Atlanticus Holdings Corp 10-Q for FY2020 Q3
Atlanticus Holdings Corp (ATLC)
About this 10-Q
Atlanticus Holdings Corp filed this 10-Q on November 13, 2020, covering the quarter ended September 30, 2020 (FY2020 Q3).
Headline figures
Quarter ended September 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $4.72M
- up 14.3% from $4.13M a year earlier
- Net income
- $38.86M
- up 197.1% from net income of $13.08M a year earlier
- Diluted EPS
- $1.72
- up 107.2% from $0.83 a year earlier
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2020
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 is not a shell company or an emerging growth company.
As of November 6, 2020, 15,962,016 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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September 30, |
December 31, |
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2020 |
2019 |
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Assets |
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| Unrestricted cash and cash equivalents (including $62.1 million and $78.7 million associated with variable interest entities at September 30, 2020 and December 31, 2019, respectively) | $ | 149,194 | $ | 135,379 | ||||
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Restricted cash and cash equivalents (including $17.3 million and $25.9 million associated with variable interest entities at September 30, 2020 and December 31, 2019, respectively) |
27,681 | 41,015 | ||||||
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Loans, interest and fees receivable: |
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Loans, interest and fees receivable, at fair value (including $236.9 million and $3.9 million associated with variable interest entities at September 30, 2020 and December 31, 2019, respectively) |
310,784 | 4,386 | ||||||
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Loans, interest and fees receivable, gross (including $574.6 million and $857.2 million associated with variable interest entities at September 30, 2020 and December 31, 2019, respectively) |
695,319 | 998,209 | ||||||
| Allowances for uncollectible loans, interest and fees receivable (including $118.0 million and $168.8 million associated with variable interest entities at September 30, 2020 and December 31, 2019, respectively) | (125,915 | ) | (186,329 | ) | ||||
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Deferred revenue (including $10.3 million and $40.7 million associated with variable interest entities at September 30, 2020 and December 31, 2019, respectively) |
(42,120 | ) | (90,307 | ) | ||||
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Net loans, interest and fees receivable |
838,068 | 725,959 | ||||||
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Property at cost, net of depreciation |
2,551 | 2,738 | ||||||
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Investments in equity-method investee |
1,521 | 1,957 | ||||||
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Deposits |
59 | 104 | ||||||
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Operating lease right-of-use assets |
10,376 | 14,091 | ||||||
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Prepaid expenses and other assets |
11,125 | 15,023 | ||||||
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Total assets |
$ | 1,040,575 | $ | 936,266 | ||||
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Liabilities |
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Accounts payable and accrued expenses |
$ | 33,987 | $ | 41,617 | ||||
| Operating lease liabilities | 15,881 | 22,259 | ||||||
| Notes payable, at face value (including $689.7 million and $701.1 million associated with variable interest entities at September 30, 2020 and December 31, 2019, respectively) | 746,392 | 749,209 | ||||||
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Notes payable associated with structured financings, at fair value (associated with variable interest entities) |
3,367 | 3,920 | ||||||
| Convertible senior notes | 24,310 | 24,091 | ||||||
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Income tax liability |
21,690 | 5,785 | ||||||
| Total liabilities | 845,627 | 846,881 | ||||||
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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 September 30, 2020 (liquidation preference - $40.0 million); 400,000 shares issued and outstanding at December 31, 2019 (Note 4) | 40,000 | 40,000 | ||||||
| Class B preferred units issued to noncontrolling interests (Note 4) | 99,275 | 49,050 | ||||||
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Shareholders' Equity |
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Common stock, no par value, 150,000,000 shares authorized: 15,967,856 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at September 30, 2020; and 15,885,314 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at December 31, 2019 |
— | — | ||||||
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Paid-in capital |
200,744 | 212,692 | ||||||
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Accumulated other comprehensive income |
— | — | ||||||
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Retained deficit |
(144,341 | ) | (211,786 | ) | ||||
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Total shareholders’ equity |
56,403 | 906 | ||||||
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Noncontrolling interests |
(730 | ) | (571 | ) | ||||
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Total equity |
55,673 | 335 | ||||||
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Total liabilities, preferred stock and shareholders' equity |
$ | 1,040,575 | $ | 936,266 | ||||
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 |
For the Nine Months Ended |
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September 30, |
September 30, |
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2020 |
2019 |
2020 |
2019 |
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Interest income: |
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Consumer loans, including past due fees |
$ | 103,552 | $ | 70,473 | $ | 306,654 | $ | 175,954 | ||||||||
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Other |
90 | 108 | 248 | 286 | ||||||||||||
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Total interest income |
103,642 | 70,581 | 306,902 | 176,240 | ||||||||||||
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Interest expense |
(12,678 | ) | (13,099 | ) | (38,514 | ) | (36,259 | ) | ||||||||
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Net interest income before fees and related income on earning assets and provision for losses on loans, interest and fees receivable |
90,964 | 57,482 | 268,388 | 139,981 | ||||||||||||
| Changes in fair value of loans, interest and fees receivable recorded at fair value | (29,081 | ) | 355 | (69,779 | ) | 725 | ||||||||||
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Fees and related income on earning assets |
35,856 | 20,080 | 103,681 | 46,111 | ||||||||||||
| Net losses upon impairment of loans, interest and fees receivable recorded at fair value | (3,291 | ) | (190 | ) | (3,931 | ) | (715 | ) | ||||||||
| Provision for losses on loans, interest and fees receivable recorded at net realizable value | (17,028 | ) | (65,527 | ) | (116,894 | ) | (148,539 | ) | ||||||||
| Net interest income, fees and related income on earning assets | 77,420 | 12,200 | 181,465 | 37,563 | ||||||||||||
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Other operating income: |
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Servicing income |
527 | 356 | 1,619 | 1,417 | ||||||||||||
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Other income |
4,195 | 30,486 | 8,739 | 75,900 | ||||||||||||
| Gain on repurchase of convertible senior notes | — | 5,127 | — | 5,127 | ||||||||||||
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Equity in income of equity-method investee |
342 | 284 | 355 | 736 | ||||||||||||
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Total other operating income |
5,064 | 36,253 | 10,713 | 83,180 | ||||||||||||
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Other operating expense: |
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Salaries and benefits |
6,624 | 6,429 | 20,642 | 19,455 | ||||||||||||
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Card and loan servicing |
16,309 | 13,152 | 47,747 | 35,123 | ||||||||||||
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Marketing and solicitation |
7,016 | 10,757 | 26,523 | 26,254 | ||||||||||||
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Depreciation |
327 | 284 | 932 | 856 | ||||||||||||
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Other |
3,945 | 1,333 | 13,332 | 9,232 | ||||||||||||
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Total other operating expense |
34,221 | 31,955 | 109,176 | 90,920 | ||||||||||||
| Income before income taxes | 48,263 | 16,498 | 83,002 | 29,823 | ||||||||||||
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Income tax expense |
(9,456 | ) | (3,478 | ) | (15,716 | ) | (5,966 | ) | ||||||||
| Net income | 38,807 | 13,020 | 67,286 | 23,857 | ||||||||||||
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Net loss attributable to noncontrolling interests |
48 | 57 | 159 | 177 | ||||||||||||
| Net income attributable to controlling interests | $ | 38,855 | $ | 13,077 | $ | 67,445 | $ | 24,034 | ||||||||
| Preferred dividends | $ | (4,788 | ) | $ | — | $ | (12,283 | ) | $ | — | ||||||
| Net income attributable to common shareholders | $ | 34,067 | $ | 13,077 | $ | 55,162 | $ | 24,034 | ||||||||
| Net income attributable to common shareholders per common share—basic | $ | 2.35 | $ | 0.90 | $ | 3.81 | $ | 1.65 | ||||||||
| Net income attributable to common shareholders per common share—diluted | $ | 1.72 | $ | 0.83 | $ | 2.85 | $ | 1.59 | ||||||||
See accompanying notes.
Atlanticus Holdings Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in thousands)
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For the Three Months Ended |
For the Nine Months Ended |
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September 30, |
September 30, |
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2020 |
2019 |
2020 |
2019 |
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| Net income | $ | 38,807 | $ | 13,020 | $ | 67,286 | $ | 23,857 | ||||||||
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Other comprehensive income (loss): |
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Foreign currency translation adjustment |
— | 1,784 | — | 2,282 | ||||||||||||
| Reclassifications of foreign currency translation gains to Other operating expense on the consolidated statements of operations | — | (2,878 | ) | — | (2,878 | ) | ||||||||||
| Comprehensive income | 38,807 | 11,926 | 67,286 | 23,261 | ||||||||||||
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Comprehensive loss attributable to noncontrolling interests |
48 | 57 | 159 | 177 | ||||||||||||
| Comprehensive income attributable to controlling interests | $ | 38,855 | $ | 11,983 | $ | 67,445 | $ | 23,438 | ||||||||
| Comprehensive income attributable to controlling interests to common shareholders | $ | 34,067 | $ | 11,983 | $ | 55,162 | $ | 23,438 | ||||||||
See accompanying notes.
Atlanticus Holdings Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Equity (Deficit) (Unaudited)
For the Three and Nine Months Ended September 30, 2020 and September 30, 2019
(Dollars in thousands)
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Common Stock |
Temporary Equity |
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Shares Issued |
Amount |
Paid-In Capital |
Accumulated Other Comprehensive Income (Loss) |
Retained Deficit |
Noncontrolling Interests |
Total Equity (Deficit) |
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 | |||||||||||||||||
| Accretion of discount associated with issuance of subsidiary equity | — | — | (75 | ) | — | — | — | (75 | ) | 75 | — | |||||||||||||||||||||||||
| Preferred dividends | — | — | (2,684 | ) | — | — | — | (2,684 | ) | — | — | |||||||||||||||||||||||||
| Stock option exercises and proceeds related thereto | 2,000 | — | 6 | — | — | — | 6 | — | — | |||||||||||||||||||||||||||
| Compensatory stock issuances, net of forfeitures | 64,915 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Contributions by preferred unit holders | — | — | — | — | — | — | — | 50,000 | — | |||||||||||||||||||||||||||
| Deferred stock-based compensation costs | — | — | 368 | — | — | — | 368 | — | — | |||||||||||||||||||||||||||
| Redemption and retirement of shares | (74,724 | ) | — | (559 | ) | — | — | — | (559 | ) | — | — | ||||||||||||||||||||||||
| Comprehensive income | — | — | — | — | 5,425 | (63 | ) | 5,362 | — | — | ||||||||||||||||||||||||||
| Balance at March 31, 2020 | 15,877,505 | $ | — | $ | 209,748 | $ | — | $ | (206,361 | ) | $ | (634 | ) | $ | 2,753 | $ | 99,125 | $ | 40,000 | |||||||||||||||||
| Accretion of discount associated with issuance of subsidiary equity | — | — | (75 | ) | — | — | — | (75 | ) | 75 | — | |||||||||||||||||||||||||
| Preferred dividends | — | — | (4,661 | ) | — | — | — | (4,661 | ) | — | — | |||||||||||||||||||||||||
| Stock option exercises and proceeds related thereto | 37,667 | — | 114 | — | — | — | 114 | — | — | |||||||||||||||||||||||||||
| Deferred stock-based compensation costs | — | — | 281 | — | — | — | 281 | — | — | |||||||||||||||||||||||||||
| Redemption and retirement of shares | (10,999 | ) | — | (112 | ) | — | — | — | (112 | ) | — | — | ||||||||||||||||||||||||
| Comprehensive income | — | — | — | — | 23,165 | (48 | ) | 23,117 | — | — | ||||||||||||||||||||||||||
| Balance at June 30, 2020 | 15,904,173 | $ | — | $ | 205,295 | $ | — | $ | (183,196 | ) | $ | (682 | ) | $ | 21,417 | $ | 99,200 | $ | 40,000 | |||||||||||||||||
| Accretion of discount associated with issuance of subsidiary equity | — | — | (75 | ) | — | — | — | (75 | ) | 75 | — | |||||||||||||||||||||||||
| Preferred dividends | — | — | (4,713 | ) | — | — | — | (4,713 | ) | — | — | |||||||||||||||||||||||||
| Stock option exercises and proceeds related thereto | 108,833 | — | 426 | — | — | — | 426 | — | — | |||||||||||||||||||||||||||
| Compensatory stock issuances, net of forfeitures | 3,125 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Deferred stock-based compensation costs | — | — | 303 | — | — | — | 303 | — | — | |||||||||||||||||||||||||||
| Redemption and retirement of shares | (48,275 | ) | — | (492 | ) | — | — | — | (492 | ) | — | — | ||||||||||||||||||||||||
| Comprehensive income | — | — | — | — | 38,855 | (48 | ) | 38,807 | — | — | ||||||||||||||||||||||||||
| Balance at September 30, 2020 | 15,967,856 | $ | — | $ | 200,744 | $ | — | $ | (144,341 | ) | $ | (730 | ) | $ | 55,673 | $ | 99,275 | $ | 40,000 | |||||||||||||||||
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Common Stock |
Temporary Equity |
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Shares Issued |
Amount |
Paid-In Capital |
Accumulated Other Comprehensive Income (Loss) |
Retained Deficit |
Noncontrolling Interests |
Total Equity (Deficit) |
Class B Preferred Units |
Series A Preferred Stock |
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Balance at December 31, 2018 |
15,563,574 | $ | — | $ | 213,435 | $ | 3,558 | $ | (238,784 | ) | $ | (338 | ) | $ | (22,129 | ) | $ | — | $ | — | ||||||||||||||||
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Cumulative effects from adoption of new lease standard |
— | — | — | — | 555 | — | 555 | — | — | |||||||||||||||||||||||||||
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Stock option exercises and proceeds related thereto |
419,500 | — | 1,065 | — | — | — | 1,065 | — | — | |||||||||||||||||||||||||||
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Deferred stock-based compensation costs |
— | — | 412 | — | — | — | 412 | — | — | |||||||||||||||||||||||||||
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Redemption and retirement of shares |
(5,944 | ) | — | (21 | ) | — | — | — | (21 | ) | — | — | ||||||||||||||||||||||||
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Comprehensive income |
— | — | — | (1,513 | ) | 5,713 | (58 | ) | 4,142 | — | — | |||||||||||||||||||||||||
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Balance at March 31, 2019 |
15,977,130 | $ | — | $ | 214,891 | $ | 2,045 | $ | (232,516 | ) | $ | (396 | ) | $ | (15,976 | ) | $ | — | $ | — | ||||||||||||||||
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Stock option exercises and proceeds related thereto |
6,000 | — | 18 | — | — | — | 18 | — | — | |||||||||||||||||||||||||||
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Compensatory stock issuances, net of forfeitures |
205,000 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
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Deferred stock-based compensation costs |
— | — | 440 | — | — | — | 440 | — | — | |||||||||||||||||||||||||||
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Redemption and retirement of shares |
(64,845 | ) | — | (238 | ) | — | — | — | (238 | ) | — | — | ||||||||||||||||||||||||
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Comprehensive income |
— | — | — | 2,011 | 5,244 | (62 | ) | 7,193 | — | — | ||||||||||||||||||||||||||
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Balance at June 30, 2019 |
16,123,285 | $ | — | $ | 215,111 | $ | 4,056 | $ | (227,272 | ) | $ | (458 | ) | $ | (8,563 | ) | $ | — | $ | — | ||||||||||||||||
| Stock option exercises and proceeds related thereto | 27,367 | — | 82 | — | — | — | 82 | — | — | |||||||||||||||||||||||||||
| Deferred stock-based compensation costs | — | — | 428 | — | — | — | 428 | — | — | |||||||||||||||||||||||||||
| Redemption and retirement of shares | (200,799 | ) | — | (1,591 | ) | — | — | — | (1,591 | ) | — | — | ||||||||||||||||||||||||
| Comprehensive income | — | — | — | (1,094 | ) | 13,077 | (57 | ) | 11,926 | — | — | |||||||||||||||||||||||||
| Balance at September 30, 2019 | 15,949,853 | $ | — | $ | 214,030 | $ | 2,962 | $ | (214,195 | ) | $ | (515 | ) | $ | 2,282 | $ | — | $ | — | |||||||||||||||||
See accompanying notes.
Atlanticus Holdings Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
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For the Nine Months Ended September 30, |
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2020 |
2019 |
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Operating activities |
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| Net income | $ | 67,286 | $ | 23,857 | ||||
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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 |
5,959 | 5,736 | ||||||
| Losses upon impairment of loans, interest and fees receivable recorded at fair value | 3,931 | 715 | ||||||
| Provision for losses on loans, interest and fees receivable | 116,894 | 148,539 | ||||||
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Interest expense from accretion of discount on notes |
436 | 677 | ||||||
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Income from accretion of merchant fees and discount associated with receivables purchases |
(91,376 | ) | (80,130 | ) | ||||
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Unrealized losses (gains) on loans, interest and fees receivable and underlying notes payable held at fair value |
69,226 | (2,398 | ) | |||||
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Amortization of deferred loan costs |
3,853 | 2,271 | ||||||
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Income from equity-method investments |
(355 | ) | (736 | ) | ||||
| Gain on repurchase of convertible senior notes | — | (5,127 | ) | |||||
| Deferred stock-based compensation costs | 952 | 1,280 | ||||||
| Lease liability payments | (7,689 | ) | (7,540 | ) | ||||
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Changes in assets and liabilities: |
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(Increase) decrease in uncollected fees on earning assets |
(30,373 | ) | 2,139 | |||||
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Increase in income tax liability |
15,905 | 5,729 | ||||||
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Decrease in deposits |
45 | 20 | ||||||
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Decrease in accounts payable and accrued expenses |
(10,833 | ) | (17,288 | ) | ||||
| Other | 3,913 | (7,511 | ) | |||||
| Net cash provided by operating activities | 147,774 | 70,233 | ||||||
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Investing activities |
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Proceeds from equity-method investee |
791 | 1,187 | ||||||
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Investments in earning assets |
(953,197 | ) | (760,692 | ) | ||||
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Proceeds from earning assets |
772,234 | 469,876 | ||||||
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Purchases and development of property, net of disposals |
(745 | ) | (196 | ) | ||||
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Net cash used in investing activities |
(180,917 | ) | (289,825 | ) | ||||
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Financing activities |
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| Proceeds from issuance of preferred units | 50,000 | — | ||||||
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Preferred dividends |
(8,855 | ) | — | |||||
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Proceeds from exercise of stock options |
546 | 1,165 | ||||||
| Purchase and retirement of outstanding stock | (1,163 | ) | (1,850 | ) | ||||
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Proceeds from borrowings |
249,353 | 527,866 | ||||||
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Repayment of borrowings |
(256,240 | ) | (336,832 | ) | ||||
| Net cash provided by financing activities | 33,641 | 190,349 | ||||||
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Effect of exchange rate changes on cash |
(17 | ) | (398 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | 481 | (29,641 | ) | |||||
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Cash and cash equivalents and restricted cash at beginning of period |
176,394 | 141,754 | ||||||
| Cash and cash equivalents and restricted cash at end of period | $ | 176,875 | $ | 112,113 | ||||
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Supplemental cash flow information |
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| Cash paid for interest | $ | 35,824 | $ | 34,542 | ||||
| Net cash income tax (refunds) payments | $ | (189 | ) | $ | 237 | |||
See accompanying notes.
Atlanticus Holdings Corporation and Subsidiaries
Notes to Consolidated Financial Statements
|
1. |
Description of Our Business |
Our accompanying consolidated financial statements include the accounts of Atlanticus Holdings Corporation (the “Company”) and those entities we control. We are primarily focused on 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.
In most cases, we invest in the receivables originated by lenders who utilize our technology platform and other related services. From time to time, we also purchase receivables portfolios from third parties. References to "receivables" include receivables purchased from our bank partners and from third parties. As discussed further below, we reflect our business lines within two reportable segments: Credit and Other Investments; and Auto Finance. See also Note 3, “Segment Reporting,” for further details.
Within our Credit and Other Investments segment, we facilitate consumer finance programs offered by our bank partner to originate consumer loans through multiple channels, including retail point-of-sale, direct mail solicitation, digital marketing and through partner relationships. In the retail credit (the “point-of-sale” operations) channel, we partner with retailers and service providers in various industries across the United States (“U.S.”) to enable them to provide credit to their customers for the purchase of goods and services. These services of our 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 additional 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.
Additionally, we report within our Credit and Other Investments segment: 1) the servicing income from our legacy credit card receivables, 2) the income earned from an investment in an equity-method investee that holds credit card receivables for which we are the servicer; and 3) gains or losses associated with investments previously made in consumer finance technology platforms. These include investments in companies engaged in mobile technologies, marketplace lending and other financial technologies. These investments are carried at the lower of cost or market valuation. None of these companies are publicly-traded and there are no material pending liquidity events.
Within our Auto Finance segment, our CAR subsidiary operations principally purchase and/or service loans secured by automobiles from or for, and also provide floor plan financing for, a pre-qualified network of independent automotive dealers and automotive finance companies in the buy-here, pay-here, used car business. We purchase auto loans at a discount and with dealer retentions or holdbacks that provide risk protection. Also within our Auto Finance segment, we are providing certain installment lending products in addition to our traditional loans secured by automobiles.
On March 13, 2020, President Trump declared a national emergency under the National Emergencies Act due to the novel coronavirus pandemic (referred to as “COVID-19”). Nationwide responses to the COVID-19 pandemic have included restrictions on “non-essential” businesses imposed by state and local governments. Consumer spending behavior has been significantly impacted by the COVID-19 pandemic, principally due to the restrictions on “non-essential” businesses, issuances of stay-at-home orders, increased unemployment and uncertainties about the extent and duration of the pandemic.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which provides relief to taxpayers affected by COVID-19. The CARES Act provides direct benefits to certain consumers in the form of one-time stimulus payments, supplemental unemployment assistance and rent relief among others. The CARES Act also provides tax relief, access to short term capital and deferrals of certain tax payments to assist companies with meeting obligations in the near term. The Company has accounted for immediately applicable benefits under the Cares Act.
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.
|
2. |
Significant Accounting Policies and Consolidated Financial Statement Components |
The following is a summary of significant accounting policies we follow in preparing our consolidated financial statements, as well as a description of significant components of our consolidated financial statements.
Basis of Presentation and Use of Estimates
We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the U.S. (“GAAP”). The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our consolidated financial statements, as well as the reported amounts of revenues and expenses during each reporting period. We base these estimates on information available to us as of the date of the financial statements. Actual results could differ materially from these estimates. Certain estimates, such as credit losses, payment rates, costs of funds, discount rates and the yields earned on credit card receivables, significantly affect the reported amount of credit card receivables that we report at fair value and our notes payable associated with structured financings, at fair value; these estimates likewise affect the changes in these amounts reflected within our fees and related income on earning assets line item on our consolidated statements of operations. Additionally, estimates of future credit losses have a significant effect on loans, interest and fees receivable, net, as shown on our consolidated balance sheets, as well as on the provision for losses on loans, interest and fees receivable within our consolidated statements of operations.
We have eliminated all significant intercompany balances and transactions for financial reporting purposes.
Loans, Interest and Fees Receivable
We maintain two categories of Loans, Interest and Fees Receivable on our consolidated balance sheet: 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.
Under the fair value option for both our Securitized Receivables and our Fair Value Receivables, direct loan origination fees (such as annual and merchant fees) are taken into income when billed to the consumer or upon loan acquisition and direct loan origination costs are expensed in the period incurred. The Company estimates the fair value of the loans using a discounted cash flow model, which considers various unobservable inputs such as remaining cumulative charge-offs, remaining cumulative prepayments, average life and discount rate. The Company re-evaluates the fair value of loans receivable at the close of each measurement period. Changes in fair value are recorded in "Changes in fair value of loans, interest and fees receivable recorded at fair value" in the consolidated statements of operations in the period of the fair value changes. Changes in the fair value of loans, interest and fees receivable recorded at fair value exclude the impact of current period charge offs associated with these receivables which are separately stated in Net losses upon impairment of loans, interest and fees receivable recorded at fair value on our consolidated statements of operations.
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 in which we hold the vehicle title. We purchased auto loans with outstanding principal of $47.1 million, $139.7 million, $45.4 million and $138.6 million for the three and nine months ended September 30, 2020 and 2019, respectively, through our pre-qualified network of independent automotive dealers and automotive finance companies.
We show both an allowance for uncollectible loans, interest and fees receivable and unearned fees (or “deferred revenue”) for our loans, interest and fees receivable that are not carried at fair value. Our loans, interest and fees receivable consist of smaller-balance, homogeneous loans, divided into two portfolio segments: Credit and Other Investments; and Auto Finance. While each of these categories has unique features, they share many of the same credit risk characteristics and thus share a similar approach to the establishment of an allowance for loan losses. Each portfolio segment is divided into pools based on common characteristics such as contract or acquisition channel. For each pool, we determine the necessary allowance for uncollectible loans, interest and fees receivable by analyzing some or all of the following unique attributes for each type of receivable pool: historical loss rates; current delinquency and roll-rate trends; vintage analyses based on the number of months an account has been in existence; the effects of changes in the economy on consumers; changes in underwriting criteria; and estimated recoveries. For our Auto Finance segment we may further reduce the expected charge-off, taking into consideration specific dealer level reserves which may allow us to offset our losses and, in the case of secured loans, the impact of collateral available to offset a potential loss. Conversely, for receivables in our Credit and Other Investments segment, which generally do not have a secured interest in collateral, we look to reserve for the gross expected exposure to charge-offs. These reserves are considered in conjunction with (and potentially reduced by) any unearned fees and discounts that may be applicable for an outstanding loan receivable.
A considerable amount of judgment is required to assess the ultimate amount of uncollectible loans, interest and fees receivable, and we continuously evaluate and update our methodologies to determine the most appropriate allowance necessary. We may individually evaluate a receivable or pool of receivables for impairment if circumstances indicate that the receivable or pool of receivables may be at higher risk for non-performance than other receivables (e.g., if a particular retail or auto-finance partner has indications of non-performance (such as a bankruptcy) that could impact the underlying pool of receivables we purchased from the partner).
Certain of our loans, interest and fees receivable also contain components of deferred revenue including merchant fees on the purchases of receivables for our point-of-sale receivables and annual fee billings for our direct-to-consumer credit card receivables. Our point-of-sale and auto finance loans, interest and fees receivable include principal balances and associated fees and interest due from customers which are earned each period a loan is outstanding, net of the unearned portion of merchant fees and loan discounts. Additionally, many of our direct-to-consumer credit card receivables have an annual membership fee that is billed to the consumer on card activation and on each anniversary of that date thereafter. As of September 30, 2020 and December 31, 2019, the weighted average remaining accretion period for the $42.1 million and $90.3 million of deferred revenue reflected in the consolidated balance sheets was 14 months and 11 months, respectively. Included within deferred revenue, are merchant fees and discounts on purchased loans of $31.1 million and $48.1 million as of September 30, 2020 and December 31, 2019, 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"). This 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 prescribed guidance, 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. Through September 30, 2020, approximately 5.2% of our accounts had received some form of short-term deferral related to COVID-19. While most participants in these short-term deferral programs have now exited the program, as of September 30, 2020, approximately 1.4% of accounts and their associated receivables were actively enrolled in a short-term payment deferral (representing $19.1 million of gross receivables outstanding). Nearly all of these customers are considered current and thus excluded from the delinquency data in the below tables. 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:
|
For the Three Months Ended September 30, 2020 |
Credit Cards |
Auto Finance |
Other Unsecured Lending Products |
Total |
||||||||||||
|
Allowance for uncollectible loans, interest and fees receivable: |
||||||||||||||||
|
Balance at beginning of period |
$ | (112.5 | ) | $ | (1.8 | ) | $ | (43.8 | ) | $ | (158.1 | ) | ||||
| Provision for loan losses | (14.9 | ) | (0.4 | ) | (1.7 | ) | (17.0 | ) | ||||||||
| Charge offs | 39.3 | 0.6 | 15.0 | 54.9 | ||||||||||||
| Recoveries | (2.8 | ) | (0.3 | ) | (2.6 | ) | (5.7 | ) | ||||||||
| Balance at end of period | $ | (90.9 | ) | $ | (1.9 | ) | $ | (33.1 | ) | $ | (125.9 | ) | ||||
|
For the Nine Months Ended September 30, 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 | (96.1 | ) | (1.8 | ) | (19.0 | ) | (116.9 | ) | ||||||||
| Charge offs | 134.3 | 2.3 | 62.3 | 198.9 | ||||||||||||
| Recoveries | (7.8 | ) | (0.8 | ) | (13.0 | ) | (21.6 | ) | ||||||||
| Balance at end of period | $ | (90.9 | ) | $ | (1.9 | ) | $ | (33.1 | ) | $ | (125.9 | ) | ||||
|
As of September 30, 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 |
$ | — | $ | (0.4 | ) | $ | (0.3 | ) | $ | (0.7 | ) | |||||
| Balance at end of period collectively evaluated for impairment | $ | (90.9 | ) | $ | (1.5 | ) | $ | (32.8 | ) | $ | (125.2 | ) | ||||
|
Loans, interest and fees receivable: |
||||||||||||||||
| Loans, interest and fees receivable, gross | $ | 370.9 | $ | 90.5 | $ | 233.9 | $ | 695.3 | ||||||||
|
Loans, interest and fees receivable individually evaluated for impairment |
$ | — | $ | 3.3 | $ | 0.3 | $ | 3.6 | ||||||||
| Loans, interest and fees receivable collectively evaluated for impairment | $ | 370.9 | $ | 87.2 | $ | 233.6 | $ | 691.7 | ||||||||
|
For the Three Months Ended September 30, 2019 |
Credit Cards |
Auto Finance |
Other Unsecured Lending Products |
Total |
||||||||||||
|
Allowance for uncollectible loans, interest and fees receivable: |
||||||||||||||||
|
Balance at beginning of period |
$ | (55.3 | ) | $ | (1.6 | ) | $ | (43.3 | ) | $ | (100.2 | ) | ||||
|
Provision for loan losses |
(41.0 | ) | (0.6 | ) | (23.9 | ) | (65.5 | ) | ||||||||
|
Charge offs |
20.0 | 1.0 | 14.8 | 35.8 | ||||||||||||
|
Recoveries |
(2.8 | ) | (0.4 | ) | (1.5 | ) | (4.7 | ) | ||||||||
|
Balance at end of period |
$ | (79.1 | ) | $ | (1.6 | ) | $ | (53.9 | ) | $ | (134.6 | ) | ||||
|
For the Nine Months Ended September 30, 2019 |
Credit Cards |
Auto Finance |
Other Unsecured Lending Products |
Total |
||||||||||||
|
Allowance for uncollectible loans, interest and fees receivable: |
||||||||||||||||
|
Balance at beginning of period |
$ | (35.4 | ) | $ | (1.3 | ) | $ | (42.5 | ) | $ | (79.2 | ) | ||||
|
Provision for loan losses |
(89.6 | ) | (2.6 | ) | (56.3 | ) | (148.5 | ) | ||||||||
|
Charge offs |
49.4 | 3.4 | 49.0 | 101.8 | ||||||||||||
|
Recoveries |
(3.5 | ) | (1.1 | ) | (4.1 | ) | (8.7 | ) | ||||||||
|
Balance at end of period |
$ | (79.1 | ) | $ | (1.6 | ) | $ | (53.9 | ) | $ | (134.6 | ) | ||||
|
As of December 31, 2019 |
Credit Cards |
Auto Finance |
Other Unsecured Lending Products |
Total |
||||||||||||
|
Allowance for uncollectible loans, interest and fees receivable: |
||||||||||||||||
|
Balance at end of period individually evaluated for impairment |
$ | — | $ | (0.4 | ) | $ | (0.1 | ) | $ | (0.5 | ) | |||||
|
Balance at end of period collectively evaluated for impairment |
$ | (121.3 | ) | $ | (1.2 | ) | $ | (63.3 | ) | $ | (185.8 | ) | ||||
|
Loans, interest and fees receivable: |
||||||||||||||||
|
Loans, interest and fees receivable, gross |
$ | 509.2 | $ | 89.8 | $ | 399.2 | $ | 998.2 | ||||||||
|
Loans, interest and fees receivable individually evaluated for impairment |
$ | — | $ | 2.1 | $ | 0.1 | $ | 2.2 | ||||||||
|
Loans, interest and fees receivable collectively evaluated for impairment |
$ | 509.2 | $ | 87.7 | $ | 399.1 | $ | 996.0 | ||||||||
An aging of our delinquent loans, interest and fees receivable, gross (in millions) by class of receivable as of September 30, 2020 and December 31, 2019 is as follows:
|
As of September 30, 2020 |
Credit Cards |
Auto Finance |
Other Unsecured Lending Products |
Total |
||||||||||||
|
30-59 days past due |
$ | 8.3 | $ | 6.0 | $ | 5.0 | $ | 19.3 | ||||||||
| 60-89 days past due | 7.5 | 2.2 | 3.8 | 13.5 | ||||||||||||
| 90 or more days past due | 21.2 | 1.9 | 9.5 | 32.6 | ||||||||||||
| Delinquent loans, interest and fees receivable, gross | 37.0 | 10.1 | 18.3 | 65.4 | ||||||||||||
| Current loans, interest and fees receivable, gross | 333.9 | 80.4 | 215.6 | 629.9 | ||||||||||||
| Total loans, interest and fees receivable, gross | $ | 370.9 | $ | 90.5 | $ | 233.9 | $ | 695.3 | ||||||||
| Balance of loans greater than 90-days delinquent still accruing interest and fees | $ | — | $ | 1.3 | $ | — | $ | 1.3 | ||||||||
|
As of December 31, 2019 |
Credit Cards |
Auto Finance |
Other Unsecured Lending Products |
Total |
||||||||||||
|
30-59 days past due |
$ | 21.7 | $ | 8.1 | $ | 14.0 | $ | 43.8 | ||||||||
|
60-89 days past due |
18.5 | 3.0 | 11.5 | 33.0 | ||||||||||||
|
90 or more days past due |
46.6 | 2.6 | 27.2 | 76.4 | ||||||||||||
|
Delinquent loans, interest and fees receivable, gross |
86.8 | 13.7 | 52.7 | 153.2 | ||||||||||||
|
Current loans, interest and fees receivable, gross |
422.4 | 76.1 | 346.5 | 845.0 | ||||||||||||
|
Total loans, interest and fees receivable, gross |
$ | 509.2 | $ | 89.8 | $ | 399.2 | $ | 998.2 | ||||||||
|
Balance of loans greater than 90-days delinquent still accruing interest and fees |
$ | — | $ | 1.9 | $ | — | $ | 1.9 | ||||||||
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 (“TDR”)s. 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 September 30, 2020 and December 31, 2019:
|
As of |
||||||||||||||||
|
September 30, 2020 |
December 31, 2019 |
|||||||||||||||
|
Point-of-sale |
Direct-to-consumer |
Point-of-sale |
Direct-to-consumer |
|||||||||||||
|
Number of TDRs |
14,460 | 40,401 | 10,682 | 14,553 | ||||||||||||
|
Number of TDRs that have been re-aged |
3,046 | 7,789 | 2,788 | 2,854 | ||||||||||||
|
Amount of TDRs on non-accrual status (in thousands) |
$ | 17,243 | $ | 29,705 | $ | 14,468 | $ | 13,037 | ||||||||
|
Amount of TDRs on non-accrual status above that have been re-aged (in thousands) |
$ | 5,161 | $ | 7,040 | $ | 5,118 | $ | 3,104 | ||||||||
|
Carrying value of TDRs (in thousands) |
$ | 12,260 | $ | 19,701 | $ | 8,864 | $ | 7,312 | ||||||||
|
TDRs - Performing (carrying value, in thousands)* |
$ | 9,965 | $ | 17,941 | $ | 6,754 | $ | 6,106 | ||||||||
|
TDRs - Nonperforming (carrying value, in thousands)* |
$ | 2,295 | $ | 1,760 | $ | 2,110 | $ | 1,206 | ||||||||
*“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 66,667 and 24,831 accounts in the amount of $78.2 million and $36.4 million during the twelve month periods ended September 30, 2020 and September 30, 2019, 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 |
||||||||||||||||
|
September 30, 2020 |
September 30, 2019 |
|||||||||||||||
|
Point-of-sale |
Direct-to-consumer |
Point-of-sale |
Direct-to-consumer |
|||||||||||||
|
Number of accounts |
3,820 | 7,986 | 2,597 | 2,689 | ||||||||||||
|
Loan balance at time of charge off (in thousands) |
$ | 5,333 | $ | 7,055 | $ | 4,115 | $ | 2,902 | ||||||||
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 effective tax rates of 19.6% and 18.9%, respectively, for the three and nine months ended September 30, 2020, compared to effective tax rates of 21.1% and 20.0%, respectively, for the three and nine months ended September 30, 2019.
Our effective tax rates for the three and nine months ended September 30, 2020, are below the statutory rate principally due to (1) 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 (2) 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. Partially offsetting such effects on our effective tax rates are the effects of accruals of interest on unpaid federal tax liabilities and uncertain tax positions and state and foreign income taxes during the three and nine months ended September 30, 2020.
Our effective tax rate for the three months ended September 30, 2019, was above the statutory rate principally due to the effects of accruals of interest on unpaid federal tax liabilities and uncertain tax positions and state and foreign income taxes during such period. However, it was below the statutory rate for the nine months ended September 30, 2019, principally due to reductions in our valuation allowances against net federal deferred tax assets during such period—the effect of such reductions being partially offset by the effects of accruals of interest on unpaid federal tax liabilities and uncertain tax positions and state and foreign income taxes during such period.
We report income tax-related interest and penalties (including those associated with both our accrued liabilities for uncertain tax positions and unpaid tax liabilities) within our income tax line item on our consolidated statements of operations. We likewise report the reversal of income tax-related interest and penalties within such line item to the extent we resolve our liabilities for uncertain tax positions or unpaid tax liabilities in a manner favorable to our accruals therefor. During the three and nine months ended September 30, 2020, we included $0.0 million and $0.1 million, respectively, of net income tax-related interest and penalties within those periods’ respective income tax expense line items.
In December 2014, we reached a settlement with the IRS concerning the tax treatment of net operating losses we incurred in 2007 and 2008 and carried back to obtain refunds of federal income taxes paid in earlier years dating back to 2003. In 2015, we filed an amended return claim that, if accepted, would have eliminated the $7.4 million assessment (and corresponding interest and penalties) under a negotiated provision of the December 2014 IRS settlement. The IRS filed a lien (as is customarily the case) associated with the assessment. Subsequently, an IRS examination team denied our amended return claims, and we filed a protest with IRS Appeals. Following correspondence and conferences held with IRS Appeals, we received and accepted a settlement offer from IRS Appeals in June 2018 that reduced our $7.4 million net unpaid income tax assessment referenced above to $3.7 million (such $3.7 million remaining unpaid assessment relating to the 2006 year to which we had originally carried back the aforementioned net operating losses). In July 2018, we paid $5.4 million to the IRS to cover the $3.7 million unpaid income tax assessment and most of the interest that had accrued thereon. Subsequently, during the three months ended September 30, 2018, the IRS refunded $0.5 million of our $5.4 million payment, and in 2019, we paid $0.7 million to the IRS to cover the interest on the 2006 income tax liability. Although we have paid all assessed income taxes related to this matter, we still have an outstanding accrued liability for failure-to-pay penalties (and accrued interest thereon) related to this matter. We are pursuing complete abatement of the failure-to-pay penalties of $0.9 million, and once this matter is resolved through either abatement or payment, we expect the IRS to remove the aforementioned lien in due course.
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: (1) 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; (2) changes in fair value of notes payable associated with structured financings recorded at fair value; and (3) gains or losses associated with our investments in securities.
We assess fees on credit card accounts underlying our credit card receivables according to the terms of the related cardholder agreements and, except for annual membership fees, we recognize these fees as income when they are charged to the customers’ accounts. We accrete annual membership fees associated with our credit card receivables into income on a straight-line basis over the cardholder privilege period which is generally 12 months for receivables that are not included as part of our Fair Value Receivables, and when billed for those receivables that are included as part of our 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. The election of the fair value option to account for certain loans receivable that are acquired on or after January 1, 2020 resulted in increased fees recognized on credit products throughout 2020.
The components (in thousands) of our fees and related income on earning assets are as follows:
|
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
|
2020 |
2019 |
2020 |
2019 |
|||||||||||||
|
Fees on credit products |
$ | 35,488 | $ | 19,725 | $ | 102,532 | $ | 44,329 | ||||||||
|
Changes in fair value of notes payable associated with structured financings recorded at fair value |
73 | 346 | 553 | 1,673 | ||||||||||||
|
Other |
295 | 9 | 596 | 109 | ||||||||||||
|
Total fees and related income on earning assets |
$ | 35,856 | $ | 20,080 | $ | 103,681 | $ | 46,111 | ||||||||
Other income
Other income includes revenues associated with ancillary product offerings and interchange revenues. We recognize these fees as income in the period earned. Included in Other income for the three and nine months ended September 30, 2019 is $26.7 and $68.1 million, respectively, associated with reductions in accruals related to one of our portfolios. The accrual was based upon our estimate of the amount that may be claimed by customers and was based upon several factors including customer claims volume, average claim amount and a determination of the amount, if any, which may be offered to resolve such claims. The assumptions used in the accrual estimate were subjective, mainly due to uncertainty associated with future claims volumes and the resolution costs, if any, per claim.
Revenue from Contracts with Customers
The majority of our revenue is earned from financial instruments and is not included within the scope of ASU No. 2014-09, "Revenue from Contracts with Customers". We have determined that revenue from contracts with customers would primarily consist of interchange revenues in our Credit and Other Investments segment and servicing revenue and other customer-related fees in both our Credit and Other Investments segment and our Auto Finance segment. Servicing revenue is generated by meeting contractual performance obligations related to the collection of amounts due on receivables, and is settled with the customer net of our fee. Revenue from these contracts with customers is included as a component of Other income on our consolidated statements of operations. Service charges and other customer related fees are earned from customers based on the occurrence of specific services that do not result in an ongoing obligation beyond what has already been rendered. Components (in thousands) of our revenue from contracts with customers is as follows:
|
Credit and |
||||||||||||
|
For the Three Months Ended September 30, 2020 |
Other Investments |
Auto Finance |
Total |
|||||||||
|
Interchange revenues, net (1) |
$ | 2,732 | $ | — | $ | 2,732 | ||||||
|
Servicing income |
262 | 265 | 527 | |||||||||
|
Service charges and other customer related fees |
1,447 | 16 | 1,463 | |||||||||
|
Total revenue from contracts with customers |
$ | 4,441 | $ | 281 | $ | 4,722 | ||||||
(1) Interchange revenue is presented net of customer reward expense.
|
Credit and |
||||||||||||
|
For the Nine Months Ended September 30, 2020 |
Other Investments |
Auto Finance |
Total |
|||||||||
|
Interchange revenues, net (1) |
$ | 6,554 | $ | — | $ | 6,554 | ||||||
|
Servicing income |
886 | 733 | 1,619 | |||||||||
|
Service charges and other customer related fees |
2,136 | 49 | 2,185 | |||||||||
|
Total revenue from contracts with customers |
$ | 9,576 | $ | 782 | $ | 10,358 | ||||||
(1) Interchange revenue is presented net of customer reward expense.
|
Credit and |
||||||||||||
|
For the Three Months Ended September 30, 2019 |
Other Investments |
Auto Finance |
Total |
|||||||||
|
Interchange revenues, net (1) |
$ | 2,674 | $ | — | $ | 2,674 | ||||||
|
Servicing income |
144 | 212 | 356 | |||||||||
|
Service charges and other customer related fees |
1,085 | 16 | 1,101 | |||||||||
|
Total revenue from contracts with customers |
$ | 3,903 | $ | 228 | $ | 4,131 | ||||||
(1) Interchange revenue is presented net of customer reward expense.
|
Credit and |
||||||||||||
|
For the Nine Months Ended September 30, 2019 |
Other Investments |
Auto Finance |
Total |
|||||||||
|
Interchange revenues, net (1) |
$ | 5,514 | $ | — | $ | 5,514 | ||||||
|
Servicing income |
698 | 719 | 1,417 | |||||||||
|
Service charges and other customer related fees |
2,193 | 49 | 2,242 | |||||||||
|
Total revenue from contracts with customers |
$ | 8,405 | $ | 768 | $ | 9,173 | ||||||
(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 (unless the fair value option is elected) 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.
In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which amends ASC 820, Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The ASU is effective for all entities for fiscal years beginning after December 15, 2019. The amendments address changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty and should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The adoption of this ASU did not have a material effect on the Company’s consolidated financial statements.
Subsequent Events
We evaluate subsequent events that occur after our consolidated balance sheet date but before our consolidated financial statements are issued. There are two types of subsequent events: (1) recognized, or those that provide additional evidence with respect to conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements; and (2) nonrecognized, or those that provide evidence with respect to conditions that did not exist at the date of the balance sheet but arose subsequent to that date.
Subsequent to quarter-end, one of the companies we invested in underwent a recapitalization which resulted in the receipt of $2.0 million in dividends. We retained our minority ownership stake in this platform and will continue to carry the investment on our books at cost.
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 and will be invested in the acquisition of receivables. See Note 9 "Notes Payable," for further discussion.
We have evaluated subsequent events occurring after September 30, 2020, 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 other than those disclosed above.
|
3. |
Segment Reporting |
We operate primarily within one industry consisting of two reportable segments by which we manage our business. Our two reportable segments are: Credit and Other Investments, and Auto Finance.
As of both September 30, 2020 and December 31, 2019, we did not have a material amount of long-lived assets located outside of the U.S., and only a negligible portion of our revenues for the nine months ended September 30, 2020 and 2019 were generated outside of the U.S.
We measure the profitability of our reportable segments based on their income after allocation of specific costs and corporate overhead; however, our segment results do not reflect any charges for internal capital allocations among our segments. Overhead costs are allocated based on headcounts and other applicable measures to better align costs with the associated revenues.
Summary operating segment information (in thousands) is as follows:
|
Three Months Ended September 30, 2020 |
Credit and Other Investments |
Auto Finance |
Total |
|||||||||
|
Interest income: |
||||||||||||
|
Consumer loans, including past due fees |
$ | 95,593 | $ | 7,959 | $ | 103,552 | ||||||
|
Other |
90 | — | 90 | |||||||||
|
Total interest income |
95,683 | 7,959 | 103,642 | |||||||||
|
Interest expense |
(12,438 | ) | (240 | ) | (12,678 | ) | ||||||
|
Net interest income before fees and related income on earning assets and provision for losses on loans, interest and fees receivable |
$ | 83,245 | $ | 7,719 | $ | 90,964 | ||||||
| Changes in fair value of loans, interest and fees receivable recorded at fair value | $ | (29,081 | ) | $ | — | $ | (29,081 | ) | ||||
|
Fees and related income on earning assets |
$ | 35,829 | $ | 27 | $ | 35,856 | ||||||
|
Servicing income |
$ | 262 | $ | 265 | $ | 527 | ||||||
|
Equity in income of equity-method investee |
$ | 342 | $ | — | $ | 342 | ||||||
| Income before income taxes | $ | 45,803 | $ | 2,460 | $ | 48,263 | ||||||
|
Income tax expense |
$ | (8,821 | ) | $ | (635 | ) | $ | (9,456 | ) | |||
|
Nine Months Ended September 30, 2020 |
Credit and Other Investments |
Auto Finance |
Total |
|||||||||
|
Interest income: |
||||||||||||
|
Consumer loans, including past due fees |
$ | 282,895 | $ | 23,759 | $ | 306,654 | ||||||
|
Other |
248 | — | 248 | |||||||||
|
Total interest income |
283,143 | 23,759 | 306,902 | |||||||||
|
Interest expense |
(37,590 | ) | (924 | ) | (38,514 | ) | ||||||
|
Net interest income before fees and related income on earning assets and provision for losses on loans, interest and fees receivable |
$ | 245,553 | $ | 22,835 | $ | 268,388 | ||||||
| Changes in fair value of loans, interest and fees receivable recorded at fair value | $ | (69,779 | ) | $ | — | $ | (69,779 | ) | ||||
|
Fees and related income on earning assets |
$ | 103,610 | $ | 71 | $ | 103,681 | ||||||
|
Servicing income |
$ | 886 | $ | 733 | $ | 1,619 | ||||||
|
Equity in income of equity-method investee |
$ | 355 | $ | — | $ | 355 | ||||||
| Income before income taxes | $ | 76,794 | $ | 6,208 | $ | 83,002 | ||||||
|
Income tax expense |
$ | (14,100 | ) | $ | (1,616 | ) | $ | (15,716 | ) | |||
|
Total assets |
$ | 960,527 | $ | 80,048 | $ | 1,040,575 | ||||||
|
Three Months Ended September 30, 2019 |
Credit and Other Investments |
Auto Finance |
Total |
|||||||||
|
Interest income: |
||||||||||||
|
Consumer loans, including past due fees |
$ | 62,558 | $ | 7,915 | $ | 70,473 | ||||||
|
Other |
108 | — | 108 | |||||||||
|
Total interest income |
62,666 | 7,915 | 70,581 | |||||||||
|
Interest expense |
(12,682 | ) | (417 | ) | (13,099 | ) | ||||||
|
Net interest income before fees and related income on earning assets and provision for losses on loans, interest and fees receivable |
$ | 49,984 | $ | 7,498 | $ | 57,482 | ||||||
| Changes in fair value of loans, interest and fees receivable recorded at fair value | $ | 355 | $ | — | $ | 355 | ||||||
|
Fees and related income on earning assets |
$ | 20,056 | $ | 24 | $ | 20,080 | ||||||
|
Servicing income |
$ | 144 | $ | 212 | $ | 356 | ||||||
| Gain on repurchase of convertible senior notes | $ | 5,127 | $ | — | $ | 5,127 | ||||||
|
Equity in income of equity-method investee |
$ | 284 | $ | — | $ | 284 | ||||||
|
Income before income taxes |
$ | 14,475 | $ | 2,023 | $ | 16,498 | ||||||
|
Income tax expense |
$ | (3,397 | ) | $ | (81 | ) | $ | (3,478 | ) | |||
|
Nine Months Ended September 30, 2019 |
Credit and Other Investments |
Auto Finance |
Total |
|||||||||
|
Interest income: |
||||||||||||
|
Consumer loans, including past due fees |
$ | 152,398 | $ | 23,556 | $ | 175,954 | ||||||
|
Other |
286 | — | 286 | |||||||||
|
Total interest income |
152,684 | 23,556 | 176,240 | |||||||||
|
Interest expense |
(35,034 | ) | (1,225 | ) | (36,259 | ) | ||||||
|
Net interest income before fees and related income on earning assets and provision for losses on loans, interest and fees receivable |
$ | 117,650 | $ | 22,331 | $ | 139,981 | ||||||
| Changes in fair value of loans, interest and fees receivable recorded at fair value | $ | 725 | $ | — | $ | 725 | ||||||
|
Fees and related income on earning assets |
$ | 45,975 | $ | 136 | $ | 46,111 | ||||||
|
Servicing income |
$ | 698 | $ | 719 | $ | 1,417 | ||||||
| Gain on repurchase of convertible senior notes | $ | 5,127 | $ | — | $ | 5,127 | ||||||
|
Equity in income of equity-method investee |
$ | 736 | $ | — | $ | 736 | ||||||
|
Income before income taxes |
$ | 24,640 | $ | 5,183 | $ | 29,823 | ||||||
|
Income tax expense |
$ | (5,072 | ) | $ | (894 | ) | $ | (5,966 | ) | |||
|
Total assets |
$ | 712,712 | $ | 79,235 | $ | 791,947 | ||||||
|
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 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 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—basic. The assumed redemption of Series A Preferred Stock in exchange for shares of common stock is included in our calculation of diluted EPS as part of the 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 and nine months ended September 30, 2020, we repurchased and contemporaneously retired 48,275 and 133,998 shares of our common stock at an aggregate cost of $492,000 and $1,163,000, 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. During the three and nine months ended September 30, 2019, we repurchased and contemporaneously retired 200,799 and 271,588 shares of our common stock at an aggregate cost of $1,591,000 and $1,850,000, 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 September 30, 2020 and December 31, 2019, 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 will be used for general corporate purposes. We have included the issuance of these Class B preferred units as temporary noncontrolling interest on the consolidated balance sheets. 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—basic. 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 September 30, 2020 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 |
||||||||
|
September 30, 2020 |
December 31, 2019 | |||||||
|
Loans, interest and fees receivables, at fair value |
$ | 2,149 | $ | 2,757 | ||||
|
Total assets |
$ | 2,265 | $ | 2,922 | ||||
|
Total liabilities |
$ | 10 | $ | 13 | ||||
|
Members’ capital |
$ | 2,255 | $ | 2,909 | ||||
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
2020 |
2019 |
2020 |
2019 |
|||||||||||||
|
Net interest income, fees and related income on earning assets |
$ | 546 | $ | 426 | $ | 638 | $ | 1,106 | ||||||||
|
Net income |
$ | 513 | $ | 381 | $ | 532 | $ | 960 | ||||||||
|
Net income attributable to our equity investment investee |
$ | 342 | $ | 284 | $ | 355 | $ | 736 | ||||||||
|
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 investments in equity securities, included in other assets, as well as our credit card loans, interest and fees receivable portfolios, the retained interests in which we historically recorded at fair value under securitization structures that were off balance sheet prior to accounting rules changes requiring their consolidation into our financial statements.
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 Fees and related income on earning assets 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 our Loans, interest and fees receivable, at fair value and therefore impact earnings.
The primary differences between fair value and amortized cost accounting are:
| • | 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 debt (other than the notes payable underlying our formerly off-balance sheet credit card securitization structures), we have not elected the fair value option. Nevertheless, pursuant to applicable requirements, we include disclosures of the fair value of this other debt to the extent practicable within the disclosures below. Additionally, we have other liabilities, associated with consolidated legacy credit card securitization trusts, that we are required to carry at fair value in our consolidated financial statements, and they also are addressed within the disclosures below.
Where applicable as noted above, we account for our financial assets and liabilities at fair value based upon a three-tiered valuation system. In general, fair values determined by Level 1 inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Fair values determined by Level 2 inputs use inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. Where inputs used to measure fair value may fall into different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety has been determined is based on the lowest level input that is significant to the fair value measurement in its entirety.
Valuations and Techniques for Assets
Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The table below summarizes (in thousands) by fair value hierarchy the September 30, 2020 and December 31, 2019 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 September 30, 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 | $ | — | $ | — | $ | 620,027 | $ | 527,284 | ||||||||
|
Loans, interest and fees receivable, at fair value |
$ | — | $ | — | $ | 310,784 | $ | 310,784 | ||||||||
|
Assets – As of December 31, 2019 (1) |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Carrying Amount of Assets |
||||||||||||
|
Loans, interest and fees receivable, net for which it is practicable to estimate fair value |
$ | — | $ | — | $ | 781,208 | $ | 721,573 | ||||||||
|
Loans, interest and fees receivable, at fair value |
$ | — | $ | — | $ | 4,386 | $ | 4,386 | ||||||||
|
(1) |
For cash, deposits and investments in equity securities, the carrying amount is a reasonable estimate of fair value. |
For those asset classes above that are required to be carried at fair value in our consolidated financial statements, gains and losses associated with fair value changes are detailed on our fees and related income on earning assets table within Note 2, “Significant Accounting Policies and Consolidated Financial Statement Components.” For our loans, interest and fees receivable included in the above tables, we assess the fair value of these assets based on our estimate of future cash flows net of servicing costs, and to the extent that such cash flow estimates change from period to period, any such changes are considered to be attributable to changes in instrument-specific credit risk.
For Level 3 assets carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) a reconciliation of the beginning and ending balances for the nine months ended September 30, 2020 and 2019:
|
Loans, Interest and Fees Receivables, at Fair Value |
||||||||
|
2020 |
2019 |
|||||||
|
Balance at January 1, |
$ | 4,386 | $ | 6,306 | ||||
|
Total gains—realized/unrealized: |
||||||||
|
Net revaluations of loans, interest and fees receivable, at fair value |
(69,779 | ) | 725 | |||||
| Purchases | 481,212 | — | ||||||
| Settlements | (167,522 | ) | (2,506 | ) | ||||
| Finance and fees | 62,487 | — | ||||||
| Balance at September 30, | $ | 310,784 | $ | 4,525 | ||||
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) within "Changes in fair value of loans, interest and fees receivable recorded at fair value" in the consolidated statements of operations in the period of the fair value changes. 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 gross yield, payment rates, expected credit loss rates, servicing costs, and discount rates. Interest income on receivables underlying our asset classes that are carried at fair value in our consolidated financial statements is recorded in Interest income - Consumer loans, including past due fees in our consolidated statements of operations.
For Level 3 assets carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) quantitative information about the valuation techniques and the inputs used in the fair value measurement as of September 30, 2020 and December 31, 2019:
Quantitative Information about Level 3 Fair Value Measurements
|
Fair Value Measurement |
Fair Value at September 30, 2020 (in thousands) |
Valuation Technique |
Unobservable Input |
Range (Weighted Average) |
|||||||
|
Loans, interest and fees receivable, at fair value |
$ | 310,784 |
Discounted cash flows |
Gross yield, net of finance charge charge-offs |
23.7% to 55.9% (41.4%) | ||||||
|
Payment rate |
4.8% to 11.8% (8.4%) | ||||||||||
|
Expected principal credit loss rate |
6.8% to 29.6% (22.7%) | ||||||||||
|
Servicing rate |
2.7% to 20.7% (4.2%) | ||||||||||
| Discount rate | 12.9% to 13.5% (13.3%) | ||||||||||
Quantitative Information about Level 3 Fair Value Measurements
|
Fair Value Measurement |
Fair Value at December 31, 2019 (in thousands) |
Valuation Technique |
Unobservable Input |
Range (Weighted Average) |
|||||||
|
Loans, interest and fees receivable, at fair value |
$ | 4,386 |
Discounted cash flows |
Gross yield, net of finance charge charge-offs |
25.5% to 53.7% (28.6%) | ||||||
|
Payment rate |
4.0% to 9.5% (4.6%) | ||||||||||
|
Expected principal credit loss rate |
10.5% to 41.7% (14.0%) | ||||||||||
|
Servicing rate |
11.3% to 16.9% (11.9%) | ||||||||||
|
Discount rate |
14.3% to 14.3% (14.3%) | ||||||||||
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 September 30, 2020 and December 31, 2019 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 September 30, 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 |
$ | — | $ | — | $ | 719,620 | $ | 719,620 | ||||||||
| Amortizing debt facilities | $ | — | $ | — | $ | 26,772 | $ | 26,772 | ||||||||
|
Notes payable to related parties |
$ | — | $ | — | $ | — | $ | — | ||||||||
| Convertible senior notes | $ | — | $ | 19,965 | $ | — | $ | 24,310 | ||||||||
|
Liabilities carried at fair value |
||||||||||||||||
|
Notes payable associated with structured financings, at fair value |
$ | — | $ | — | $ | 3,367 | $ | 3,367 | ||||||||
|
Liabilities – As of December 31, 2019 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Carrying Amount of Liabilities |
||||||||||||
|
Liabilities not carried at fair value |
||||||||||||||||
|
Revolving credit facilities |
$ | — | $ | — | $ | 720,687 | $ | 720,687 | ||||||||
|
Amortizing debt facilities |
$ | — | $ | — | $ | 28,522 | $ | 28,522 | ||||||||
|
Notes payable to related parties |
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Convertible senior notes |
$ | — | $ | 16,920 | $ | — | $ | 24,091 | ||||||||
|
Liabilities carried at fair value |
||||||||||||||||
|
Notes payable associated with structured financings, at fair value |
$ | — | $ | — | $ | 3,920 | $ | 3,920 | ||||||||
For our notes payable, we assess the fair value of these liabilities based on our estimate of future cash flows generated from their underlying credit card receivables collateral, net of servicing compensation required under the note facilities, and to the extent that such cash flow estimates change from period to period, any such changes are considered to be attributable to changes in instrument-specific credit risk. Gains and losses associated with fair value changes for our notes payable associated with structured financing liabilities that are carried at fair value are detailed on our fees and related income on earning assets table within Note 2, “Significant Accounting Policies and Consolidated Financial Statement Components.” For our 5.875% convertible senior notes due 2035 (“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 nine months ended September 30, 2020 and 2019.
| Notes Payable Associated with Structured Financings, at Fair Value | ||||||||
|
2020 |
2019 |
|||||||
|
Balance at January 1, |
$ | 3,920 | $ | 5,651 | ||||
|
Total (gains) losses—realized/unrealized: |
||||||||
|
Net revaluations of notes payable associated with structured financings, at fair value |
(553 | ) | (1,673 | ) | ||||
|
Repayments on outstanding notes payable, net |
— | — | ||||||
|
Balance at September 30, |
$ | 3,367 | $ | 3,978 | ||||
The unrealized gains and losses for liabilities within the Level 3 category presented in the table above include changes in fair value that are attributable to both observable and unobservable inputs. We provide below a brief description of the valuation techniques used for Level 3 liabilities.
Net Revaluation of Notes Payable Associated with Structured Financings, at Fair Value. We record the net revaluations of notes payable associated with structured financings, at fair value, in the changes in fair value of notes payable associated with structured financings line item within the fees and related income on earning assets category of our consolidated statements of operations. The legal entity associated with the securitization transaction is consolidated as a VIE as the Company is deemed the primary beneficiary of the entity. The Company is not liable for the full face value of the liability in the VIE so it is carried at fair value based upon amounts the borrower will receive from the legal entity. The net revaluation of these notes is based on the present value of future cash flows utilized in repayment of the outstanding principal and interest under the facilities using a valuation model of expected cash flows net of the contractual service expenses within the facilities. We estimate the present value of these future cash flows using a valuation model consisting of internally developed estimates of assumptions third-party market participants would use in determining fair value, including: estimates of 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 September 30, 2020 and December 31, 2019:
Quantitative Information about Level 3 Fair Value Measurements
|
Fair Value Measurement |
Fair Value at September 30, 2020 (in thousands) |
Valuation Technique |
Unobservable Input |
Weighted Average |
|||||||
|
Notes payable associated with structured financings, at fair value |
$ | 3,367 |
Discounted cash flows |
Gross yield, net of finance charge charge-offs |
25.4 | % | |||||
| Payment rate | 4.8 | % | |||||||||
| Expected principal credit loss rate | 7.9 | % | |||||||||
|
Discount rate |
13.2 | % | |||||||||
Quantitative Information about Level 3 Fair Value Measurements
|
Fair Value Measurement |
Fair Value at December 31, 2019 (in thousands) |
Valuation Technique |
Unobservable Input |
Weighted Average |
|||||||
|
Notes payable associated with structured financings, at fair value |
$ | 3,920 |
Discounted cash flows |
Gross yield, net of finance charge charge-offs |
25.5 | % | |||||
|
Payment rate |
4.0 | % | |||||||||
|
Expected principal credit loss rate |
10.5 | % | |||||||||
|
Discount rate |
14.3 | % | |||||||||
Other Relevant Data
Other relevant data (in thousands) as of September 30, 2020 and December 31, 2019 concerning certain assets and liabilities we carry at fair value are as follows:
|
As of September 30, 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 principal balance included within loans, interest and fees receivable that are reported at fair value | $ | 658 | $ | 361,839 | ||||
|
Aggregate fair value of loans, interest and fees receivable that are reported at fair value |
$ | 619 | $ | 310,165 | ||||
| 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 | $ | 615 | ||||
| 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 | $ | 11 | $ | 5,639 | ||||
|
As of December 31, 2019 |
Loans, Interest and Fees Receivable at Fair Value | Loans, Interest and Fees Receivable Pledged as Collateral under Structured Financings at Fair Value | ||||||
|
Aggregate unpaid principal balance included within loans, interest and fees receivable that are reported at fair value |
$ | 644 | $ | 5,280 | ||||
|
Aggregate fair value of loans, interest and fees receivable that are reported at fair value |
$ | 466 | $ | 3,920 | ||||
|
Aggregate fair value of receivables carried at fair value that are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies) |
$ | 1 | $ | 8 | ||||
|
Unpaid principal balance of receivables within loans, interest and fees receivable that are reported at fair value and are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies) over the fair value of such loans, interest and fees receivable |
$ | 28 | $ | 185 | ||||
|
Notes Payable |
Notes Payable Associated with Structured Financings, at Fair Value as of September 30, 2020 |
Notes Payable Associated with Structured Financings, at Fair Value as of December 31, 2019 |
||||||
|
Aggregate unpaid principal balance of notes payable |
$ | 101,314 | $ | 101,314 | ||||
|
Aggregate fair value of notes payable |
$ | 3,367 | $ | 3,920 | ||||
|
7. |
Variable Interest Entities |
The Company contributes certain receivables to VIEs. These entities are sometimes established to facilitate third party financing. When assets are contributed to the VIE, they serve as collateral for the debt securities issued by the VIE. The evaluation of whether the entity qualifies as a VIE is based upon the sufficiency of the equity at risk in the legal entity. This evaluation is generally a function of the level of excess collateral in the legal entity. We consolidate VIEs when we hold a variable interest and are the primary beneficiary. We are the primary beneficiary when we have the power to direct activities that most significantly affect the economic performance and have the obligation to absorb the majority of the losses or benefits. In certain circumstances we guarantee the performance of the underlying debt or agree to contribute additional collateral when necessary. When collateral is pledged it is not available for the general use of the Company and can only be used to satisfy the related debt obligation. The results of operations and financial position of consolidated VIEs are included in our consolidated financial statements.
The following table presents a summary of VIEs in which we had continuing involvement or held a variable interest (in millions):
|
As of |
||||||||
|
September 30, 2020 |
December 31, 2019 |
|||||||
|
Unrestricted cash and cash equivalents |
$ | 62.1 | $ | 78.7 | ||||
|
Restricted cash and cash equivalents |
$ | 17.3 | $ | 25.9 | ||||
| Loans, interest and fees receivable, at fair value | $ | 236.9 | $ | 3.9 | ||||
|
Loans, interest and fees receivable, gross |
$ | 574.6 | $ | 857.2 | ||||
| Allowances for uncollectible loans, interest and fees receivable | $ | (118.0 | ) | $ | (168.8 | ) | ||
|
Deferred revenue |
$ | (10.3 | ) | $ | (40.7 | ) | ||
| Total Assets held by VIEs | $ | 762.6 | $ | 756.2 | ||||
|
Notes Payable, at face value held by VIEs |
$ | 689.7 | $ | 701.1 | ||||
|
Notes Payable, at fair value held by VIEs |
$ | 3.4 | $ | 3.9 | ||||
| Maximum exposure to loss due to involvement with VIEs | $ | 687.6 | $ | 654.3 | ||||
|
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 (in thousands):
|
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
|
2020 |
2019 |
2020 |
2019 |
|||||||||||||
|
Operating lease cost, gross |
$ | 1,710 | $ | 1,737 | $ | 5,155 | $ | 5,173 | ||||||||
|
Sublease income |
(1,334 | ) | (1,283 | ) | (3,901 | ) | (3,848 | ) | ||||||||
|
Net Operating lease cost |
$ | 376 | $ | 454 | $ | 1,254 | $ | 1,325 | ||||||||
|
Cash paid under operating leases, gross |
$ | 2,588 | $ | 2,541 | $ | 7,689 | $ | 7,540 | ||||||||
|
Weighted average remaining lease term - months |
21 | |||||||||||||||
|
Weighted average discount rate |
6.8 | % | ||||||||||||||
As of September 30, 2020, maturities of lease liabilities were as follows (in thousands):
|
Gross Lease Payment |
Payments received from Sublease |
Net Lease Payment |
||||||||||
|
2020 (excluding the nine months ended September 30, 2020) |
$ | 2,589 | $ | (1,804 | ) | $ | 785 | |||||
|
2021 |
10,311 | (7,315 | ) | 2,996 | ||||||||
|
2022 |
4,495 | (3,112 | ) | 1,383 | ||||||||
|
2023 |
207 | — | 207 | |||||||||
|
2024 |
100 | — | 100 | |||||||||
|
Thereafter |
24 | — | 24 | |||||||||
|
Total lease payments |
17,726 | (12,231 | ) | 5,495 | ||||||||
| Less imputed interest | (1,845 | ) | ||||||||||
| Total | $ | 15,881 | ||||||||||
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 September 30, 2020, we had no material non-cancelable capital leases with initial or remaining terms of more than one year.
| 9. |
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 September 30, 2020 and December 31, 2019, (2) the outstanding face amount of our structured financing note secured by certain credit card receivables and reported at fair value as of September 30, 2020 and December 31, 2019, 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 September 30, 2020 and December 31, 2019.
|
Carrying Amounts at Fair Value as of |
||||||||
|
September 30, 2020 |
December 31, 2019 |
|||||||
|
Securitization facility (stated maturity of December 2021), outstanding face amount of $101.3 million as of September 30, 2020 ($101.3 million as of December 31, 2019) bearing interest at a weighted average 5.7% interest rate, based upon LIBOR, at September 30, 2020 (6.9% at December 31, 2019), which is secured by credit card receivables and restricted cash aggregating $3.4 million as of September 30, 2020 ($3.9 million as of December 31, 2019) in carrying amount |
$ | 3.4 | $ | 3.9 | ||||
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 $3.4 million in fair value of the structured financing facility indicated in the above table is $3.4 million, which means that we have no aggregate exposure to pre-tax equity loss associated with the above structured financing arrangement at September 30, 2020.
As discussed elsewhere, the legal entity holding the securitization facility discussed in the table above, is a VIE. Beyond our role as servicer of the underlying assets within the credit cards receivables structured financing, we have provided no other financial or other support to the structure, and we have no explicit or implicit arrangements that could require us to provide financial support to the structure.
Notes Payable, at Face Value and Notes Payable to Related Parties
Other notes payable outstanding as of September 30, 2020 and December 31, 2019 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 |
||||||||
|
September 30, 2020 |
December 31, 2019 |
|||||||
|
Revolving credit facilities at a weighted average interest rate equal to 5.5% at September 30, 2020 (6.0% at December 31, 2019) secured by the financial and operating assets of CAR and/or certain receivables and restricted cash with a combined aggregate carrying amount of $664.5 million as of September 30, 2020 ($740.4 million at December 31, 2019) |
||||||||
|
Revolving credit facility, not to exceed $55.0 million (expiring November 1, 2021) (1) (2) (3) |
$ | 36.5 | $ | 39.1 | ||||
|
Revolving credit facility, not to exceed $50.0 million (expiring October 30, 2022) (2) (3) (4) (5) |
— | 40.5 | ||||||
| Revolving credit facility, not to exceed $70.0 million (expiring February 8, 2022) (3) (4) (5) (6) | 5.8 | 25.8 | ||||||
| Revolving credit facility, not to exceed $100.0 million (expiring June 11, 2021) (3) (4) (5) (6) | — | — | ||||||
|
Revolving credit facility, not to exceed $15.0 million (expiring July 15, 2021) (2) (4) (5) |
— | 14.6 | ||||||
| Revolving credit facility, not to exceed $100.0 million (expiring August 15, 2022) (3) (4) (5) (6) | 2.5 | — | ||||||
| Revolving credit facility, not to exceed $167.3 million (expiring November 15, 2023) (3) (4) (5) (6) | 167.3 | 167.3 | ||||||
| Revolving credit facility, not to exceed $200.0 million (expiring December 15, 2022) (3) (4) (5) (6) | 200.0 | 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 $15.0 million (expiring April 21, 2021) (2) (3) (4) (5) |
15.0 | 8.6 | ||||||
|
Revolving credit facility, not to exceed $50.0 million (expiring September 19, 2021) (2) (3) (4) (5) |
— | 15.0 | ||||||
| Revolving credit facility, not to exceed $100.0 million (expiring January 15, 2025) (3) (4) (5) (6) | 100.0 | — | ||||||
|
Other facilities |
||||||||
|
Other debt with a weighted annual rate equal to 2.7% |
3.2 | 1.2 | ||||||
| Unsecured term debt (expiring August 26, 2024) with an annual rate equal to 8.0% (3) | 17.4 | 17.4 | ||||||
|
Amortizing debt facility (repaid in July 2020) (2) (4) (5) |
— |
19.4 | ||||||
| Amortizing debt facility (expiring September 30, 2021) with an annual rate equal to 4.7% (2) (3) (4) (5) | 6.2 | 10.0 | ||||||
|
Total notes payable before unamortized debt issuance costs and discounts |
753.9 | 758.9 | ||||||
|
Unamortized debt issuance costs and discounts |
(7.5 | ) | (9.7 | ) | ||||
| Total notes payable outstanding | $ | 746.4 | $ | 749.2 | ||||
|
(1) |
Loan is subject to certain affirmative covenants, including a coverage ratio, a leverage ratio and a collateral performance test, the failure of which could result in required early repayment of all or a portion of the outstanding balance by our CAR Auto Finance operations. |
|
(2) |
These notes reflect modifications to either extend the maturity date, increase the loan amount or both, and are treated as accounting modifications. |
|
(3) |
See below for additional information. |
| (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 September 30, 2020, the LIBOR rate was 0.15% 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 September 30, 2020). This facility is secured by the loans, interest and fees receivable and related restricted cash and accrues interest at an annual rate equal to LIBOR plus 3.0%. The facility matures on October 30, 2022 and is subject to certain affirmative covenants, including a liquidity test and an eligibility test, the failure of which could result in required early repayment of all or a portion of the outstanding balance. The facility is guaranteed by Atlanticus who is required to maintain certain minimum liquidity levels.
In October 2016, we (through a wholly owned subsidiary) entered a revolving credit facility with an initial $40.0 million borrowing limit available to the extent of outstanding eligible principal receivables of our CAR subsidiary (of which $36.5 million was drawn as of September 30, 2020). 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 September 30, 2020, the borrowing limit was $55.0 million and the maturity was November 1, 2021. There were no other material changes to the existing terms or conditions as a result of these amendments and the new maturity date and borrowing limit are reflected in the table above.
In December 2016, we (through a wholly owned subsidiary) entered a credit facility with a $20.0 million borrowing limit available to the extent of outstanding eligible principal receivables (of which $0.0 million was drawn as of September 30, 2020). In periods subsequent to December 2016, we amended the original agreement to either extend the maturity date and/or reduce the capacity of this credit facility. This facility was repaid in July 2020 and is not available for subsequent draws. The facility was secured by the loans, interest and fees receivable and related restricted cash and accrued interest at an annual rate equal to LIBOR plus 5.0%.
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 September 30, 2020) 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 December 2017, we (through a wholly owned subsidiary) entered a revolving credit facility with a (as subsequently amended) $15.0 million revolving borrowing limit that is available to the extent of outstanding eligible principal receivables (of which $15.0 million was drawn as of September 30, 2020). 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, 2021 and is subject to certain affirmative covenants, including payment, delinquency and charge-off tests, the failure of which could result in required early repayment of all or a portion of the outstanding balance. The note is guaranteed by Atlanticus.
In 2018, we (through a wholly owned subsidiary) entered into two separate facilities associated with the above mentioned program to sell up to an aggregate $200.0 million of notes which are secured by the receivables and other assets of the trust (of which $2.5 million was outstanding as of September 30, 2020) to separate unaffiliated third parties pursuant to facilities that can be drawn upon to the extent of outstanding eligible receivables. Interest rates on the notes are based on commercial paper rates plus 3.75% and LIBOR plus 4.875%, respectively. The facilities mature on June 11, 2021 and November 16, 2020, respectively, and are subject to certain affirmative covenants and collateral performance tests, the failure of which could result in required early repayment of all or a portion of the outstanding balance of notes. The facilities also may be prepaid subject to payment of a prepayment or other fee.
In September 2018, we (through a wholly owned subsidiary) entered a revolving credit facility with a (as subsequently amended) $50.0 million revolving borrowing limit that is available to the extent of outstanding eligible principal receivables (of which $0.0 million was drawn as of September 30, 2020). This facility is secured by the loans, interest and fees receivable and related restricted cash and accrues interest at an annual rate equal to LIBOR plus 6.5%. The loan is subject to certain affirmative covenants, including a charge-off and delinquency test, the failure of which could result in required early repayment of all or a portion of the outstanding balance. The note is guaranteed by Atlanticus.
In November 2018, we sold $167.3 million of asset backed securities (“ABS”) secured by certain retail point-of-sale receivables. A portion of the proceeds from the sale were used to pay-down our existing term and revolving facilities associated with our point-of-sale receivables, noted in the table above, and the remaining proceeds are available to fund the acquisition of future receivables. The terms of the ABS allow for a two-year revolving structure with a subsequent 18-month amortization period. The weighted average interest rate on the securities is fixed at 5.76%. These securities were repaid in October 2020 as part of a new securitization noted below.
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 $0.0 million was drawn as of September 30, 2020). This facility is secured by the loans, interest and fees receivable and related restricted cash and accrues interest at an annual rate equal to the prime rate. The note is guaranteed by Atlanticus.
In June 2019, we sold $200.0 million of ABS secured by certain credit card receivables. A portion of the proceeds from the sale was used to pay-down our existing facilities associated with our credit card receivables. The terms of the ABS allow for a two-year revolving structure with a subsequent 12-month to 18-month amortization period. The weighted average interest rate on the securities is fixed at 5.37%.
In August 2019, we repurchased $54.4 million in face amount of our outstanding convertible senior notes for $16.3 million in cash (including accrued interest) and the issuance of a $17.4 million term note, which bears interest at a fixed rate of 8.0% and is due in August 2024. See Note 10 “Convertible Senior Notes” for additional information.
In September 2019, we (through a wholly owned subsidiary) entered a term facility with a $30.0 million revolving borrowing limit (of which $6.2 million was drawn as of September 30, 2020) that is available to the extent of outstanding eligible principal receivables. This facility is secured by the loans, interest and fees receivable and related restricted cash and accrues interest at an annual rate equal to LIBOR plus 4.5%. The facility matures on September 30, 2021 and is subject to certain affirmative covenants, including a liquidity test and an eligibility test, the failure of which could result in required early repayment of all or a portion of the outstanding balance. The note is guaranteed by Atlanticus, which is required to maintain certain minimum liquidity levels.
In November 2019, we sold $200.0 million of ABS secured by certain credit card receivables. A portion of the proceeds from the sale was used to pay-down our existing facilities associated with our credit card receivables and the remaining proceeds were available to fund the acquisition of future receivables. The terms of the ABS allow for a three-year revolving structure with a subsequent 12-month to 18-month amortization period. The weighted average interest rate on the securities is fixed at 4.91%.
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 are available to fund the acquisition of future 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 and will be 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%.
As of September 30, 2020, we were in compliance with the covenants underlying our various notes payable.
|
10. |
Convertible Senior Notes |
In November 2005, we issued $300.0 million aggregate principal amount of 5.875% convertible senior notes due November 30, 2035. The convertible senior notes are unsecured, subordinate to existing and future secured obligations and structurally subordinate to existing and future claims of our subsidiaries’ creditors. These notes (net of repurchases since the issuance dates) are reflected within convertible senior notes on our consolidated balance sheets. No put rights exist under our convertible senior notes.
On August 26, 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. The repurchase resulted in a gain of approximately $5.1 million (net of the convertible senior notes’ applicable share of deferred costs, which were written off in connection with the repurchase). Upon acquisition, the notes were retired. See Note 9 "Notes Payable" for further information regarding the note issuance.
The following summarizes (in thousands) components of our consolidated balance sheets associated with our convertible senior notes:
|
As of |
||||||||
|
September 30, 2020 |
December 31, 2019 |
|||||||
| Face amount of convertible senior notes | $ | 33,839 | $ | 33,839 | ||||
| Discount | (9,529 | ) | (9,748 | ) | ||||
| Net carrying value | $ | 24,310 | $ | 24,091 | ||||
|
Carrying amount of equity component included in paid-in capital |
$ | 108,714 | $ | 108,714 | ||||
|
Excess of instruments’ if-converted values over face principal amounts |
$ | — | $ | — | ||||
|
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 $1.5 billion at September 30, 2020. 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 September 30, 2020, CAR had unfunded outstanding floor-plan financing commitments totaling $9.7 million. Each draw against unused commitments is reviewed for conformity to pre-established guidelines.
Under agreements with third-party originating and other financial institutions, we have pledged security (collateral) related to their issuance of consumer credit and purchases thereunder, of which $10.3 million remains pledged as of September 30, 2020 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 September 30, 2020, 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 $23.9 million as of September 30, 2020 (of which we have accrued $0.6 million as of September 30, 2020 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 | For the Nine Months Ended | |||||||||||||||
|
September 30, |
September 30, |
|||||||||||||||
|
2020 |
2019 |
2020 |
2019 |
|||||||||||||
|
Numerator: |
||||||||||||||||
|
Net income attributable to controlling interests |
$ | 38,855 | $ | 13,077 | $ | 67,445 | $ | 24,034 | ||||||||
| Preferred stock and preferred unit dividends and accretion | (4,788 | ) | — | (12,283 | ) | — | ||||||||||
| Net income attributable to common shareholders—basic | 34,067 | 13,077 | 55,162 | 24,034 | ||||||||||||
| Effect of dilutive preferred stock dividends and accretion | 604 | — | 1,797 | — | ||||||||||||
|
Net income attributable to common shareholders—diluted |
$ | 34,671 | $ | 13,077 | $ | 56,959 | $ | 24,034 | ||||||||
|
Denominator: |
||||||||||||||||
| Basic (including unvested share-based payment awards) (1) | 14,523 | 14,596 | 14,462 | 14,526 | ||||||||||||
| Effect of dilutive stock compensation arrangements and exchange of preferred stock | 5,625 | 1,067 | 5,515 | 570 | ||||||||||||
| Diluted (including unvested share-based payment awards) (1) | 20,148 | 15,663 | 19,977 | 15,096 | ||||||||||||
|
Net income attributable to common shareholders per share—basic |
$ | 2.35 | $ | 0.90 | $ | 3.81 | $ | 1.65 | ||||||||
|
Net income attributable to common shareholders per share—diluted |
$ | 1.72 | $ | 0.83 | $ | 2.85 | $ | 1.59 | ||||||||
|
(1) |
Shares related to unvested share-based payment awards included in our basic and diluted share counts were 417,483 and 436,414, respectively, for the three and nine months ended September 30, 2020, compared to 572,998 and 492,636, respectively, for the three and nine months ended September 30, 2019. |
As their effects were anti-dilutive, we excluded stock options to purchase 0.0 million shares, and 0.5 million shares from our net income attributable to controlling interests per share of common stock calculations for the three and nine months ended September 30, 2019, respectively. No stock options were excluded from these calculations for either the three or nine months ended September 30, 2020.
For the three and nine months ended September 30, 2020 and 2019, there were no shares potentially issuable and thus includible in the diluted net income attributable to controlling interests per share of common stock calculations pursuant to our convertible senior notes. However, in future reporting periods during which our closing stock price is above the $24.61 conversion price for the convertible senior notes, and depending on the closing stock price at conversion, the maximum potential dilution under the conversion provisions of such notes is 1.4 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”). 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 September 30, 2020, 57,666 shares remained available for issuance under the ESPP and 1,735,594 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 and nine months ended September 30, 2020 and 2019.
Restricted Stock and Restricted Stock Units
During the nine months ended September 30, 2020 and 2019, we granted 61,373 and 205,000 shares of restricted stock and restricted stock units (net of any forfeitures), respectively, with aggregate grant date fair values of $0.6 million and $0.7 million, respectively. We incurred expenses of $0.7 million and $0.7 million during the nine months ended September 30, 2020 and 2019, 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 September 30, 2020, our unamortized deferred compensation costs associated with unvested restricted stock awards were $0.7 million with a weighted-average remaining amortization period of 1.2 years.
Stock Options
Our Fourth Amended 2014 Plan provides that we may grant options on or shares of our common stock (and other types of equity awards) to members of our Board of Directors, employees, consultants and advisors. The exercise price per share of the options must be equal to or greater than the market price on the date the option is granted. The option period may not exceed 10 years from the date of grant. The vesting requirements for options are determined by the Compensation Committee of the Board of Directors. We had expense of $0.1 million, $0.3 million, $0.2 million and $0.6 million related to stock option-related compensation costs during the three and nine months ended September 30, 2020 and 2019, 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, 2019 |
2,687,499 | $ | 3.66 | |||||||||||||
|
Issued |
— | $ | — | |||||||||||||
|
Exercised |
(148,500 | ) | $ | 3.68 | ||||||||||||
|
Cancelled/Forfeited |
— | $ | — | |||||||||||||
|
Outstanding at September 30, 2020 |
2,538,999 | $ | 3.66 | 1.6 | $ | 20,933,160 | ||||||||||
|
Exercisable at September 30, 2020 |
2,011,167 | $ | 3.13 | 1.2 | $ | 17,628,216 | ||||||||||
We had $0.2 million and $0.5 million of unamortized deferred compensation costs associated with unvested stock options as of September 30, 2020 and December 31, 2019, 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, 2019, 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 or associated with the financially underserved consumer credit market. According to data published by Experian, 41% of Americans had FICO® scores of less than 700 as of the second quarter of 2019, which represents a population in excess of 90 million consumers. A recent survey conducted by Charles Schwab further found that 59% of Americans lived “paycheck to paycheck” and only 38% of people have an emergency fund. These consumers often have short-term, immediate credit needs that are often not effectively met by many financial institutions. By facilitating fairly priced consumer credit alternatives with value added features and benefits specifically curated for the unique needs of this financially underserved consumer, we endeavor to empower consumers on a path to improved financial well-being.
Currently, within our Credit and Other Investments segment, we are applying the experiences gained and infrastructure built from servicing over $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 retail credit and credit cards originated by lenders through multiple channels, including retail point-of-sale, direct mail solicitation, and partnerships with third parties. In the point-of-sale channel, we partner with retailers and service providers in various industries across the U.S. to allow them to provide credit to their customers for the purchase of a variety of goods and services including consumer electronics, furniture, elective medical procedures, healthcare, educational services and home-improvements. The services of our bank partners are often extended to consumers who may not have access to financing options. 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. Additionally, we support lenders who market general purpose credit cards directly to consumers and enable them to reach consumers through a diverse origination platform that includes retail point-of-sale, direct mail and digital marketing solicitation and partnerships with third parties. Our technology platform and proprietary analytics enable lenders to make instant credit decisions utilizing hundreds of inputs from multiple sources and thereby offer credit to consumers overlooked by many providers of financing. 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.
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. Subsequent to quarter-end, one of the companies we invested in underwent a recapitalization which resulted in the receipt of $2.0 million in dividends. We retained our minority ownership stake in this platform and will continue to carry the investment on our books at cost.
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.
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. One of our portfolios of credit card receivables is encumbered by non-recourse structured financing, and for this portfolio our principal remaining economic interest is the servicing compensation we receive as an offset against our servicing costs given that the likely future collections on the portfolio are insufficient to allow for full repayment of the financing.
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, President Trump declared a national emergency 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 work-at-home 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. 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 who request 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, 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 the novel coronavirus, or 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 September 30, |
Increases (Decreases) |
|||||||||||
|
(In Thousands) |
2020 |
2019 |
from 2019 to 2020 |
|||||||||
|
Total interest income |
$ | 103,642 | $ | 70,581 | $ | 33,061 | ||||||
|
Interest expense |
(12,678 | ) | (13,099 | ) | 421 | |||||||
|
Fees and related income on earning assets: |
||||||||||||
|
Fees on credit products |
35,488 | 19,725 | 15,763 | |||||||||
|
Changes in fair value of loans, interest and fees receivable recorded at fair value |
(29,081 | ) | 355 | (29,436 | ) | |||||||
|
Changes in fair value of notes payable associated with structured financings recorded at fair value |
73 | 346 | (273 | ) | ||||||||
|
Other |
295 | 9 | 286 | |||||||||
|
Other operating income: |
||||||||||||
|
Servicing income |
527 | 356 | 171 | |||||||||
|
Other income |
4,195 | 30,486 | (26,291 | ) | ||||||||
| Gain on repurchase of convertible senior notes | — | 5,127 | (5,127 | ) | ||||||||
|
Equity in income of equity-method investee |
342 | 284 | 58 | |||||||||
|
Total |
$ | 102,803 | $ | 114,170 | $ | (11,367 | ) | |||||
| Net losses upon impairment of loans, interest and fees receivable recorded at fair value | 3,291 | 190 | (3,101 | ) | ||||||||
| Provision for losses on loans, interest and fees receivable recorded at net realizable value | 17,028 | 65,527 | 48,499 | |||||||||
|
Other operating expenses: |
||||||||||||
|
Salaries and benefits |
6,624 | 6,429 | (195 | ) | ||||||||
|
Card and loan servicing |
16,309 | 13,152 | (3,157 | ) | ||||||||
|
Marketing and solicitation |
7,016 | 10,757 | 3,741 | |||||||||
|
Depreciation |
327 | 284 | (43 | ) | ||||||||
|
Other |
3,945 | 1,333 | (2,612 | ) | ||||||||
| Net income | 38,807 | 13,020 | 25,787 | |||||||||
|
Net loss attributable to noncontrolling interests |
48 | 57 | (9 | ) | ||||||||
| Net income attributable to controlling interests | 38,855 | 13,077 | 25,778 | |||||||||
| Net income attributable to controlling interests to common shareholders | 34,067 | 13,077 | 20,990 | |||||||||
|
Income |
||||||||||||
|
For the Nine Months Ended September 30, |
Increases (Decreases) |
|||||||||||
|
(In Thousands) |
2020 |
2019 |
from 2019 to 2020 |
|||||||||
|
Total interest income |
$ | 306,902 | $ | 176,240 | $ | 130,662 | ||||||
|
Interest expense |
(38,514 | ) | (36,259 | ) | (2,255 | ) | ||||||
|
Fees and related income on earning assets: |
||||||||||||
|
Fees on credit products |
102,532 | 44,329 | 58,203 | |||||||||
|
Changes in fair value of loans, interest and fees receivable recorded at fair value |
(69,779 | ) | 725 | (70,504 | ) | |||||||
|
Changes in fair value of notes payable associated with structured financings recorded at fair value |
553 | 1,673 | (1,120 | ) | ||||||||
|
Other |
596 | 109 | 487 | |||||||||
|
Other operating income: |
||||||||||||
|
Servicing income |
1,619 | 1,417 | 202 | |||||||||
|
Other income |
8,739 | 75,900 | (67,161 | ) | ||||||||
| Gain on repurchase of convertible senior notes | — | 5,127 | (5,127 | ) | ||||||||
|
Equity in income of equity-method investee |
355 | 736 | (381 | ) | ||||||||
| Total | $ | 313,003 | $ | 269,997 | $ | 43,006 | ||||||
| Net losses upon impairment of loans, interest and fees receivable recorded at fair value | 3,931 | 715 | (3,216 | ) | ||||||||
| Provision for losses on loans, interest and fees receivable recorded at net realizable value | 116,894 | 148,539 | 31,645 | |||||||||
|
Other operating expenses: |
||||||||||||
|
Salaries and benefits |
20,642 | 19,455 | (1,187 | ) | ||||||||
|
Card and loan servicing |
47,747 | 35,123 | (12,624 | ) | ||||||||
|
Marketing and solicitation |
26,523 | 26,254 | (269 | ) | ||||||||
|
Depreciation |
932 | 856 | (76 | ) | ||||||||
|
Other |
13,332 | 9,232 | (4,100 | ) | ||||||||
| Net income | 67,286 | 23,857 | 43,429 | |||||||||
|
Net loss attributable to noncontrolling interests |
159 | 177 | (18 | ) | ||||||||
| Net income attributable to controlling interests | 67,445 | 24,034 | 43,411 | |||||||||
| Net income attributable to controlling interests to common shareholders | 55,162 | 24,034 | 31,128 | |||||||||
Three and Nine Months Ended September 30, 2020, Compared to Three and Nine Months Ended September 30, 2019
Total interest income. Total interest income consists primarily of finance charges and late fees earned on point-of-sale and direct-to-consumer receivables, credit card and auto finance receivables. Period-over-period results primarily relate to growth in point-of-sale finance and direct-to-consumer products, the receivables of which increased from $769.0 million as of September 30, 2019 to $982.5 million as of September 30, 2020. We are currently experiencing continued period-over-period growth in point-of-sale and direct-to-consumer receivables and to a lesser extent in our CAR receivables—growth which we expect to result in net period-over-period growth in our total interest income for these operations over the next year. 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 elected the fair value option to account for certain loan receivables associated with our point-of-sale and direct-to-consumer platform that are acquired on or after January 1, 2020. As a result, merchant fees that are associated with the acquisition of the receivable will no longer be deferred and will be recognized in the loan acquisition period. As discussed above, consumer spending behavior has been impacted negatively by COVID-19 and continues to impact our ability to acquire new receivables. Absent the continued unknown impacts of COVID-19 and related government stimulus and relief measures on future consumer spending behavior or the impact they may have on consumer's ability to make payments on outstanding loans and fees receivable, the earlier recognition of these merchant fees is expected to further increase our period-over-period results in the near term.
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 associated with our point-of-sale and direct-to-consumer platform increased from $566.2 million as of September 30, 2019 to $696.8 million as of September 30, 2020. We anticipate additional debt financing over the next few quarters as we continue to grow, and as such, we expect our quarterly interest expense to be above that experienced in the prior periods for these operations.
Fees and related income on earning assets. The significant factors affecting our differing levels of fees and related income on earning assets include:
|
• |
increases in fees on credit products, primarily associated with growth in direct-to-consumer products and to a lesser degree by growth in point-of-sale finance products; and |
|
• |
the effects of changes in the fair values of credit card receivables recorded at fair value and notes payable associated with structured financings recorded at fair value as described below. |
We expect increasing levels of direct-to-consumer fee income over the next year as we continue to invest in new credit card receivables. 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 the year commensurate with growth in these receivables. Inversely, we expect our change in fair value of notes payable associated with structured financings for our legacy credit card receivables recorded at fair value amounts to gradually diminish (absent significant changes in the assumptions used to determine these fair values) in the future. These amounts, however, are subject to potentially high levels of volatility if we experience changes in the quality of our credit card receivables or if there are significant changes in market valuation factors (e.g., interest rates and spreads) in the future. Additionally, we expect to recognize certain fee billings (such as annual membership fees) associated with receivables accounted for under fair value as they are billed to the consumer (as opposed to deferred fee recognition), which, 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, will further increase the expected levels of fee income in the near term.
Servicing income. We earn servicing income by servicing loan portfolios for third parties (including our equity-method investee). While we have experienced some growth in this category of income, 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 income within this category.
Other income. Included within our other income category are ancillary and interchange revenues. Given recent growth associated with new credit card receivables, we expect ancillary and interchange revenues to grow throughout the year. Also included within our other income category for the three and nine months ended September 30, 2019 is $26.7 and $68.1 million associated with reductions in accruals related to one of our portfolios. The original accrual was based upon our estimate of the amount that may be claimed by customers and was based upon several factors including customer claims volume, average claim amount and a determination of the amount, if any, which may be offered to resolve such claims. The assumptions used in the accrual estimate were subjective, mainly due to uncertainty associated with future claims volumes and the resolution costs, if any, per claim.
Equity in income of equity-method investee. Because our equity-method investee uses the fair value option to account for its financial assets and liabilities, changes in fair value estimates can cause some volatility in the earnings of this investee. Because of continued liquidations in the credit card receivables portfolio of our equity-method investee, absent additional investments in our existing or in new equity-method investees in the future, we expect gradually declining effects from our equity-method investment on our operating results.
Net losses upon impairment of loans, interest and fees receivable recorded at fair value. This account reflects charge offs (net of recoveries) of the face amount of credit card receivables we record at fair value on our consolidated balance sheets. We have experienced a general trending decline in this category as our legacy credit card portfolios diminished. As discussed above and evidenced in the three months ended September 30, 2020, we expect future trending increases in this category due to our election of the fair value option to account for certain loans receivable that are acquired on or after January 1, 2020. These increases will be abated somewhat as we continue to liquidate our historical credit card receivables. Further, the unknown impacts of COVID-19 could lead to increased variability in our expected charge-offs.
Provision for losses on loans, interest and fees receivable recorded at net realizable value. Our provision for losses on loans, interest and fees receivable recorded at net realizable value covers, with respect to such receivables, changes in estimates regarding our aggregate loss exposures on (1) principal receivable balances, (2) finance charges and late fees receivable underlying income amounts included within our total interest income category, and (3) other fees receivable. We have experienced a period-over-period decline in this category between the nine months ended September 30, 2020 and 2019 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 as the underlying receivables that continue to be recorded at net realizable value liquidate.
Total other operating expense. Total other operating expense variances for the three and nine months ended September 30, 2020, relative to the three and nine months ended September 30, 2019, reflect the following:
|
• |
increases in salaries reflecting marginal growth in both the number of employees and increases in related benefit costs. We expect some marginal increase in this cost for 2021 when compared to 2020 as we expect to maintain staffing levels and also expect receivable growth during the year; |
|
• |
increases in card and loan servicing expenses in the three and nine months ended September 30, 2020 when compared to the three and nine months ended September 30, 2019 due to growth in receivables associated with our investments in point-of-sale and direct-to-consumer receivables, which grew from $769.0 million outstanding to $982.5 million outstanding at September 30, 2019 and September 30, 2020, respectively, offset by the continued net liquidations in our legacy credit card portfolios, the receivables of which declined from $7.1 million outstanding to $4.9 million outstanding at September 30, 2019 and September 30, 2020, respectively; |
|
• |
overall reductions in marketing and solicitation costs for the three months ended September 30, 2020 with a slight increase for the nine months ended September 30,2020. Variations in our marketing and solicitation costs are primarily due to volume-related increases in costs attributable to the growth in our direct-to-consumer and (to a lesser extent) retail point-of-sale portfolios. While we may have some variability in the timing of these costs over the next 12 months, 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 | |
| • | slight increases in other expenses primarily related to realized translation gains recognized during the prior period. |
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-control efforts and focus, we expect increased levels of expenditures associated with anticipated growth in point-of-sale and direct-to-consumer credit card-related operations. These expenses will primarily relate to the variable costs of marketing efforts and card and loan servicing expenses associated with new receivable acquisitions. While we have greater control over our variable expenses, it is difficult (as explained above) for us to appreciably reduce our fixed and other costs associated with an infrastructure (particularly within our Credit and Other Investments segment) that was built to support levels of managed receivables that are significantly higher than both our current levels and the levels that we expect to see in the near future. Additionally, the above referenced unknown potential impacts related to COVID-19 could result in more variability in these expenses. At this point, our Credit and Other Investments segment cash inflows are sufficient to cover its direct variable costs and a portion, but not all, of its share of overhead costs (including, for example, corporate-level executive and administrative costs and our convertible senior notes interest costs). As such, if we are unable to contain overhead costs or expand revenue-earning activities to levels commensurate with such costs, then we may experience continuing pressure on our ability to achieve consistent profitability. Additionally, as previously discussed, the unknown impacts of COVID-19 could impair our ability to acquire new receivables and could result 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.
Income Taxes. We experienced effective tax rates of 19.6% and 18.9%, respectively, for the three and nine months ended September 30, 2020, compared to effective tax rates of 21.1% and 20.0%, respectively, for the three and nine months ended September 30, 2019.
Our effective tax rates for the three and nine months ended September 30, 2020, are below the statutory rate principally due to (1) 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 (2) 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. Partially offsetting such effects on our effective tax rates are the effects of accruals of interest on unpaid federal tax liabilities and uncertain tax positions and state and foreign income taxes during the three and nine months ended September 30, 2020.
Our effective tax rate for the three months ended September 30, 2019, was above the statutory rate principally due to the effects of accruals of interest on unpaid federal tax liabilities and uncertain tax positions and state and foreign income taxes during such period. However, it was below the statutory rate for the nine months ended September 30, 2019, principally due to reductions in our valuation allowances against net federal deferred tax assets during such period—the effect of such reductions being partially offset by the effects of accruals of interest on unpaid federal tax liabilities and uncertain tax positions and state and foreign income taxes during such period.
We report income tax-related interest and penalties (including those associated with both our accrued liabilities for uncertain tax positions and unpaid tax liabilities) within our income tax line item on our consolidated statements of operations. We likewise report the reversal of income tax-related interest and penalties within such line item to the extent we resolve our liabilities for uncertain tax positions or unpaid tax liabilities in a manner favorable to our accruals therefor. During the three and nine months ended September 30, 2020, we included $0.0 million and $0.1 million, respectively, of net income tax-related interest and penalties within those periods’ respective income tax expense line items.
In December 2014, we reached a settlement with the IRS concerning the tax treatment of net operating losses we incurred in 2007 and 2008 and carried back to obtain refunds of federal income taxes paid in earlier years dating back to 2003. In 2015, we filed an amended return claim that, if accepted, would have eliminated the $7.4 million assessment (and corresponding interest and penalties) under a negotiated provision of the December 2014 IRS settlement. The IRS filed a lien (as is customarily the case) associated with the assessment. Subsequently, an IRS examination team denied our amended return claims, and we filed a protest with IRS Appeals. Following correspondence and conferences held with IRS Appeals, we received and accepted a settlement offer from IRS Appeals in June 2018 that reduced our $7.4 million net unpaid income tax assessment referenced above to $3.7 million (such $3.7 million remaining unpaid assessment relating to the 2006 year to which we had originally carried back the aforementioned net operating losses). In July 2018, we paid $5.4 million to the IRS to cover the $3.7 million unpaid income tax assessment and most of the interest that had accrued thereon. Subsequently, during the three months ended September 30, 2018, the IRS refunded $0.5 million of our $5.4 million payment, and in 2019, we paid $0.7 million to the IRS to cover the interest on the 2006 income tax liability. Although we have paid all assessed income taxes related to this matter, we still have an outstanding accrued liability for failure-to-pay penalties (and accrued interest thereon) related to this matter. We are pursuing complete abatement of the failure-to-pay penalties of $0.9 million, and once this matter is resolved through either abatement or payment, we expect the IRS to remove the aforementioned lien in due course.
Credit and Other Investments Segment
Our Credit and Other Investments segment includes our activities relating to our servicing of and our investments in the point-of-sale, direct-to-consumer personal finance and credit card operations, our various credit card receivables portfolios, as well as other product testing and investments that generally utilize much of the same infrastructure. The types of revenues we earn from our investments in receivables portfolios and services primarily include finance charges, fees and the accretion of merchant fees associated with the point-of-sale receivables or annual fees on our direct-to-consumer receivables.
We record (i) the finance charges, merchant fee accretion and late fees assessed on our Credit and Other Investments segment receivables in the interest income - consumer loans, including past due fees category on our consolidated statements of operations, (ii) the annual, activation, monthly maintenance, returned-check, cash advance and other fees in the fees and related income on earning assets category on our consolidated statements of operations, and (iii) the charge offs (and recoveries thereof) within our provision for losses on loans, interest and fees receivable recorded at net realizable value on our consolidated statements of operations (for all credit product receivables other than those for which we have elected the fair value option) and within net losses upon impairment of loans, interest and fees receivable recorded at fair value on our consolidated statements of operations (for all of our other receivables for which we have elected the fair value option). Additionally, we show the effects of fair value changes for those credit card receivables for which we have elected the fair value option as a component of fees and related income on earning assets in our consolidated statements of operations.
We historically have invested in receivables portfolios through subsidiary entities. If we control through direct ownership or exert a controlling interest in the entity, we consolidate it and reflect its operations as noted above. If we exert significant influence but do not control the entity, we record our share of its net operating results in the equity in income of equity-method investee category on our consolidated statements of operations.
Managed Receivables
We make various references within our discussion of the Credit and Other Investments segment to our managed receivables. Our managed receivables data includes only the performance of those receivables underlying consolidated subsidiaries and excludes from managed receivables data the performance of receivables held by our equity method investee. As the receivables underlying our equity method investee reflect a 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.
Financial, operating and statistical data based on aggregate managed receivables are important to any evaluation of the performance of our credit portfolios, including our risk management, servicing and collection activities and our valuing of purchased receivables. In allocating our resources and managing our business, management relies heavily upon financial data and results prepared on this “managed basis.” Analysts, investors and others also consider it important that we provide selected financial, operating and statistical data on a managed basis because this allows a comparison of us to others within the specialty finance industry. Moreover, our management, analysts, investors and others believe it is critical that they understand the credit performance of our managed receivables because it provides information concerning the quality of loan originations and the related credit risks inherent within the portfolios.
Reconciliation of the managed receivables data to our GAAP financial statements requires an understanding that: (1) our managed receivables data are based on billings and actual charge-offs as they occur, without regard to any changes in our allowance for uncollectible loans, interest and fees receivable; (2) our managed receivables data exclude non-consolidated receivables; (3) our managed receivables data amortize certain loan origination fees (such as annual and merchant fees) associated with our Fair Value Receivables; (4) certain costs, such as claims made under credit deferral programs are recognized as settled; and (5) the period-end and average managed receivables data include the face value of receivables which are accounted for under the fair value option.
A reconciliation of our Securitized Receivables and our Fair Value Receivables, both within our Loans, interest and fees receivable, at fair value to the assets underlying those receivables which are included in our managed receivables are as follows (in thousands):
|
At or for the Three Months Ended |
||||||||||||||||||||||||||||||||
|
2020 |
2019 |
2018 |
||||||||||||||||||||||||||||||
|
Sep. 30 (1) |
Jun. 30 (1) |
Mar. 31 (1) |
Dec. 31 |
Sept. 30 |
Jun. 30 |
Mar. 31 |
Dec. 31 |
|||||||||||||||||||||||||
|
Loans, interest and fees receivable, gross - Securitized Receivables |
4,863 | 5,111 | 5,765 | 6,404 | 7,070 | 7,803 | 8,664 | 9,575 | ||||||||||||||||||||||||
|
Fair value adjustment - Securitized Receivables |
(877 | ) | (1,279 | ) | (2,080 | ) | (2,018 | ) | (2,545 | ) | (2,899 | ) | (3,270 | ) | (3,269 | ) | ||||||||||||||||
|
Loans, interest and fees receivable, at fair value - Securitized Receivables |
3,986 | 3,832 | 3,685 | 4,386 | 4,525 | 4,904 | 5,394 | 6,306 | ||||||||||||||||||||||||
|
Loans, interest and fees receivable, gross - Fair Value Receivables |
377,717 | 215,492 | 101,134 | — | — | — | — | — | ||||||||||||||||||||||||
|
Fair value adjustment - Fair Value Receivables |
(70,919 | ) | (41,438 | ) | (15,425 | ) | — | — | — | — | — | |||||||||||||||||||||
|
Loans, interest and fees receivable, at fair value - Fair Value Receivables |
306,798 | 174,054 | 85,709 | — | — | — | — | — | ||||||||||||||||||||||||
|
Loans, interest and fees receivable, at fair value |
310,784 | 177,886 | 89,394 | 4,386 | 4,525 | 4,904 | 5,394 | 6,306 | ||||||||||||||||||||||||
(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.
As discussed above, our managed receivables data amortize certain loan origination 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. Reconciliations of our Consumer Loans, including past due fees on Fair Value Receivables and our Other Fees on credit products on Fair Value Receivables to comparable amounts used in our calculation of our Total Yield Ratio are as follows (in millions):
|
At or for the Three Months Ended |
||||||||||||
|
2020 |
||||||||||||
|
Sep. 30 |
Jun. 30 |
Mar. 31 |
||||||||||
|
Consumer Loans, including past due fees on Fair Value Receivables |
$ | 95.6 | $ | 92.1 | $ | 95.2 | ||||||
|
Other Fees on credit products on Fair Value Receivables |
40.3 | 35.2 | 37.8 | |||||||||
|
Change in fair value for Notes payable associated with structured financings, at fair value |
(0.1 | ) | 0.1 | (0.6 | ) | |||||||
|
Accelerated recognition under fair value accounting for Fair Value Receivable billings |
(27.8 | ) | (23.1 | ) | (17.6 | ) | ||||||
|
Total yield on Fair Value Receivables |
$ | 108.0 | $ | 104.3 | $ | 114.8 | ||||||
Asset quality. Our delinquency and charge-off data at any point in time reflect the credit performance of our managed receivables. The average age of the accounts underlying our receivables, the timing of portfolio purchases, the success of our collection and recovery efforts and general economic conditions all affect our delinquency and charge-off rates. The average age of the accounts underlying our receivables portfolio also affects the stability of our delinquency and loss rates. We consider this delinquency and charge-off data in our allowance for uncollectible loans, interest and fees receivable for our other credit product receivables that we report at net realizable value. Our strategy for managing delinquency and receivables losses consists of account management throughout the life of the receivable. This strategy includes credit line management and pricing based on the risks. See also our discussion of collection strategies under the “How Do We Collect?” in Item 1, “Business” of our Annual Report on Form 10-K for the year ended December 31, 2019.
The following table presents the delinquency trends of the receivables we manage within our Credit and Other Investments segment, as well as charge-off data and other managed receivables statistics (in thousands; percentages of total):
|
At or for the Three Months Ended |
||||||||||||||||||||||||||||||||
|
2020 |
2019 |
2018 |
||||||||||||||||||||||||||||||
|
Sep. 30 |
Jun. 30 |
Mar. 31 |
Dec. 31 |
Sept. 30 |
Jun. 30 |
Mar. 31 |
Dec. 31 |
|||||||||||||||||||||||||
|
Period-end managed receivables |
$ | 987,385 | $ | 900,196 | $ | 917,482 | $ | 914,828 | $ | 776,102 | $ | 610,129 | $ | 480,928 | $ | 462,862 | ||||||||||||||||
|
Percent 30 or more days past due |
7.7 | % | 10.7 | % | 16.0 | % | 15.3 | % | 12.9 | % | 11.5 | % | 13.7 | % | 13.2 | % | ||||||||||||||||
|
Percent 60 or more days past due |
5.6 | % | 8.9 | % | 12.4 | % | 11.4 | % | 9.2 | % | 8.2 | % | 10.3 | % | 9.5 | % | ||||||||||||||||
|
Percent 90 or more days past due |
4.0 | % | 6.9 | % | 9.0 | % | 8.1 | % | 6.1 | % | 5.8 | % | 7.5 | % | 6.7 | % | ||||||||||||||||
|
Averaged managed receivables |
$ | 943,791 | $ | 908,839 | $ | 916,155 | $ | 845,465 | $ | 693,116 | $ | 545,529 | $ | 471,895 | $ | 434,460 | ||||||||||||||||
|
Total yield ratio |
45.8 | % | 45.9 | % | 50.1 | % | 50.0 | % | 49.7 | % | 47.0 | % | 46.5 | % | 44.3 | % | ||||||||||||||||
|
Combined gross charge-off ratio |
22.1 | % | 26.9 | % | 29.0 | % | 22.4 | % | 17.6 | % | 23.8 | % | 23.6 | % | 21.6 | % | ||||||||||||||||
The following table presents additional trends and data with respect to our current 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 |
||||||||||||||||||||||||||||||||
|
2020 |
2019 |
2018 |
||||||||||||||||||||||||||||||
|
Sept. 30 |
Jun. 30 |
Mar. 31 |
Dec. 31 |
Sept. 30 |
Jun. 30 |
Mar. 31 |
Dec. 31 |
|||||||||||||||||||||||||
|
Period-end managed receivables |
$ | 493,943 | $ | 431,118 | $ | 406,101 | $ | 397,690 | $ | 365,652 | $ | 308,382 | $ | 255,922 | $ | 257,772 | ||||||||||||||||
|
Percent 30 or more days past due |
6.2 | % | 7.5 | % | 12.2 | % | 13.2 | % | 11.6 | % | 10.4 | % | 12.7 | % | 13.6 | % | ||||||||||||||||
|
Percent 60 or more days past due |
4.2 | % | 5.9 | % | 9.3 | % | 9.7 | % | 8.2 | % | 7.3 | % | 9.8 | % | 9.9 | % | ||||||||||||||||
|
Percent 90 or more days past due |
2.8 | % | 4.5 | % | 6.8 | % | 6.8 | % | 5.6 | % | 5.0 | % | 7.2 | % | 7.1 | % | ||||||||||||||||
|
Average APR |
19.0 | % | 19.8 | % | 21.3 | % | 22.1 | % | 22.5 | % | 24.0 | % | 24.8 | % | 25.0 | % | ||||||||||||||||
|
Receivables purchased during period |
$ | 170,232 | $ | 141,094 | $ | 110,479 | $ | 116,327 | $ | 133,528 | $ | 123,533 | $ | 69,120 | $ | 80,096 | ||||||||||||||||
|
Direct - At or for the Three Months Ended |
||||||||||||||||||||||||||||||||
|
2020 |
2019 |
2018 |
||||||||||||||||||||||||||||||
|
Sept. 30 |
Jun. 30 |
Mar. 31 |
Dec. 31 |
Sept. 30 |
Jun. 30 |
Mar. 31 |
Dec. 31 |
|||||||||||||||||||||||||
|
Period-end managed receivables |
$ | 488,579 | $ | 463,967 | $ | 505,616 | $ | 510,734 | $ | 403,380 | $ | 293,944 | $ | 216,342 | $ | 195,515 | ||||||||||||||||
|
Percent 30 or more days past due |
9.2 | % | 13.7 | % | 19.2 | % | 17.0 | % | 14.2 | % | 12.8 | % | 15.1 | % | 13.0 | % | ||||||||||||||||
|
Percent 60 or more days past due |
7.0 | % | 11.8 | % | 15.0 | % | 12.8 | % | 10.3 | % | 9.3 | % | 11.2 | % | 9.3 | % | ||||||||||||||||
|
Percent 90 or more days past due |
5.1 | % | 9.2 | % | 10.8 | % | 9.1 | % | 6.7 | % | 6.7 | % | 8.0 | % | 6.4 | % | ||||||||||||||||
|
Average APR |
26.1 | % | 24.6 | % | 26.1 | % | 27.0 | % | 28.2 | % | 28.5 | % | 27.9 | % | 28.1 | % | ||||||||||||||||
|
Receivables purchased during period |
$ | 174,768 | $ | 117,367 | $ | 127,825 | $ | 195,243 | $ | 174,026 | $ | 123,776 | $ | 60,733 | $ | 69,585 | ||||||||||||||||
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 $213.5 million in net receivables growth associated with the combined point-of-sale and direct-to-consumer products offered by our bank partners from September 30, 2019 to September 30, 2020. 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 $128.3 million and $126.8 million in the twelve months ended September 30, 2020 and 2019, respectively. Our direct-to-consumer acquisitions grew by over $85.2 million and $246.7 million, net during the twelve months ended September 30, 2020 and 2019, respectively. We have noted recent recoveries in consumer spending behavior 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 as well as the timing of solicitations within the direct-to-consumer platform by our bank partner. 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 September 30, 2020.
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. This is largely a result of the risk profiles (and corresponding expected returns) for these receivables. Our delinquency rates have continued to be somewhat lower than what we ultimately expect for our new point-of-sale and direct-to-consumer receivables given the continued growth and age of the related accounts 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 moderates, with no further government stimulus programs or other interventions, we expect increased overall delinquency rates when compared to prior periods. This increase would be similar to those noted in the first quarter of 2020 when compared to the first quarter of 2019, 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. Through September 30, 2020, approximately 5.2% of our accounts had received some form of short-term deferral related to COVID-19. Of this amount, approximately 1.4% of accounts and their associated receivables were actively enrolled in short-term payment deferrals (representing $19.1 million of gross receivables outstanding) as of September 30, 2020. 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 yield ratio. Currently, we are experiencing growth in newer, higher yielding receivables, including direct-to-consumer receivables and our point-of-sale receivables. While this growth has contributed to higher total yield ratios, we expect this growth also will continue to 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 recent declines in direct-to-consumer receivables contributed to slightly lower total yield ratios for the second and third quarters of 2020 when compared to comparable periods in 2019. Additionally, lower delinquencies (and thus associated fee billings) noted during the second and third quarters of 2020, in addition to reductions in the prime rate that corresponds to lower yields charged on credit card receivables, contributed to an overall lower Total yield ratio. Our fourth, third, second and first quarter 2019 total yield ratios exclude the impacts of $37.8 million, $26.7 million, $26.0 million and $15.4 million, respectively, associated with our aforementioned reduction in reserves associated with one of our portfolios. Similarly, our fourth quarter 2018 total yield ratio excludes the impact of $36.2 million associated with a litigation settlement in such quarter.
Absent the unknown impacts COVID-19 and related government stimulus and relief measures may have on our ability to acquire new receivables, the impact they may have on consumers' ability to make payments on outstanding loans and fees receivable or the impact created by future decisions to waive or suspend additional consumer fees, we expect total yield ratios to continue to fluctuate modestly based on the relative mix of growth in point-of-sale receivables and higher yielding direct-to-consumer credit card receivables.
Combined gross charge-off ratio. We charge off our Credit and Other Investments segment receivables when they become contractually more than 180 days past due. For all of our products, we charge off receivables within 30 days of notification and confirmation of a customer’s bankruptcy or death. However, in some cases of death, we do not charge off receivables if there is a surviving, contractually liable individual or estate large enough to pay the debt in full.
Growth within point-of-sale finance and direct-to-consumer receivables has resulted in increases in our charge-off rates over time. Combined gross charge-off rates for the fourth quarter of 2018 and first quarter of 2019 reflect the expected higher charge-off rates associated with a mix shift to higher yielding products and ongoing testing of new products throughout 2018. The combined gross charge-off ratio in the third quarter of 2019 further reflects the positive impacts of a bulk sale of charged off receivables. Absent this sale, the combined gross charge-off ratio would have been 18.6%. The first and second quarters 2020 gross charge-off ratios reflect receivable growth during 2019 reaching peak charge-off periods. The combined gross charge-off ratio in the second quarter of 2020 further reflects the positive impacts of a bulk sale of charged off receivables in that period. Absent this sale, the combined gross charge-off ratio would have been 29.1%. Third quarter 2020 gross chargeoffs do not reflect the recent improvements in our delinquency rates. We do expect these delinquency improvements to result in lower combined gross charge-off rates for the remainder of 2020 and for the first quarter of 2021.
Notwithstanding the improvements we will see in the next couple of quarters due to recent improvements in delinquency rates, the growth in point-of-sale and direct-to-consumer receivables is expected to continue to result in higher charge-offs than those experienced historically. We expect continued elevated charge off rates for future periods when compared to historical results, given the following: (1) higher expected charge off rates on the point-of-sale and direct-to-consumer receivables corresponding with higher yields on these receivables, (2) continued testing of receivables with higher risk profiles, which could lead to periodic increases in combined gross charge-offs, (3) 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 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.
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 ranges 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. As noted in the first quarter of 2020, shifts in the relative mix of receivables acquired caused a drop in our average APRs relative to prior quarters. We currently expect our average APRs in 2021 to remain consistent with the average APRs we have experienced over the past several quarters; however, the timing and relative mix of receivables acquired could cause some minor fluctuations.
Receivables purchased during period. Receivables purchased during the period reflect the gross amount of investments we have made in a given period, net of any credits issued to consumers during that same period. For most periods presented, our point-of-sale receivable purchases experienced overall growth, which is 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 bank partners. We currently expect to see decreases in the level of growth in receivable acquisitions when compared to the same period in prior years due to the rapid growth we experienced in 2019 and due to the decreased consumer spending behavior noted as a result of COVID-19. Our direct-to-consumer receivable acquisitions tend to have more volatility based on the issuance of new credit card accounts by our bank partner and the availability of capital to fund new purchases. Nonetheless, 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 some declines in the acquisition of these receivables throughout 2020.
Auto Finance Segment
CAR, our auto finance platform acquired in April 2005, principally purchases and/or services loans secured by automobiles from or for, and also provides floor-plan financing for, a pre-qualified network of independent automotive dealers and automotive finance companies in the buy-here, pay-here used car business. We have expanded these operations to also include certain installment lending products in addition to our traditional loans secured by automobiles both in the U.S. and U.S. territories.
Collectively, as of September 30, 2020, we served more than 590 dealers through our Auto Finance segment in 34 states, the District of Columbia and two U.S. territories.
Managed Receivables Background
For reasons set forth above within our Credit and Other Investments segment discussion, we also provide managed receivables-based financial, operating and statistical data for our Auto Finance segment. Reconciliation of the auto finance managed receivables data to our GAAP financial statements requires an understanding that our managed receivables data are based on billings and actual charge offs as they occur, without regard to any changes in our allowance for uncollectible loans, interest and fees receivable. Similar to the managed calculation above, the average managed receivables used in the ratios below is calculated based on the quarter ending balances of consolidated receivables.
Analysis of Statistical Data
Financial, operating and statistical metrics for our Auto Finance segment are detailed (in thousands; percentages of total) in the following table:
| At or for the Three Months Ended | ||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||
|
Sept. 30 |
Jun. 30 |
Mar. 31 |
Dec. 31 |
Sept. 30 |
Jun. 30 |
Mar. 31 |
Dec. 31 |
|||||||||||||||||||||||||
|
Period-end managed receivables |
$ | 90,514 | $ | 89,637 | $ | 90,226 | $ | 89,785 | $ | 89,451 | $ | 89,490 | $ | 90,208 | $ | 88,057 | ||||||||||||||||
|
Percent 30 or more days past due |
11.2 | % | 11.0 | % | 12.5 | % | 15.2 | % | 14.5 | % | 13.3 | % | 11.4 | % | 14.7 | % | ||||||||||||||||
|
Percent 60 or more days past due |
4.5 | % | 4.4 | % | 5.0 | % | 6.2 | % | 5.9 | % | 5.4 | % | 5.3 | % | 5.7 | % | ||||||||||||||||
|
Percent 90 or more days past due |
2.1 | % | 2.3 | % | 2.7 | % | 2.9 | % | 3.1 | % | 2.6 | % | 2.9 | % | 2.5 | % | ||||||||||||||||
|
Average managed receivables |
$ | 90,076 | $ | 89,932 | $ | 90,006 | $ | 89,618 | $ | 89,471 | $ | 89,849 | $ | 89,133 | $ | 86,698 | ||||||||||||||||
|
Total yield ratio |
36.6 | % | 36.4 | % | 36.2 | % | 36.3 | % | 36.4 | % | 36.7 | % | 36.0 | % | 36.1 | % | ||||||||||||||||
|
Combined gross charge-off ratio |
1.3 | % | 2.7 | % | 2.7 | % | 4.0 | % | 2.7 | % | 4.9 | % | 2.7 | % | 2.8 | % | ||||||||||||||||
|
Recovery ratio |
1.3 | % | 0.9 | % | 1.3 | % | 1.3 | % | 1.8 | % | 1.8 | % | 1.3 | % | 0.9 | % | ||||||||||||||||
Managed receivables. 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. Managed receivable levels increased in each of the periods of 2019 when compared to the same period in 2018 primarily due to the acquisition of new dealer relationships, which has enabled us to purchase greater amounts of auto receivables. Although receivable levels in each period of 2020 were roughly equal to those in 2019, this primarily reflects strong customer payments throughout 2020 offsetting receivables growth when compared to the same periods of 2019. We expect receivable levels will continue to result in modest period over period increases, when compared to the same periods in the prior year, for the coming quarters 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.
Delinquencies. Current delinquency levels are consistent with our expectations for levels in the near term with some improvement noted 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 which 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 yield ratio. We have experienced modest fluctuations in our total yield ratio largely impacted by the relative mix of receivables in various products offered by CAR as some shorter term product offerings tend to have higher yields. Yields on our CAR products over the last few quarters are consistent with our expectations. Further, we expect our total yield ratio to remain in line with current experience, with moderate fluctuations based on relative growth or declines in average managed receivables for a given quarter. These variations would be based on the relative mix of receivables in our various product offerings. Additionally, our product offerings in the U.S. territories tend to have slightly lower yields than those offered in the U.S. As such, continued growth in that region also will serve to slightly depress our overall total yield ratio, yet we expect growth in that region to continue to generate attractive returns on assets.
Combined gross charge-off ratio and recovery ratio. We charge off auto finance receivables when they are between 120 and 180 days past due, unless the collateral is repossessed and sold before that point, in which case we will record a charge off when the proceeds are received. Combined gross charge-off ratios in the above table reflect the lower delinquency rates we have recently experienced. While we anticipate our charge-offs to be incurred ratably across our portfolio of dealers, specific dealer-related losses are difficult to predict and can negatively influence our combined gross charge-off ratio. This is evidenced by the slightly elevated combined gross charge-off rate we 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 Financial, Operating and Statistical Measures
Total yield ratio. Represents an annualized fraction, the numerator of which includes (as appropriate for each applicable disclosed segment) the: 1) finance charge and late fee income billed on all consolidated outstanding receivables and the amortization of 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 and activation fees with respect to certain credit card receivables, collectively included in our fees and related income on earning assets category on our consolidated statements of income; plus 3) servicing, other income and other activities collectively included in our other operating income category on our consolidated statements of income. The denominator used represents our average managed receivables.
Combined gross charge-off ratio. Represents an annualized fraction, the numerator of which is the aggregate consolidated amounts of finance charge, fee and principal losses from consumers unwilling or unable to pay their receivables balances, as well as from bankrupt and deceased consumers, less current-period recoveries (including recoveries from dealer reserve offsets for our CAR operations) and the related portion of unamortized 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.
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.
Debt and capital markets, particularly the asset-backed securities market on which we are dependent, have been disrupted by COVID-19, and this has slowed down our ability to establish new facilities. While we have been successful in our recent capital raising efforts, we do not expect these markets to return to normal in the near-term. For that reason, we have implemented measures to ensure that our liquidity position is as strong as possible through the current economic cycle and expect to take advantage of opportunities to obtain additional liquidity when and as they become available.
We believe that our actions taken to date, future cash provided by operating activities, availability under our debt facilities, and possibly the capital markets or government-sponsored programs will provide adequate resources to fund our operating and financing needs.
As discussed elsewhere in this Report, we incur a significant level of costs associated with a fixed infrastructure. While we had in the past focused on cost reduction, our primary focus now is growing the point-of-sale and direct-to-consumer credit card receivables so that our revenues from these investments can cover our infrastructure costs and return us to consistent profitability. Increases in new and existing retail partnerships and the expansion of our investments in direct-to-consumer finance products have resulted in 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) containing costs (as opposed to our previous focus on reducing expenses), (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) obtaining the funding necessary to meet capital needs required by the growth of our receivables.
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. Additionally, we do not expect any imminent refunding or financing needs associated with our convertible senior notes given their maturity in 2035. As such, facilities that could represent near-term significant refunding or refinancing needs as of September 30, 2020 are those associated with the following notes payable in the amounts indicated (in millions):
|
Revolving credit facility (expiring November 1, 2021) that is secured by certain assets of our CAR subsidiary |
$ | 36.5 | ||
| Revolving credit facility (expiring February 8, 2022) that is secured by certain receivables and restricted cash | 5.8 | |||
| Revolving credit facility (expiring August 15, 2022) that is secured by certain receivables and restricted cash | 2.5 | |||
|
Revolving credit facility (expiring April 21, 2021) that is secured by certain receivables and restricted cash |
15.0 | |||
| Amortizing debt facility (expiring September 30, 2021) that is secured by certain receivables and restricted cash | 6.2 | |||
| Total | $ | 66.0 |
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. Also see Part II, Item 1A “Risk Factors—We Are Substantially Dependent Upon Borrowed Funds to Fund Receivables We Purchase.”
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 September 30, 2020) 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%. The facility matures on February 8, 2022 and is subject to certain affirmative covenants and collateral performance tests, the failure of which could result in required early repayment of all or a portion of the outstanding balance of notes. The facility also may be prepaid subject to payment of a prepayment or other fee.
In June 2018 and again in November 2018, we (through a wholly owned subsidiary) expanded the above-mentioned program to sell up to an additional $100.0 million of notes ($200.0 million in total notes through the June and November 2018 expansions) which are secured by the receivables and other assets of the trust (of which $2.5 million was outstanding as of September 30, 2020) to separate unaffiliated third parties pursuant to facilities that can be drawn upon to the extent of outstanding eligible receivables. Interest rates on the notes are based on commercial paper rates plus 3.75% and LIBOR plus 4.875%, respectively. The above facilities mature on June 11, 2021 and November 16, 2020, respectively, and are subject to certain affirmative covenants and collateral performance tests, the failure of which could result in required early repayment of all or a portion of the outstanding balance of notes. The facilities also may be prepaid subject to payment of a prepayment or other fee.
In November 2018, we sold $167.3 million of asset backed securities (“ABS”) secured by certain retail point-of-sale receivables. A portion of the proceeds from the sale were used to pay-down our existing term and revolving facilities associated with our point-of-sale receivables. The weighted average interest rate on the securities is 5.76%. These securities were repaid in October 2020 as part of a new securitization described below.
In June 2019, we sold $200.0 million of ABS secured by certain credit card receivables. A portion of the proceeds from the sale was used to pay-down our existing facilities associated with our credit card receivables. The terms of the ABS allow for a two-year revolving structure with a subsequent 12-month to 18-month amortization period. The weighted average interest rate on the securities is fixed at 5.37%.
In September 2019, we extended the maturity date of the revolving credit facility secured by the financial and operating assets of CAR to November 1, 2021, and, in October 2019, we expanded the borrowing capacity of such facility 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 are available to fund the acquisition of future 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 pay-down our existing term ABS associated with our point-of-sale receivables, noted above, and the remaining proceeds have and will be 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 the end of 2021. 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. Going forward, we will work with our lenders to use suitable alternative reference rates for our financial instruments. We will continue to monitor, assess and plan for the phase out of LIBOR; however, we currently do not expect the impact to be material to the Company.
At September 30, 2020, we had $149.2 million in unrestricted cash held by our various business subsidiaries. Because the characteristics of our assets and liabilities change, liquidity management has been a dynamic process for us, driven by the pricing and maturity of our assets and liabilities. We historically have financed our business through cash flows from operations, asset-backed structured financings and the issuance of debt and equity. Details concerning our cash flows for the nine months ended September 30, 2020 and 2019 are as follows:
|
• |
During the nine months ended September 30, 2020, we generated $147.8 million of cash flows from operations compared to our generating $70.2 million of cash flows from operations during the nine months ended September 30, 2019. 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 as well as a bulk sale of charge-off accounts which resulted in proceeds of $5.0 million. |
|
• |
During the nine months ended September 30, 2020, we used $180.9 million of cash in our investing activities, compared to use of $289.8 million of cash in investing activities during the nine months ended September 30, 2019. This decrease in cash used is primarily due to significant decreases in the level of investments in the point-of-sale and direct-to-consumer receivables relative to the same period in 2019, in some cases as a result of diminished purchase activity by consumers as a result of COVID-19 market impacts. While we are seeing some increases in consumer spending behavior, 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. Additionally contributing to the decline in cash used by investing activities are returns on our aforementioned investments in point-of-sale and direct-to-consumer receivables which contributed positively to our cash generated from investing activities. |
|
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During the nine months ended September 30, 2020, we generated $33.6 million of cash in financing activities, compared to our generating $190.3 million of cash in financing activities during the nine months ended September 30, 2019. 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. In 2019, this included the issuance of $400 million in asset backed securities. 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 September 30, 2020 we were authorized to repurchase a remaining 4,946,231 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, 2019.
Commitments and Contingencies
We do not currently have any off-balance-sheet arrangements; however, we do have certain contractual arrangements that would require us to make payments or provide funding if certain circumstances occur, which we refer to as contingent commitments. We do not currently expect that these contingent commitments will result in any material amounts being paid by us. See Note 11, “Commitments and Contingencies,” to our consolidated financial statements included herein for further discussion of these matters.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2, “Significant Accounting Policies and Consolidated Financial Statement Components,” to our consolidated financial statements included herein for a discussion of recent accounting pronouncements.
CRITICAL ACCOUNTING ESTIMATES
We have prepared our financial statements in accordance with GAAP. These principles are numerous and complex. We have summarized our significant accounting policies in the notes to our consolidated financial statements. In many instances, the application of GAAP requires management to make estimates or to apply subjective principles to particular facts and circumstances. A variance in the estimates used or a variance in the application or interpretation of GAAP could yield a materially different accounting result. It is impracticable for us to summarize every accounting principle that requires us to use judgment or estimates in our application. Nevertheless, we describe below the areas for which we believe that the estimations, judgments or interpretations that we have made, if different, would have yielded the most significant differences in our consolidated financial statements.
On a quarterly basis, we review our significant accounting policies and the related assumptions, in particular, those mentioned below, with the Audit Committee of the Board of Directors.
Revenue Recognition
Consumer Loans, Including Past Due Fees
Consumer loans, including past due fees reflect interest income, including finance charges, and late fees on loans in accordance with the terms of the related customer agreements. Premiums, discounts and merchant fees paid or received associated with 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: (1) 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; (2) changes in fair value of notes payable associated with structured financings recorded at fair value; and (3) gains or losses associated with our investments in securities.
We assess fees on credit card accounts underlying our credit card receivables according to the terms of the related cardholder agreements and, except for annual membership fees, we recognize these fees as income when they are charged to the customers’ accounts. We accrete annual membership fees associated with our credit card receivables into income on a straight-line basis over the cardholder privilege period which is generally 12 months for receivables that are not included as part of our Fair Value Receivables, and when billed for those receivables that are included as part of our 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 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 they likewise affect our changes in fair value of loans, interest and fees receivable recorded at fair value and changes in fair value of notes payable associated with structured financings recorded at fair value categories within our fees and related income on earning assets line item on our consolidated statements of operations.
Allowance for Uncollectible Loans, Interest and Fees
Through our analysis of loan performance, delinquency data, charge-off data, economic trends and the potential effects of those economic trends on consumers, we establish an allowance for uncollectible loans, interest and fees receivable as an estimate of the probable losses inherent within those loans, interest and fees receivable that we do not report at fair value. Our loans, interest and fees receivable consist of smaller-balance, homogeneous loans, divided into two portfolio segments: Credit and Other Investments; and Auto Finance. Each of these portfolio segments is further divided into pools based on common characteristics such as contract or acquisition channel. For each pool, we determine the necessary allowance for uncollectible loans, interest and fees receivable by analyzing some or all of the following unique to each type of receivable pool: historical loss rates; current delinquency and roll-rate trends; vintage analyses based on the number of months an account has been in existence; the effects of changes in the economy on 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 $16,627 and $18,089 for 2019 and 2018, respectively. The aggregate amount of payments required under the sublease from January 1, 2020 to the expiration of the sublease in May 2022 is $41,527.
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 nine months ended September 30, 2020 and 2019, we received $225,003 and $202,813, 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 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 expected revenue; income; receivables; the impact of COVID-19 and related government stimulus and relief measures on our financial condition, results of operations and liquidity; acquisitions of financial assets and other growth opportunities; divestitures and discontinuations of businesses; loss exposure and loss provisions; delinquency and charge-off rates; changes in the credit quality and fair value of our credit card loans, interest and fees receivable and the fair value of their underlying structured financing facilities; the impact of actions by the Federal Deposit Insurance Corporation (“FDIC”), Federal Reserve Board, Federal Trade Commission (“FTC”), Consumer Financial Protection Bureau (“CFPB”) and other regulators on both us, banks that issue credit cards and other credit products on our behalf, and merchants that participate in our point-of-sale finance operations; account growth; the performance of investments that we have made; operating expenses; marketing plans and expenses; the performance of our Auto Finance segment; the impact of our credit card receivables on our financial performance; the sufficiency of available capital; future interest costs; sources of funding operations and acquisitions; growth and profitability of our point-of-sale finance operations; our ability to raise funds or renew financing facilities; share repurchases or issuances; debt retirement; the results associated with our equity-method investee; our servicing income levels; gains and losses from investments in securities; experimentation with new products and other statements of our plans, beliefs or expectations are forward-looking statements. These and other statements using words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and similar expressions also are forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement. The forward-looking statements we make are not guarantees of future performance, and we have based these statements on our assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or historical earnings levels.
Although it is not possible to identify all factors, we continue to face many risks and uncertainties. Among the factors that could cause actual future results to differ materially from our expectations are the risks and uncertainties described under “Risk Factors” set forth in Part II, Item 1A, and the risk factors and other cautionary statements in other documents we file with the SEC, including the following:
| • | the duration and magnitude of the impact the novel coronavirus, or COVID-19, could have on credit usage and payments; | |
| • | the impact of COVID-19 on capital markets; | |
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the availability of adequate financing to support growth; |
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the extent to which federal, state, local and foreign governmental regulation of our various business lines and the products we service for others limits or prohibits the operation of our businesses; |
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current and future litigation and regulatory proceedings against us; |
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the effect of adverse economic conditions on our revenues, loss rates and cash flows; |
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competition from various sources providing similar financial products, or other alternative sources of credit, to consumers; |
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the adequacy of our allowances for uncollectible loans, interest and fees receivable and estimates of loan losses used within our risk management and analyses; |
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the possible impairment of assets; |
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our ability to manage costs in line with the expansion or contraction of our various business lines; |
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our relationship with (i) the merchants that participate in point-of-sale finance operations and (ii) the 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 September 30, 2020, 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.
Investors should be particularly cautious regarding investments in our common stock or other securities at the present time in light of our inability to achieve consistent earnings from our operations in recent years. Additionally, 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 the novel coronavirus, or 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 sub-prime. Historically, we have invested in receivables in one of two ways—we have either (i) invested in receivables originated by lenders who utilize our services or (ii) invested in or purchased pools of receivables from other issuers. In either case, substantially all of our receivables are from financially underserved borrowers—borrowers represented by credit risks that regulators classify as “sub-prime.” Our reliance on sub-prime receivables has negatively impacted and may in the future negatively impact, our performance. Our past losses may have been mitigated had our portfolios consisted of higher-grade receivables in addition to our sub-prime receivables.
Economic slowdowns increase our credit losses. During periods of economic slowdown or recession, we 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 than those experienced by other providers of consumer credit because of our focus on the financially underserved consumer market, which may be disproportionately impacted.
Because a significant portion of our reported income is based on management’s estimates of the future performance of receivables, differences between actual and expected performance of the receivables may cause fluctuations in net income. Significant portions of our reported income (or losses) are based on management’s estimates of cash flows we expect to receive on receivables, particularly for such assets that we report based on fair value. The expected cash flows are based on management’s estimates of interest rates, default rates, payment rates, cardholder purchases, servicing costs, and discount rates. These estimates are based on a variety of factors, many of which are not within our control. Substantial differences between actual and expected performance of the receivables will occur and cause fluctuations in our net income. For instance, higher than expected rates of delinquencies and losses could cause our net income to be lower than expected. Similarly, levels of loss and delinquency can result in our being required to repay lenders earlier than expected, thereby reducing funds available to us for future growth.
Due to our relative lack of historical experience with Internet consumers, we may not be able to evaluate their creditworthiness. We have less historical experience with respect to the credit risk and performance of receivables owed by consumers acquired over 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 the novel coronavirus, or COVID-19, in many countries continues to adversely impact global commercial activity and has contributed to significant volatility in financial markets. The global impact of the outbreak has been rapidly evolving, and 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 $982.5 million at September 30, 2020 from $769.0 million at September 30, 2019. 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 50% of our outstanding point-of-sale receivables as of December 31, 2019. 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 selected states. To the extent that these remedies are imposed on the issuing banks that originate credit products using our platform, under certain circumstances we are responsible for the remedies as a result of our indemnification obligations with those banks. We or our issuing banks also may elect to change practices that we believe are compliant with law in order to respond to regulatory concerns. Furthermore, negative publicity relating to any specific inquiry or investigation could hurt our ability to conduct business with various industry participants or to generate new receivables and could negatively affect our stock price, which would adversely affect our ability to raise additional capital and would raise our costs of doing business.
If any deficiencies or violations of law or regulations are identified by us or asserted by any regulator, or if the CFPB, the FDIC, the FTC or any other regulator requires us or issuing banks to change any practices, the correction of such deficiencies or violations, or the making of such changes, could have a material adverse effect on our financial condition, results of operations or business. In addition, whether or not these practices are modified when a regulatory or enforcement authority requests or requires, there is a risk that we or other industry participants may be named as defendants in litigation involving alleged violations of federal and state laws and regulations, including consumer protection laws. Any failure to comply with legal requirements by us or the banks that originate credit products utilizing our platform in connection with the issuance of those products, or by us or our agents as the servicer of our accounts, could significantly impair our ability to collect the full amount of the account balances. The institution of any litigation of this nature, or any judgment against us or any other industry participant in any litigation of this nature, could adversely affect our business and financial condition in a variety of ways.
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.
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 sub-prime lenders and are intended to prohibit or curtail industry-standard practices as well as non-standard practices. For instance, Congress enacted legislation that regulates loans to military personnel through imposing interest rate and other limitations and requiring new disclosures, all as regulated by the Department of Defense. Similarly, in 2009 Congress enacted legislation that required changes to a variety of marketing, billing and collection practices, and the Federal Reserve adopted significant changes to a number of practices through its issuance of regulations. While our practices are in compliance with these changes, some of the changes (e.g., limitations on the ability to assess up-front fees) have significantly affected the viability of certain credit products within the U.S. Changes in the consumer protection laws could result in the following:
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receivables not originated in compliance with law (or revised interpretations) could become unenforceable and uncollectible under their terms against the obligors; |
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we may be required to credit or refund previously collected amounts; |
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certain fees and finance charges could be limited, prohibited or restricted, which would reduce the profitability of certain investments in receivables; |
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certain collection methods could be prohibited, forcing us to revise our practices or adopt more costly or less effective practices; |
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limitations on our ability to recover on charged-off receivables regardless of any act or omission on our part; |
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some credit products and services could be banned in certain states or at the federal level; |
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federal or state bankruptcy or debtor relief laws could offer additional protections to consumers seeking bankruptcy protection, providing a court greater leeway to reduce or discharge amounts owed to us; and |
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a reduction in our ability or willingness to invest in receivables arising under loans to certain consumers, such as military personnel. |
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 to Our Business
The global outbreak of the novel coronavirus, or 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, the President declared a national emergency under the National Emergencies Act due to a new strain of coronavirus, originating in Wuhan, China (the "COVID-19" outbreak) 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:
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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; |
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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 |
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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, 2019, we had U.S. federal NOL carryforwards of $85.6 million the deferred tax assets on which were not offset by valuation allowances, and we had no material U.S. state and local or foreign NOLs 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, $18.1 million of the NOLs will expire in 2029, and $17.8 million of the NOLs will expire in 2030. 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, 2019. 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 that outsourcing relationship could harm our business. We generally outsource account and payment processing. If these outsourcing relationships were not renewed or were terminated or the services provided to us were otherwise disrupted, we would have to obtain these services from an alternative provider. There is a risk that we would not be able to enter into a similar outsourcing arrangement with an alternate provider on terms that we consider favorable or in a timely manner without disruption of our business.
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.
Also, federal legislators and regulators are increasingly pursuing new guidelines, laws and regulations that, if adopted, could further restrict how we collect, use, share and secure consumer information, which could impact some of our current or planned business initiatives.
Unplanned system interruptions or system failures could harm our business and reputation. Any interruption in the availability of our transactional processing services due to hardware and operating system failures will reduce our revenues and profits. Any unscheduled interruption in our services results in an immediate, and possibly substantial, loss of revenues. Frequent or persistent interruptions in our services could cause current or potential consumers to believe that our systems are unreliable, leading them to switch to our competitors or to avoid our websites or services, and could permanently harm our reputation.
Although our systems have been designed around industry-standard architectures to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, computer viruses, computer denial-of-service attacks, and similar events or disruptions. Some of our systems are not fully redundant, and our disaster recovery planning may not be sufficient for all eventualities. Our systems also are subject to break-ins, sabotage, and intentional acts of vandalism. Despite any precautions we may take, the occurrence of a natural disaster, 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.
Climate change and related regulatory responses may impact our business. Climate change as a result of emissions of greenhouse gases is a significant topic of discussion and may generate federal and other regulatory responses. It is impracticable to predict with any certainty the impact on our business of climate change or the regulatory responses to it, although we recognize that they could be significant. The most direct impact is likely to be an increase in energy costs, which would adversely impact consumers and their ability to incur and repay indebtedness. However, we are uncertain of the ultimate impact, either directionally or quantitatively, of climate change and related regulatory responses on our business.
We have elected the fair value option effective as of January 1, 2020, and we use estimates in determining the fair value of our loans. If our estimates prove incorrect, we may be required to write down the value of these assets, which could adversely affect our results of operations. Our ability to measure and report our financial position and results of operations is influenced by the need to estimate the impact or outcome of future events on the basis of information available at the time of the issuance of the financial statements. Further, most of these estimates are determined using Level 3 inputs for which changes could significantly impact our fair value measurements. A variety of factors including, but not limited to, estimated yields on consumer receivables, customer default rates, the timing of expected payments, estimated costs to service the portfolio, interest rates, and valuations of comparable portfolios may ultimately affect the fair values of our loans and finance receivables. If actual results differ from our judgments and assumptions, then it may have an adverse impact on the results of operations and cash flows. Management has processes in place to monitor these judgments and assumptions, but these processes may not ensure that our judgments and assumptions are correct.
Our allowance for uncollectible loans is determined based upon both objective and subjective factors and may not be adequate to absorb loan losses. We face the risk that customers will fail to repay their loans in full. Through our analysis of loan performance, delinquency data, charge-off data, economic trends and the potential effects of those economic trends on consumers, we establish an allowance for uncollectible loans, interest and fees receivable as an estimate of the probable losses inherent within those loans, interest and fees receivable that we do not report at fair value. We determine the necessary allowance for uncollectible loans, interest and fees receivable by analyzing some or all of the following unique to each type of receivable pool: historical loss rates; current delinquency and roll-rate trends; vintage analyses based on the number of months an account has been in existence; the effects of changes in the economy on 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:
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actual or anticipated fluctuations in our operating results; |
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changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors; |
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the overall financing environment, which is critical to our value; |
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the operating and stock performance of our competitors; |
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announcements by us or our competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; |
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changes in interest rates; |
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the announcement of enforcement actions or investigations against us or our competitors or other negative publicity relating to us or our industry; |
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changes in generally accepted accounting principles in the U.S. ("GAAP"), laws, regulations or the interpretations thereof that affect our various business activities and segments; |
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general domestic or international economic, market and political conditions; |
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changes in ownership by executive officers, directors and parties related to them who control a majority of our common stock; |
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additions or departures of key personnel; and |
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future sales of our common stock and the transfer or cancellation of shares of common stock pursuant to a share lending agreement. |
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.
We have no current plans to pay cash dividends on our common stock for the foreseeable future, and an increase in the market price of our common stock, if any, may be the sole source of gain on your investment. With the exception of dividends payable on our Series A Convertible Preferred Stock, we currently intend to retain any future earnings for use in the operation and expansion of our business and do not expect to pay any dividends on our common stock in the foreseeable future. The declaration and payment of all future dividends on our common stock, if any, will be at the sole discretion of our board of directors, which retains the right to change our dividend policy at any time. Any decision by our board of directors to declare and pay dividends in the future will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions, restrictions on dividends imposed by the document governing the terms of the Series A Convertible Preferred Stock and other factors that our board of directors may deem relevant. Consequently, appreciation in the market price of our common stock, if any, may be the sole source of gain on your investment for the foreseeable future.
Holders of the Series A Convertible Preferred Stock are entitled to receive dividends on each share of such stock equal to 6% per annum on the liquidation preference of $100. The dividends on the Series A Convertible Preferred Stock are cumulative and non-compounding and must be paid before we pay any dividends on the common stock.
We have the ability to issue additional preferred stock, warrants, convertible debt and other securities without shareholder approval. Our common stock may be subordinate to additional classes of preferred stock issued in the future in the payment of dividends and other distributions made with respect to common stock, including distributions upon liquidation or dissolution. Our articles of incorporation permit our Board of Directors to issue preferred stock without first obtaining shareholder approval, 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 September 30, 2020, Atlanticus Holdings Corporation had outstanding: $737.9 million of secured indebtedness, which would rank senior in right of payment to the convertible senior notes; $49.6 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 September 30, 2020, our subsidiaries had total liabilities of approximately $783.4 million (including the $737.9 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 September 30, 2020.
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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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July 1 - July 31 |
7,000 | $ | 11.50 | 7,000 | 4,993,000 | |||||||||||
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August 1 - August 31 |
24,000 | $ | 9.25 | 23,051 | 4,969,949 | |||||||||||
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September 1 - September 30 |
17,275 | $ | 10.97 | 16,718 | 4,946,231 | |||||||||||
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Total |
48,275 | $ | 10.19 | 46,769 | 4,946,231 | |||||||||||
| (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 1,506 such shares returned to us during the three months ended September 30, 2020. | |
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(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.
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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 |
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Description of Exhibit |
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Incorporated by Reference from Atlanticus’ SEC Filings Unless Otherwise Indicated |
| 10.1 | Outside Director Compensation Package | 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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| November 13, 2020 |
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
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:
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Annual Cash Retainer |
$ | 50,000 | ||
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Attendance Fee for Each Board Meeting (including telephonic attendance) |
$ | 3,000 | ||
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Attendance Fee for Each Committee Meeting (including telephonic attendance) |
$ | 1,500 |
In addition, the Chairman of the Audit Committee will receive an additional annual fee of $25,000. The Chairman 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 31.1
CERTIFICATIONS
I, David G. Hanna, 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: November 13, 2020
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/s/ DAVID G. HANNA |
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David G. Hanna |
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Chief Executive Officer and Chairman of the Board |
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: November 13, 2020
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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 Chief Executive Officer and Chairman of the Board, 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 September 30, 2020, 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 13th day of November, 2020.
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/s/ DAVID G. HANNA |
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David G. Hanna |
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Chief Executive Officer and |
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Chairman of the Board |
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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.