: /s/ Jeffrey A. Howard
Name: Jeffrey A. Howard
Title: President and Chief Executive Officer
/s/ David G. Hanna
David G. Hanna
Exhibit 10.2
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into this the 18th day of March, 2021 (the “Effective Date”), by and between ATLANTICUS HOLDINGS CORPORATION, a Georgia corporation (“Atlanticus”), and JEFFREY A. HOWARD, an individual resident of the State of Georgia (“Employee”).
W I T N E S S E T H:
WHEREAS, Atlanticus and the Employee entered into an Employment Agreement, dated March 28, 2014 (the “Original Employment Agreement”); and
WHEREAS, the parties hereto desire to replace and supersede all prior employment arrangements, including the Original Employment Agreement, between Atlanticus and any of its related affiliates and Employee in their entirety and set forth herein the terms and conditions of Employee’s employment as President and Chief Executive Officer of Atlanticus.
NOW, THEREFORE, for and in consideration of the Employee’s employment with Atlanticus and the premises and the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Atlanticus and Employee hereby agree as follows:
1.0 RELATIONSHIP ESTABLISHED. Upon the terms and subject to the conditions of this Agreement, Atlanticus hereby employs Employee to serve as the President and Chief Executive Officer of Atlanticus effective on the Effective Date, and, as such, Employee shall perform the executive level services (the “Services”) for Atlanticus as delegated to him from time to time by the Board of Directors of Atlanticus. Employee hereby agrees to devote one hundred percent (100%) of his business time, attention, energy and skill exclusively to performing his obligations and duties hereunder and to engage in no business activities other than the performance of his obligations and duties hereunder, except for those specific activities as the Board of Directors of Atlanticus shall approve in advance in writing. Employee shall perform his obligations and duties hereunder diligently, faithfully and to the best of his abilities and, in doing so, shall comply with applicable Atlanticus policies and procedures. If there is any conflict between such policies and procedures and this Agreement, this Agreement shall control. During the “Term” (as defined below) Employee shall not, directly or indirectly, make any advance, loan, extension of credit or capital contribution to, or purchase any stocks, bonds or other securities of, or make any investment in, any individual, partnership, corporation, limited liability company, trust, trustee, joint stock company, unincorporated organization, joint venture, association, governmental authority or other entity (each, an “Entity”) other than Atlanticus that creates a conflict of interest with Atlanticus.
2.0 TERM; TERMINATION.
2.1 TERM OF EMPLOYMENT. The term of Employee’s employment under this Agreement shall commence on the Effective Date and shall continue indefinitely on an at will basis, subject to termination at any time by either party on not less than thirty (30) days prior written notice to the other party, or as otherwise provided pursuant to Section 2.2 hereof. The period of time Employee is employed by Atlanticus under this Agreement shall be referred to as the “Term.”
2.2 TERMINATION OF EMPLOYMENT.
(a) Employee’s employment shall automatically and immediately terminate upon the death of Employee.
(b) Either party may terminate Employee’s employment upon the Complete Disability of Employee. “Complete Disability,” as used herein, shall mean the inability of Employee by reason of any physical or mental impairment to perform fully and effectively, as determined in the reasonable judgment of a competent physician selected in good faith by Atlanticus, the Services on a full time basis for an aggregate of ninety (90) days in any period of one hundred and eighty (180) consecutive days.
(c) In addition to any other rights or remedies available to Atlanticus, Atlanticus may, in its sole discretion, terminate Employee’s employment for Cause effective immediately upon delivery of written notice to Employee. In this Agreement, “Cause” means the reasonable, good faith determination of a majority of the Board of Directors of Atlanticus that:
(i) (A) Employee has committed an act constituting fraud, moral turpitude, deceit or intentional material misrepresentation with respect to Atlanticus or any client, business partner, customer or supplier of Atlanticus; (B) Employee has embezzled funds or assets from Atlanticus or any client, business partner, customer or supplier of Atlanticus; (C) Employee has engaged in willful misconduct or gross negligence in the performance of the Services; or (D) Employee has failed to comply with any of the terms of Section 1 or Section 9 hereof;
(ii) Employee has breached or defaulted in the performance of any other provision of this Agreement and has not cured such breach or default to Atlanticus’ reasonable satisfaction within thirty (30) days after receiving notice thereof (provided that any breach by Employee of any obligation under Section 9 will be grounds for immediate termination for “Cause” without any notice or right to cure); or
(iii) Employee’s conduct is materially detrimental to the reputation of Atlanticus which Employee has not cured (if such conduct is curable in Atlanticus’ reasonable opinion) to Atlanticus’ reasonable satisfaction within ten (10) days after receiving notice thereof.
(d) Atlanticus may, in its sole discretion, terminate Employee’s employment other than for Cause or Employee’s Complete Disability.
(e) Employee may, in his sole discretion, terminate his employment for any reason or no reason as set forth above.
(f) The date on which Employee’s employment expires or terminates for any reason is referred to herein as the “Termination Date.”
3.0 COMPENSATION.
(a) During the Term, Atlanticus shall pay Employee as compensation for the Services an annual salary as set forth on Exhibit A hereto and incorporated herein by reference. Such compensation shall be payable in substantially equal semi-monthly installments or in such other installments or at such other intervals as may be the policy of Atlanticus from time to time, but no less frequently than monthly, and shall be subject to such deductions and withholdings as are required by law or policies of Atlanticus in effect from time to time. Employee’s salary per annum may from time to time be adjusted as agreed in writing by both Atlanticus and Employee.
(b) During the Term, Employee shall be eligible for bonus and equity compensation as determined by the Compensation Committee of the Board of Directors from time to time. Any bonus payments due hereunder shall be payable to the Employee no later than two and one-half (2 ½) months after the end of the calendar year in which Employee becomes vested in such bonus for purposes of Section 409A of the Internal Revenue Code.
(c) Notwithstanding anything to the contrary herein, if this Agreement is terminated for any of the reasons set forth in Section 2 hereof, Atlanticus shall be released of its obligation to pay further compensation or benefits to Employee as set forth in this Agreement; PROVIDED, HOWEVER, subject to Section 20 hereof, that Employee shall be entitled to receive (i) any salary already earned under Section 3(a) hereof as set forth therein, and (ii) a portion of any previously agreed upon bonus (prorated based upon full months worked by Employee) for any fiscal year in which Employee worked for Atlanticus for at least six (6) months, in each case within thirty (30) days of the Termination Date. Employee will not be entitled to any severance or other benefits upon any termination of his employment hereunder. If this Agreement is terminated pursuant to Section 2.2(a), (b) or (d), all of Employee’s outstanding equity awards shall immediately vest.
4.0 VACATION. During the Term of this Agreement, Employee shall be entitled to such number of weeks of paid vacation in each calendar year of the Term as is provided in, and in accordance with, Atlanticus’ policies in effect from time to time for management employees.
5.0 BENEFITS. During the Term of this Agreement, Employee shall be entitled to participate in executive employee benefit plans generally provided by Atlanticus to its executives, but only if and to the extent provided from time to time in such executive benefits plans and for so long as Atlanticus provides or offers such benefit plans.
6.0 REIMBURSEMENT FOR EXPENSES. Atlanticus shall reimburse Employee for reasonable out-of-pocket expenses incurred by Employee in connection with the performance of the Services hereunder for travel; entertainment and other miscellaneous expenses to the extent such expenses are consistent with Atlanticus’ reimbursement policy as the same shall be in effect from time to time. Reimbursement shall be made only against an itemized list of such expenses submitted to Atlanticus by Employee within thirty (30) days after being incurred, and, to the extent requested by Atlanticus, receipts and invoices evidencing such expenses. In no event shall any such reimbursement be made later than thirty (30) days after the period for submitting such itemized list expires. All reimbursements shall be made within thirty (30) days of submission of the itemized list and, if requested, receipts and invoices.
7.0 CONFIDENTIALITY.
(a) PROPRIETARY INFORMATION. Employee acknowledges that as an employee of Atlanticus, he may from time to time have access to and be provided with trade secrets (as defined under applicable law), and other confidential, secret and proprietary information including without limitation, financial statements or information, technical or nontechnical data, formulae, compilations, programs, methods, data, financial plans, models, product plans, marketing or sales strategies, portfolio information, or lists of actual or potential borrowers, loan program participants, business partners or other customers not generally available to the public concerning any aspect of the products, services or businesses of Atlanticus, its affiliates, or its and their officers, directors, employees, advisers, agents or other personnel (collectively, “Proprietary Information”). Employee agrees that he will not, directly or indirectly, disclose, publish, disseminate or use any Proprietary Information except as authorized herein. Employee may use Proprietary Information to perform the Services but in doing so will only allow dissemination of Proprietary Information to any Entity on a strict need-to-know basis (provided such persons are first informed of the confidential nature of such Proprietary Information and directed to use or disclose it only as permitted herein). If disclosure of any Proprietary Information is required by law, a court or agency of the government, then Employee may make such disclosure after providing Atlanticus with reasonable notice, to the extent that providing such notice to Atlanticus is legally permissible, so that Atlanticus may seek protective relief.
(b) NON-PROPRIETARY INFORMATION. Notwithstanding the provisions of Section 7(a) hereof, the following shall not be considered to be Proprietary Information: (i) any information that was in the public domain through no fault or act of Employee prior to the disclosure thereof to Employee; (ii) any information that comes into the public domain through no fault or act of Employee; (iii) any information that is disclosed without restriction to Employee by a third party (which term shall not include any equity holder, affiliate, or counsel, accountants and other non-employee representatives of affiliated entities, or of any of their respective equity holders, affiliates or related persons) having the legal right to make such disclosure; and (iv) any confidential business information that is not a trade secret on the three (3) year anniversary of the Termination Date; PROVIDED, HOWEVER, that the limited duration of the confidentiality obligation with regard to Proprietary Information not constituting a trade secret shall not operate or be construed as affording Employee any right or license thereafter to use Proprietary Information, or as a waiver by Atlanticus of the rights and benefits otherwise available to Atlanticus under the laws governing the protection and enforceability of patents, trade secrets and other intellectual property.
(c) RETURN OF MATERIALS. On or before the Termination Date, or when otherwise requested by Atlanticus, Employee will deliver promptly to Atlanticus all Proprietary Information and all other files, customer lists, management reports, drawings, memoranda, forms, financial data and reports and other materials or documents and equipment provided to, or obtained or created by Employee in connection with the Services (including all copies of the foregoing, and including all notes, records and other materials of or relating to Atlanticus, its affiliates or their respective business partners or customers) in his possession or control and shall destroy all other Proprietary Information in his possession.
8.0 TRANSFER AND ASSIGNMENT TO ATLANTICUS.
(a) To the greatest extent possible, any Work Product will be “work made for hire” (as defined in the Copyright Act, 17 U.S.C.A. Section 101 ET SEQ., as amended) and owned exclusively by Atlanticus. In this Agreement, “Work Product” means work product, property, data, documentation, concepts, plans, inventions, improvements, processes or information, prepared, discovered, developed or created by Employee while employed by Atlanticus. Nothing herein shall affect any right, title and interest Employee has or may have in any Work Product unrelated to the business of Atlanticus that Employee develops or creates outside of his employment by Atlanticus on his own personal time. Employee hereby unconditionally and irrevocably transfers and assigns to Atlanticus all right, title and interest Employee has or will have, by operation of law or otherwise, in or to any Work Product, including, without limitation, all patents, copyrights, trademarks, service marks, trade secrets and other intellectual property rights. Employee agrees to execute and deliver to Atlanticus any transfers or other instruments which Atlanticus may deem necessary or appropriate to vest complete title and ownership of any Work Product, and all rights therein, exclusively in Atlanticus.
(b) POWER OF ATTORNEY. Employee hereby irrevocably constitutes and appoints Atlanticus as his agent and attorney-in-fact, with full power of substitution, in the name, place and stead of Employee, to execute and deliver any and all assignments or other instruments described in Section 8(a) hereof that Employee fails or refuses promptly to execute and deliver. The foregoing power and agency are coupled with an interest and are irrevocable.
9.0 BUSINESS PROTECTION COVENANTS.
9.1 DEFINITIONS. For purposes of this Agreement, the following terms shall have the following meanings:
(a) “Business of Atlanticus” means (i) point-of-sale financing to provide credit to customers for the purchase of goods and services, (ii) loan servicing activities including underwriting, marketing, customer service and collections operations for third parties, (iii) acquisition and collection of portfolios of credit card receivables underlying credit card accounts, (iv) origination and marketing of credit cards, (v) purchase and servicing of loans secured by automobiles, and (vi) management of portfolios of auto finance receivables and additional lending products such as floor plan financing and installment lending products.
(b) “Competing Business” means any person, business or subdivision of a business which substantially engages in the Business of Atlanticus, or which is actively planning to engage in the Business of Atlanticus, excluding subdivisions of a business, if any, which are unrelated to the Business of Atlanticus.
(c) “Material Contact” for purposes of the business partner and customer non-solicitation provision below means contact between Employee and each business partner or customer or potential business partner or customer of Atlanticus within twenty-four (24) months prior to Employee’s termination or resignation:
(i) With whom or which Employee dealt on behalf of Atlanticus;
(ii) Whose dealings with Atlanticus were coordinated or supervised by Employee;
(iii) About whom Employee obtained Proprietary Information in the ordinary course of business as a result of Employee’s association with Atlanticus; or
(iv) Who receives products or services authorized by Atlanticus, the sale or provision of which results or resulted in compensation, commissions, or earnings for Employee within two (2) years prior to the date of the Employee’s termination.
(d) “Material Contact” for purposes of the employee/contractor non-recruit provision below means contact in person, by telephone, or by paper or electronic correspondence, in furtherance of the business interests of Atlanticus, and within the last twenty-four (24) months of Employee’s employment with Atlanticus.
(e) “Restricted Period” means the period while Employee is employed by Atlanticus and for twelve (12) months following the termination for Cause or resignation of Employee from employment with Atlanticus.
9.2 NON-RECRUITMENT OF ATLANTICUS EMPLOYEES AND CONTRACTORS. Employee agrees that during the Restricted Period, Employee shall not, directly or indirectly, whether on Employee’s own behalf or on behalf of any other person or entity, solicit or induce any employee or independent contractor of Atlanticus with whom Employee had Material Contact, to terminate or lessen such employment or contract with Atlanticus.
9.3 NON-SOLICITATION OF ATLANTICUS BUSINESS PARTNERS AND CUSTOMERS. Employee agrees that during the Restricted Period, Employee shall not, directly or indirectly, whether on Employee’s own behalf or on behalf of any other person or entity, solicit any actual or prospective business partners or customers of Atlanticus with whom Employee had Material Contact, for the purpose of selling any products or services for a Competing Business.
9.4 ACKNOWLEDGEMENTS. Employee acknowledges and agrees that the provisions of Sections 7, 8 and 9 of this Agreement (the “Restrictive Covenants”) are reasonable as to time, scope and territory given Atlanticus’ need to protect its Proprietary Information and its relationships and goodwill with its business partners, customers, suppliers, employees and contractors, all of which have been developed at great time and expense to Atlanticus. Employee represents that Employee has the skills and abilities to obtain alternative employment that would not violate these Restrictive Covenants in the event that Employee leaves employment with Atlanticus, and that these Restrictive Covenants do not pose an undue hardship on Employee. Employee further acknowledges that Employee’s breach of any of these Restrictive Covenants would likely cause irreparable injury to Atlanticus, and therefore entitles Atlanticus to injunctive relief, in addition to any other remedies available in law or equity.
9.5 CONSTRUCTION AND SEVERABILITY. The laws of the state of Georgia shall apply to all questions regarding the interpretation, modification, breach or enforcement of the Restrictive Covenants. The provisions of the Restrictive Covenants shall be presumed to be enforceable, and any reading causing unenforceability shall yield to a construction permitting enforcement. In the event that a court should determine that any provision of the Restrictive Covenants is overbroad or otherwise unenforceable as written, the parties authorize such court to modify and enforce such provision to the extent the court deems reasonable. If any provision of the Restrictive Covenants shall be found by a court to be overbroad or otherwise unenforceable and not capable of modification, it shall be severed and the remaining covenants and clauses enforced in accordance with the tenor of this Agreement.
10.0. REMEDIES AND FORUM. The parties agree that they will not file any action arising out of or relating in any way to this Agreement other than in the United States District Court for the Northern District of Georgia or the Superior Court(s) of Fulton County, Georgia. The parties consent to personal jurisdiction and venue solely within these forums and waive all possible objections thereto. The prevailing party shall be entitled to recover its costs and attorney’s fees from the non-prevailing party in any such proceeding no later than thirty (30) days following the final settlement or adjudication of such proceeding. Employee waives any defense to enforcement of the provisions of this Agreement by injunction or otherwise based on claims Employee has or alleges to have against Atlanticus.
11.0 INTERPRETATION; SEVERABILITY. All rights and restrictions contained in this Agreement may be exercised and shall be applicable and binding only to the extent that they do not violate any applicable laws and are intended to be limited to the extent necessary so that they will not render this Agreement illegal, invalid or unenforceable. It is understood and agreed that the provisions hereof are severable; if such provisions shall be deemed invalid or unenforceable as to any period of time, territory, or business activity, such provisions shall be deemed limited to the extent necessary to render it valid and enforceable, and the unenforceability of any provisions hereof shall not in any event cause any other provision hereof to be unenforceable. No provision of this Agreement shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured or dictated such provision.
12.0 RELIEF. In the event of any threatened or actual breach of the provisions of this Agreement by either party, including, without limitation, the provisions of Section 9 hereof, the other party shall be entitled to specific performance and injunctive relief in addition to any other remedies it may have at law or in equity.
13.0 NONWAIVER. Failure of either party to insist, in one or more instances, on performance by the other in strict accordance with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of any right granted hereunder or of the future performance of any such term or condition or of any other term or condition of this Agreement, unless such waiver is contained in a writing signed by or on behalf of both parties.
14.0 NOTICES. Any notice or other communication required or permitted hereunder shall be deemed sufficiently given if delivered by hand or sent by registered or certified mail, return receipt requested, postage and fees prepaid, addressed to the party to be notified as follows:
(a) If to Atlanticus: Atlanticus Holdings Corporation
Five Concourse Parkway, Suite 300
Atlanta, GA 30328
Attn: General Counsel
With a cc: Troutman Pepper Hamilton Sanders LLP
Bank of America Plaza
600 Peachtree Street, N.E.
Suite 3000
Atlanta, GA 30308
Attn: Brink Dickerson
(b) If to Employee: Jeffrey A. Howard
or in each case to such other address as either party may from time to time designate in writing to the other. Such notice or communication shall be deemed to have been given as of the date so delivered or five (5) days after the date so mailed.
15.0 GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Georgia.
16.0 ENTIRE AGREEMENT; AMENDMENT. This Agreement contains the sole and entire agreement between the parties hereto with respect to Atlanticus’ employment of Employee and supersedes all prior discussions, arrangements and agreements between Atlanticus and any of its related affiliates and Employee relating to Employee’s employment and any such prior arrangements and agreements shall, from and after the date hereof, be null and void. Employee is a sophisticated businessperson and has received such documents and other information as he has deemed necessary to make his own independent judgment as to the merits of this Agreement and the remuneration that he will receive as a result hereof; further, it is hereby agreed by Employee that neither Atlanticus nor its affiliates nor any of their officers, employees, directors or agents have made any representation to Employee other than those specifically set forth in this Agreement. This Agreement shall not be modified or amended except by an instrument in writing signed by or on behalf of all of the parties hereto.
17.0 PARTIES BENEFITED. This Agreement shall inure to the benefit of, and be binding upon Employee, Atlanticus, and their respective heirs, legal representatives, successors and assigns; provided that, as to Employee, this is a personal service contract and Employee may not assign this Agreement or any part hereof.
18.0 TAX CONSEQUENCES. Atlanticus shall have no obligation to Employee with respect to any tax obligation Employee incurs as a result of or attributable to this Agreement, including all supplemental agreements and employee benefit plans, if any, in which Employee may hereafter participate, or arising from any payments made or to be made hereunder or thereunder.
19.0 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall for all purposes be deemed an original, and all of such counterparts shall together constitute one and the same agreement.
20.0 NONQUALIFIED DEFERRED COMPENSATION OMNIBUS PROVISION. It is intended that any payment or benefit which is provided pursuant to or in connection with this Agreement which is considered to be deferred compensation subject to Section 409A of the Internal Revenue Code shall be paid and provided in a manner, and at such time, including without limitation, payment and provision of benefits only in connection with the occurrence of a permissible payment event contained in Section 409A (e.g., death, disability, separation from service from Atlanticus and its affiliates as defined for purposes of Section 409A of the Internal Revenue Code), and in such form, as complies with the applicable requirements of Section 409A of the Internal Revenue Code to avoid the unfavorable tax consequences provided therein for non-compliance. In connection with effecting such compliance with Section 409A of the Internal Revenue Code, the following shall apply:
(a) Neither Employee nor Atlanticus shall take any action to accelerate or delay the payment of any monies and/or provision of any benefits in any manner which would not be in compliance with Section 409A of the Internal Revenue Code.
(b) If Employee is a specified employee for purposes of Section 409A(a)(2)(B)(i) of the Internal Revenue Code, any payment or provision of benefits in connection with a separation from service (as determined for purposes of Section 409A of the Internal Revenue Code) shall not be made until the earlier of (i) Employee’s death or (ii) six (6) months after Employee’s separation from service (the “409A Deferral Period”) to the extent required by Section 409A of the Code. In the event such payments are otherwise due to be made in installments or periodically during the 409A Deferral Period, the payments which would otherwise have been made in the 409A Deferral Period shall be accumulated and paid in a lump sum as soon as the 409A Deferral Period ends, and the balance of the payments shall be made as otherwise scheduled. In the event benefits are required to be deferred, any such benefits may be provided during the 409A Deferral Period at Employee’s expense, with Employee having a right to reimbursement from Atlanticus once the 409A Deferral Period ends, and the balance of the benefits shall be provided as otherwise scheduled.
(c) For purposes of this Agreement, all rights to payments and benefits hereunder shall be treated as rights to receive a series of separate payments and benefits to the fullest extent allowed by Section 409A of the Internal Revenue Code.
(d) For purposes of determining time of (but not entitlement to) payment or provision of deferred compensation under this Agreement under Section 409A of the Internal Revenue Code in connection with a termination of employment, termination of employment will be read to mean a “separation from service” within the meaning of Section 409A of the Internal Revenue Code where it is reasonably anticipated that no further services would be performed after that date or that the level of bona fide services Employee would perform after that date (whether as an employee or independent contractor) would permanently decrease to no more than twenty percent (20%) of the average level of bona fide services performed over the immediately preceding thirty-six (36) month period.
(e) For purposes of this Agreement, a specified employee for purposes of Section 409A(a)(2)(B)(i) of the Internal Revenue Code shall be determined on the basis of the applicable 12-month period ending on the specified employee identification date designated by Atlanticus consistently for purposes of this Agreement and similar agreements or, if no such designation is made, based on the default rules and regulations under Section 409A(a)(2)(B)(i) of the Internal Revenue Code.
(f) Notwithstanding any other provision of this Agreement, Atlanticus shall not be liable to Employee for any additional Section 409A taxes, penalties or interest as the result of any payment or benefit which is to be provided pursuant to this Agreement and which is considered deferred compensation subject to Section 409A of the Internal Revenue Code otherwise fails to comply with, or be exempt from, the requirements of Section 409A of the Internal Revenue Code.
21.0 INDEMNIFICATION. Atlanticus shall indemnify Employee, to the maximum extent permitted under applicable law and as set forth in the applicable organizational documents governing Atlanticus (including articles of incorporation and bylaws (as such articles of incorporation and bylaws may be amended, modified, supplemented or restated from time to time)), against all liabilities, losses, damages, costs, charges and expenses incurred or sustained by Employee in connection with any claim, action, suit, or proceeding to which Employee may be made a party, brought directly or derivatively by any third party by reason of any act or omission by Employee as a director or officer of Atlanticus; PROVIDED, HOWEVER, Employee shall be liable for (and shall not be entitled to indemnification for) any such losses incurred by reason of his gross negligence, willful misconduct, or breach of the duty of loyalty.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.
ATLANTICUS HOLDINGS CORPORATION
By: /s/ David G. Hanna
Name: David G. Hanna
Title: Executive Chairman
EMPLOYEE
/s/ Jeffrey A. Howard
Jeffrey A. Howard
EXHIBIT A
| Salary per annum | $ | 850,000 |
Exhibit 10.3
OUTSIDE DIRECTOR COMPENSATION PACKAGE
Effective January 1, 2021, Atlanticus Holdings Corporation (the “Company”) will pay each outside director who is independent in accordance with the NASDAQ and SEC rules governing director independence (an “Eligible Director”) the following for service to the Company:
|
Annual Cash Retainer |
$ | 50,000 | ||
|
Attendance Fee for Each Board Meeting (including telephonic attendance) |
$ | 3,000 | ||
|
Attendance Fee for Each Committee Meeting (including telephonic attendance) |
$ | 1,500 |
In addition, the Chair of each of the Audit Committee and the Social Impact Committee will receive an additional annual fee of $25,000. The Chair of each of the Nominating and Corporate Governance Committee and the Compensation Committee will receive an additional annual fee of $10,000. The Annual Cash Retainer and the Committee Chair fees will be paid semi-annually.
Each Eligible Director also will receive a restricted stock award of 4,000 shares, such grant to be effective on January 2, 2021. The restricted stock award will vest in two equal annual installments beginning on the first anniversary of the grant date.
The Company also will reimburse all reasonable out-of-pocket travel expenses that are incurred in connection with board and committee meetings.
Exhibit 10.4
AMENDED AND RESTATED CONSULTANT AGREEMENT
THIS AMENDED AND RESTATED CONSULTANT AGREEMENT (the “Agreement”) is made and entered into this May 1, 2020 by and between Atlanticus Services Corporation, a Georgia corporation (“Company”), and Denise Harrod, a Georgia resident (“Consultant”).
BACKGROUND:
Company desires to retain Consultant to provide certain services to Company, and Consultant desires to provide such services to Company, all subject to and in accordance with the terms and conditions contained herein.
NOW, THEREFORE, FOR AND IN CONSIDERATION of the premise, the mutual promises, covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Services. Subject to the terms and conditions set forth in this Agreement, Company hereby retains Consultant to provide to Company advisory services (the “Services”), and Consultant agrees to render the Services to Company. All findings, analyses and work product of Consultant in connection with the Services shall be provided to Company in a format reasonably requested by Company.
2. Obligations of Consultant. In her performance of the Services hereunder, Consultant shall at all times comply with and abide by the terms and conditions set forth in this Agreement, all applicable policies and procedures of Company, and all applicable laws. Consultant shall be responsible for all reporting of compensation she receives and the payment of all taxes in connection therewith.
3. Compensation and Expenses; Independent Contractor.
(a) Subject to the terms and conditions set forth in this Agreement, as compensation for the Services, Company shall pay to Consultant, and Consultant shall accept, compensation in the amount of (i) $7,500 per month from May 1, 2020 to January 31, 2021 and (ii) $2,500 per month from February 1, 2021 and thereafter. Company shall make payment to Consultant in a manner reasonably agreed between the parties.
(b) All expenses incurred by Consultant in connection with the provision of Services hereunder shall be the sole responsibility of Consultant unless agreed in writing in advance by the Company.
(c) The relationship created by the agreement shall be one of an independent contractor, and not any form of employment. The parties agree to this relationship, and shall take any measures reasonably required to demonstrate that there is no employment relationship created in connection with this Agreement, and Consultant is not an employee of Company.
4. Confidentiality.
(a) For purposes of this Agreement, the following terms shall have the following respective meanings:
“Confidential Information” means any data or information belonging to or pertaining to Company (and/or any other person or entity, if such data or information is provided or disclosed to Consultant in connection with her performance of the Services), other than “Trade Secrets” (as defined below), that is not generally known by or available to the public or competitors of Company, concerning any aspect of the products, services or business of Company (and/or other applicable person or entity), including, without limitation, financial statements or information, technical or nontechnical data, formulae, compilations, programs, methods, financial plans, product plans, marketing or sales strategies, portfolio information, and lists of actual or potential borrowers, loan program participants or other customers.
“Trade Secrets” means the “trade secrets” of Company (and/or any other person or entity, if such trade secrets are provided or disclosed to Consultant in connection with her performance of the Services) as defined under applicable law.
(b) In recognition of Company’s need to protect its legitimate business interests, Consultant hereby covenants and agrees that she shall regard and treat each item of information or data constituting a Trade Secret or Confidential Information as strictly confidential and wholly owned by Company (and/or other applicable person or entity) and that she will not use, distribute, disclose, reproduce or otherwise communicate any such item of information or data to any person or entity for any purpose other than as necessary in connection with the performance of her obligations under this Agreement. The covenant contained in the preceding sentence shall apply: (i) with respect to Confidential Information, at all times during the term of this Agreement and for a period of three (3) years thereafter; and (ii) with respect to Trade Secrets, at all times such data or information constitutes a “trade secret” under applicable law. The limited duration of Consultant’s obligations under this Section 4(b) shall not operate or be construed as affording Consultant any right or license thereafter to use any Confidential Information or Trade Secrets, or as a waiver by Company of the rights and benefits otherwise available to Company under the laws governing the protection and enforceability of patents, trade secrets and other intellectual property. Consultant agrees that any agents, employees or independent consultants of Consultant (or any other parties) to whom any Confidential Information or Trade Secrets are disclosed in connection with Consultant’s performance of the Services will be bound by the provisions of this Section 4, and Consultant shall be responsible for the actions, uses and disclosures of all such parties.
(c) Notwithstanding the provisions of Section 4(a) above, the following shall not be considered to be Confidential Information: (i) any information that was in the public domain through no fault or act of Consultant prior to the disclosure thereof to Consultant; (ii) any information that comes into the public domain after the disclosure thereof to Consultant through no fault or act of Consultant; and (iii) any information that is disclosed without restriction to Consultant by a third party having the legal right to make such disclosure.
(d) Upon the termination of Consultant’s engagement with Company hereunder, or when otherwise requested by Company, Consultant will deliver promptly to Company all files, customer lists, management reports, drawings, memoranda, forms, financial data, reports and other documents (including all copies of the foregoing and all notes, records, analyses, compilations, studies and other materials) containing Confidential Information or Trade Secrets or otherwise obtained or created by or for Consultant in connection with her engagement hereunder, and all of the equipment and other materials of Company, in her possession or under her control.
(e) In the event that Consultant is requested or required (by oral questions, interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process) to disclose any Confidential Information or Trade Secrets, it is agreed that Consultant will provide Company with prompt written notice of such request(s) so that it may seek an appropriate protective order or other appropriate remedy and/or waive Consultant's compliance with the provisions of this Agreement. In the event that such protective order or other remedy is not obtained, or that Company grants a waiver hereunder, Consultant may furnish that portion (and only that portion) of the Confidential Information or Trade Secrets which, in the written opinion of Consultant's counsel, Consultant is legally compelled to disclose, and Consultant agrees to exercise best efforts to obtain reliable assurance that confidential treatment will be accorded any Confidential Information or Trade Secrets so furnished.
5. Ownership of Work Product. All work product, property, data, documentation, information, analyses or materials conceived, discovered, developed or created by Consultant pursuant to this Agreement (collectively, the “Work Product”) shall be owned exclusively by Company. To the greatest extent possible, any Work Product shall be deemed to be a “work made for hire” (as defined in the United States Copyright Act, 17 U.S.C.A. §101 et seq., as amended) and owned exclusively by Company. “Intellectual Property Rights” means, on a world-wide basis, any and all now-known or hereafter known rights associated with works of authorship or creation including, without limitation, (i) copyrights, copyright rights, moral rights and mask work rights; (ii) trademark and trade name rights and similar rights; (iii) trade secret rights; (iv) patents and other patent rights; (v) other rights with respect to inventions, discoveries, improvements, know-how, formulas, algorithms, processes, technical information and other technology; (vi) all other intellectual and industrial property rights of every kind or nature and however designated, whether arising by operation of law, contract, license or otherwise; and (vii) all national, foreign and state registrations, applications for registration and all renewals and extensions thereof (including, without limitation, any continuations, continuations-in-part, divisional, reissues, substitutions and reexaminations), all goodwill associated therewith, and all benefits, privileges, causes of action and remedies relating to any of the foregoing, whether before or hereafter accrued (including, without limitation, the exclusive rights to apply for and maintain all such registrations, renewals and extensions; to sue for all past, present and future infringements or other violations of any rights relating thereto; and to settle and retain proceeds from any such actions). Consultant hereby unconditionally and irrevocably transfers and assigns, and upon the future creation thereof automatically transfers and assigns, without further consideration, to Company all right, title and interest in or to any Work Product and Intellectual Property Rights. Consultant agrees to perform, during or after Consultant’s engagement, such further acts as may be necessary or desirable to transfer, perfect, and defend Company’s ownership of the Work Product and Intellectual Property Rights that are reasonably requested by Company.
6. Term. The term of this Agreement shall commence as of the date hereof and shall terminate upon thirty (30) days’ prior written notice by either party.
7. Indemnification. Consultant hereby indemnifies and agrees to defend and hold harmless Company and its employees, officers, directors, agents, affiliates and independent Consultants from and against any and all damages, losses, costs (including, without limitation, court costs and attorneys’ fees), settlements, suits, actions, expenses, liabilities and claims of any kind caused by or resulting from any breach of this Agreement by Consultant or any other act or omission of Consultant in connection with the performance of the Services.
Company hereby indemnifies and agrees to defend and hold harmless Consultant from and against any and all damages, losses, costs (including, without limitation, court costs and attorneys’ fees), settlements, suits, actions, expenses, liabilities and claims of any kind caused by or resulting from any breach of this Agreement by Company or any other act or omission of Company or its employees, agents or independent Consultants in connection with the performance of the Services.
8. Notices.
(a) All notices provided for or required by this Agreement shall be in writing and shall be delivered personally to the other party, or mailed by certified or registered mail (return receipt requested), or delivered by a recognized overnight courier service, as follows:
If to Company: Atlanticus Services Corporation
Five Concourse Parkway
Suite 300
Atlanta, Georgia 30328
Attention: General Counsel
If to Consultant: Denise Harrod
(b) Notices delivered pursuant to Section 8(a) hereof shall be deemed given: at the time delivered, if personally delivered, three (3) business days after being deposited in the mail, if mailed; and one (1) business day after timely delivery to the courier, if by overnight courier service.
(c) Either party hereto may change the address to which notice is to be sent by written notice to the other party in accordance with the provisions of this Section 8.
9. Miscellaneous.
(a) This Agreement, including all Exhibits hereto (which are incorporated herein by this reference), contains the entire agreement and understanding concerning the subject matter hereof between the parties hereto. No waiver, termination or discharge of this Agreement, or any of the terms or provisions hereof, shall be binding upon either party hereto unless confirmed in writing. This Agreement may not be modified or amended, except by a writing executed by both parties hereto. No waiver by either party hereto of any term or provision of this Agreement or of any default hereunder shall affect such party’s rights thereafter to enforce such term or provision or to exercise any right or remedy in the event of any other default, whether or not similar.
(b) This Agreement shall be governed by and construed in accordance with the laws of the State of Georgia.
(c) Consultant may not assign this Agreement, in whole or in part, without the prior written consent of Company, and any attempted assignment not in accordance herewith shall be null and void and of no force or effect.
(d) This Agreement shall be binding on and inure to the benefit of the parties hereto and their respective heirs, representatives, successors and permitted assigns.
(e) The headings contained herein are for the convenience of the parties only and shall not be interpreted to limit or affect in any way the meaning of the language contained in this Agreement.
(f) This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute the same Agreement. Any signature page of any such counterpart, or any electronic facsimile thereof, may be attached or appended to any other counterpart to complete a fully executed counterpart of this Agreement, and any telecopy or other facsimile transmission of any signature shall be deemed an original and shall bind such party.
(g) If any provision of this Agreement shall be held void, voidable, invalid or inoperative, no other provision of this Agreement shall be affected as a result thereof, and accordingly, the remaining provisions of this Agreement shall remain in full force and effect as though such void, voidable, invalid or inoperative provision had not been contained herein.
(h) This Agreement shall not be construed more strongly against either party hereto regardless of which party is responsible for its preparation.
(i) Upon the reasonable request of the other party, each party hereto agrees to take any and all actions, including, without limitation, the execution of certificates, documents or instruments, necessary or appropriate to give effect to the terms and conditions set forth in this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
“Company”
ATLANTICUS SERVICES CORPORATION
By: /s/ Rohit H. Kirpalani
Name: Rohit H. Kirpalani
Title: Secretary
“Consultant”
/s/ Denise Harrod
Denise Harrod
Exhibit 31.1
CERTIFICATIONS
I, Jeffrey A. Howard, certify that:
1. I have reviewed this Report on Form 10-Q of Atlanticus Holdings Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report; and
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
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designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the fourth fiscal period in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
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a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: May 14, 2021
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/s/ JEFFREY A. HOWARD |
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Jeffrey A. Howard |
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President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATIONS
I, William R. McCamey, certify that:
1. I have reviewed this Report on Form 10-Q of Atlanticus Holdings Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report; and
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
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a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the fourth fiscal period in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
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a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: May 14, 2021
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/s/ WILLIAM R. McCAMEY |
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William R. McCamey |
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Chief Financial Officer |
Exhibit 32.1
CERTIFICATION
The undersigned, as the President and Chief Executive Officer, and as the Chief Financial Officer, respectively, of Atlanticus Holdings Corporation, certify that, to the best of their knowledge and belief, the Quarterly Report on Form 10-Q for the period ended March 31, 2021, which accompanies this certification fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of Atlanticus Holdings Corporation at the dates and for the periods indicated. The foregoing certifications are made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) and shall not be relied upon for any other purpose.
This 14th day of May, 2021.
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/s/ JEFFREY A. HOWARD |
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Jeffrey A. Howard |
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President and Chief Executive Officer |
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/s/ WILLIAM R. McCAMEY |
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William R. McCamey |
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Chief Financial Officer |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Atlanticus Holdings Corporation and will be retained by Atlanticus Holdings Corporation and furnished to the Securities and Exchange Commission or its staff upon request.