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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
  
FORM 10-Q
 
For the quarterly period ended September 30, 2014
 
of
ATLANTICUS HOLDINGS CORPORATION
 
a Georgia Corporation
IRS Employer Identification No. 58-2336689
SEC File Number 0-53717
 
Five Concourse Parkway, Suite 400
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”).
 
Atlanticus is not a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.
 
Atlanticus (1) is required to file reports pursuant to Section 13 of the Act, (2) has filed all reports required to be filed by Section 13 of the Act during the preceding 12 months and (3) has been subject to such filing requirements for the past 90 days.
 
Atlanticus has submitted electronically and posted on its corporate Web site every Interactive Data File required to be submitted and posted 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.
 
As of November 7, 2014, 13,909,414 shares of common stock, no par value, of Atlanticus were outstanding. This excludes 1,459,233 loaned shares to be returned.




Table of Contents
 

Page
PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements (Unaudited)
 
 
Consolidated Balance Sheets
 
 
Consolidated Statements of Operations
 
 
Consolidated Statements of Comprehensive Loss
 
 
Consolidated Statement of Shareholders' Equity
 
 
Consolidated Statements of Cash Flows
 
 
Notes to Consolidated Financial Statements
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
Item 4.
Controls and Procedures
 
Part II. OTHER INFORMATION
 
Item 1.
Legal Proceedings
 
Item 1A.
Risk Factors
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 3.
Defaults Upon Senior Securities
 
Item 4.
Mine Safety Disclosure
 
Item 5.
Other Information
 
Item 6.
Exhibits
 
 
Signatures
 




PART I—FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
 
Atlanticus Holdings Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands)
 
September 30,
2014
 
December 31,
2013
Assets
 
 
 
Unrestricted cash and cash equivalents
$
38,187

 
$
50,873

Restricted cash and cash equivalents
22,875

 
18,871

Loans and fees receivable:
 

 
 

Loans and fees receivable, net (of $14,849 and $13,258 in deferred revenue and $19,969 and $24,214 in allowances for uncollectible loans and fees receivable at September 30, 2014 and December 31, 2013, respectively)
101,486

 
97,208

Loans and fees receivable, at fair value
9,007

 
12,080

Loans and fees receivable pledged as collateral under structured financings, at fair value
64,971

 
88,132

Rental merchandise, net of depreciation
12,268

 
28,849

Property at cost, net of depreciation
10,050

 
8,937

Investments in equity-method investees
31,402

 
35,134

Deposits
2,014

 
1,908

Prepaid expenses and other assets
10,135

 
10,243

Total assets
$
302,395

 
$
352,235

Liabilities
 

 
 

Accounts payable and accrued expenses
$
32,730

 
$
48,625

Notes payable, at face value
71,304

 
56,740

Notes payable associated with structured financings, at fair value
69,657

 
94,523

Convertible senior notes
96,365

 
95,934

Income tax liability
58,700

 
55,255

Total liabilities
328,756

 
351,077

Commitments and contingencies (Note 9)


 


Equity
 

 
 

Common stock, no par value, 150,000,000 shares authorized: 15,426,873 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at September 30, 2014; and 15,594,325 shares issued and outstanding  (including 1,672,656 loaned shares to be returned) at December 31, 2013

 

Additional paid-in capital
211,339

 
210,315

Accumulated other comprehensive loss
(1,090
)
 
(737
)
Retained deficit
(236,612
)
 
(208,414
)
Total shareholders’ equity
(26,363
)
 
1,164

Noncontrolling interests
2

 
(6
)
Total equity
(26,361
)
 
1,158

Total liabilities and equity
$
302,395

 
$
352,235


 
See accompanying notes.

1


Atlanticus Holdings Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share data)
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Interest income:
 
 
 
 
 
 
 
Consumer loans, including past due fees
$
18,481

 
$
17,975

 
$
55,825

 
$
54,480

Other
51

 
33

 
325

 
228

Total interest income
18,532

 
18,008

 
56,150

 
54,708

Interest expense
(6,106
)
 
(5,999
)
 
(18,451
)
 
(17,637
)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
12,426

 
12,009

 
37,699

 
37,071

Fees and related income on earning assets
20,669

 
18,382

 
75,750

 
35,407

Losses upon charge off of loans and fees receivable recorded at fair value, net of recoveries
150

 
(3,329
)
 
(1,685
)
 
(13,478
)
Provision for losses on loans and fees receivable recorded at net realizable value
(8,120
)
 
(10,681
)
 
(22,726
)
 
(20,633
)
Net interest income, fees and related income on earning assets
25,125

 
16,381

 
89,038

 
38,367

Other operating income:
 

 
 

 
 
 
 
Servicing income
1,058

 
1,713

 
3,532

 
6,918

Other income
689

 
1,069

 
2,010

 
3,521

Equity in income of equity-method investees
1,936

 
2,080

 
5,183

 
7,344

Total other operating income
3,683

 
4,862

 
10,725

 
17,783

Other operating expense:
 

 
 

 
 
 
 
Salaries and benefits
4,544

 
4,421

 
14,306

 
13,201

Card and loan servicing
11,383

 
11,732

 
38,117

 
33,260

Marketing and solicitation
529

 
2,059

 
1,922

 
6,580

Depreciation
11,285

 
5,108

 
53,566

 
5,899

Other
5,973

 
5,365

 
16,304

 
16,521

Total other operating expense
33,714

 
28,685

 
124,215

 
75,461

Loss before income taxes
(4,906
)
 
(7,442
)
 
(24,452
)
 
(19,311
)
Income tax expense
(940
)
 
(1,443
)
 
(3,595
)
 
(2,351
)
Net loss
(5,846
)
 
(8,885
)
 
(28,047
)
 
(21,662
)
Net loss (income) attributable to noncontrolling interests

 
1

 
(151
)
 
(79
)
Net loss attributable to controlling interests
$
(5,846
)
 
$
(8,884
)
 
$
(28,198
)
 
$
(21,741
)
Net loss attributable to controlling interests per common share—basic
$
(0.42
)
 
$
(0.65
)
 
$
(2.01
)
 
$
(1.58
)
Net loss attributable to controlling interests per common share—diluted
$
(0.42
)
 
$
(0.65
)
 
$
(2.01
)
 
$
(1.58
)

 
See accompanying notes.

2


Atlanticus Holdings Corporation and Subsidiaries
Consolidated Statements of Comprehensive Loss (Unaudited)
(Dollars in thousands)

 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net loss
$
(5,846
)
 
$
(8,885
)
 
$
(28,047
)
 
$
(21,662
)
Other comprehensive loss:
 

 
 

 
 
 
 
Foreign currency translation adjustment
(896
)
 
1,476

 
(449
)
 
(35
)
Income tax benefit (expense) related to other comprehensive income
73

 
(212
)
 
96

 
(73
)
Comprehensive loss
(6,669
)
 
(7,621
)
 
(28,400
)
 
(21,770
)
Comprehensive loss (income) attributable to noncontrolling interests

 
1

 
(151
)
 
(79
)
Comprehensive loss attributable to controlling interests
$
(6,669
)
 
$
(7,620
)
 
$
(28,551
)
 
$
(21,849
)

 

 

 

 

 

 

 

 

 

 

 

 

 
See accompanying notes.

3


Atlanticus Holdings Corporation and Subsidiaries
Consolidated Statements of Equity
For the Nine Months Ended September 30, 2014 (Unaudited)
(Dollars in thousands)
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
Shares Issued
 
Amount
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Retained Deficit
 
Noncontrolling Interests
 
Total Equity
Balance at December 31, 2013
15,594,325

 
$

 
$
210,315

 
$
(737
)
 
$
(208,414
)
 
$
(6
)
 
$
1,158

Compensatory stock issuances, net of forfeitures
65,600

 

 

 

 

 

 

Distributions to owners of noncontrolling interests

 

 

 

 

 
(143
)
 
(143
)
Amortization of deferred stock-based compensation costs

 

 
1,076

 

 

 

 
1,076

Redemption and retirement of shares
(233,052
)
 

 
(52
)
 

 

 

 
(52
)
Other comprehensive loss

 

 

 
(353
)
 
(28,198
)
 
151

 
(28,400
)
Balance at September 30, 2014
15,426,873

 
$

 
$
211,339

 
$
(1,090
)
 
$
(236,612
)
 
$
2

 
$
(26,361
)


See accompanying notes.

4


Atlanticus Holdings Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
 
For the Nine Months Ended September 30,
 
2014
 
2013
Operating activities
 
 
 
Net loss
$
(28,047
)
 
$
(21,662
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation of rental merchandise
51,064

 
4,637

Depreciation, amortization and accretion, net
1,545

 
1,060

Losses upon charge off of loans and fees receivable recorded at fair value
11,646

 
22,480

Provision for losses on loans and fees receivable
22,726

 
20,633

Interest expense from accretion of discount on convertible senior notes
486

 
445

Income from accretion of discount associated with receivables purchases
(24,953
)
 
(21,721
)
Unrealized gain on loans and fees receivable and underlying notes payable held at fair value
(6,923
)
 
(15,251
)
Income from equity-method investments
(5,183
)
 
(7,344
)
Changes in assets and liabilities:
 

 
 

Decrease (increase) in uncollected fees on earning assets
715

 
(1,887
)
Increase in income tax liability
3,524

 
2,196

(Increase) decrease in deposits
(106
)
 
10,085

Decrease (increase) in prepaid expenses
602

 
(470
)
(Decrease) increase in accounts payable and accrued expenses
(11,807
)
 
4,760

Additions to rental merchandise
(34,479
)
 
(21,613
)
Other
574

 
3,467

Net cash used in operating activities
(18,616
)
 
(20,185
)
Investing activities
 

 
 

Increase in restricted cash
(4,011
)
 
(6,037
)
Investment in equity-method investees

 
(3,750
)
Proceeds from equity-method investees
8,807

 
12,339

Investments in earning assets
(160,942
)
 
(139,322
)
Proceeds from earning assets
185,381

 
181,302

Purchases and development of property, net of disposals
(3,602
)
 
(2,040
)
Net cash provided by investing activities
25,633

 
42,492

Financing activities
 

 
 

Noncontrolling interests (distributions) contributions, net
(143
)
 
26

Purchase and retirement of outstanding stock
(52
)
 
(1,163
)
Proceeds from borrowings
64,396

 
36,187

Repayment of borrowings
(83,564
)
 
(65,840
)
Net cash used in financing activities
(19,363
)
 
(30,790
)
Effect of exchange rate changes on cash
(340
)
 
402

Net decrease in unrestricted cash
(12,686
)
 
(8,081
)
Unrestricted cash and cash equivalents at beginning of period
50,873

 
67,915

Unrestricted cash and cash equivalents at end of period
$
38,187

 
$
59,834

Supplemental cash flow information
 

 
 

Cash paid for interest
$
20,159

 
$
19,176

Net cash income tax payments
$
71

 
$
154


5


Supplemental non-cash information
 

 
 

Issuance of stock options and restricted stock
$
931

 
$
522

Notes payable associated with capital leases
$
160

 
$
152


See accompanying notes.

6


Atlanticus Holdings Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2014 and 2013
 
1.
Description of Our Business
 
Our accompanying consolidated financial statements include the accounts of Atlanticus Holdings Corporation (the “Company”) and those entities we control. We are primarily focused on providing financial services. Through our subsidiaries, we offer an array of financial products and services to a market largely represented by credit risks that regulators classify as “sub-prime.” 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.

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 United States (“GAAP”), under which we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our consolidated financial statements, as well as the reported amounts of revenues and expenses during each reporting period. We base these estimates on information available to us as of the date of the financial statements. Actual results could differ materially from these estimates. Certain estimates, such as credit losses, payment rates, costs of funds, discount rates and the yields earned on credit card receivables, significantly affect the reported amount of credit card receivables that we report at fair value and our notes payable associated with structured financings, at fair value; these estimates likewise affect the changes in these amounts reflected within our fees and related income on earning assets line item on our consolidated statements of operations. Additionally, estimates of future credit losses have a significant effect on loans and fees receivable, net, as shown on our consolidated balance sheets, as well as on the provision for losses on loans and fees receivable within our consolidated statements of operations.
 
We have eliminated all significant intercompany balances and transactions for financial reporting purposes.

Loans and Fees Receivable
 
Our loans and fees receivable include:  (1) loans and fees receivable, net; (2) loans and fees receivable, at fair value; and (3) loans and fees receivable pledged as collateral under structured financings, at fair value.
 
Components of our loans and fees receivable, net (in millions) are as follows:
 
Balance at December 31, 2013
 
Additions
 
Subtractions
 
Balance at September 30, 2014
Loans and fees receivable, gross
$
134.7

 
$
211.8

 
$
(210.2
)
 
$
136.3

Deferred revenue
(13.3
)
 
(26.6
)
 
25.1

 
(14.8
)
Allowance for uncollectible loans and fees receivable
(24.2
)
 
(22.7
)
 
26.9

 
(20.0
)
Loans and fees receivable, net
$
97.2

 
$
162.5

 
$
(158.2
)
 
$
101.5

 
Balance at December 31, 2012
 
Additions
 
Subtractions
 
Balance at September 30, 2013
Loans and fees receivable, gross
$
89.1

 
$
178.7

 
$
(150.8
)
 
$
117.0

Deferred revenue
(8.3
)
 
(24.7
)
 
21.8

 
(11.2
)
Allowance for uncollectible loans and fees receivable
(11.2
)
 
(20.6
)
 
10.3

 
(21.5
)
Loans and fees receivable, net
$
69.6

 
$
133.4

 
$
(118.7
)
 
$
84.3

 

7


As of September 30, 2014 and September 30, 2013, the weighted average remaining accretion periods for the $14.8 million and $11.2 million, respectively, of deferred revenue reflected in the above tables were 11 months and 13 months, respectively.
A roll-forward (in millions) of our allowance for uncollectible loans and fees receivable by class of receivable is as follows: 

For the Three Months Ended September 30, 2014
 
Credit Cards
 
Auto Finance
 
Other Unsecured Lending Products
 
Total
Allowance for uncollectible loans and fees receivable:
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
(8.5
)
 
$
(1.4
)
 
$
(10.5
)
 
$
(20.4
)
Provision for loan losses
 
(1.2
)
 
(0.3
)
 
(6.6
)
 
(8.1
)
Charge offs
 
4.8

 
0.7

 
3.6

 
9.1

Recoveries
 
(0.1
)
 
(0.3
)
 
(0.2
)
 
(0.6
)
Balance at end of period
 
$
(5.0
)
 
$
(1.3
)
 
$
(13.7
)
 
$
(20.0
)

For the Nine Months Ended September 30, 2014
 
Credit Cards
 
Auto Finance
 
Other Unsecured Lending Products
 
Total
Allowance for uncollectible loans and fees receivable:
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
(11.6
)
 
$
(1.4
)
 
$
(11.2
)
 
$
(24.2
)
Provision for loan losses
 
(8.2
)
 
(0.2
)
 
(14.3
)
 
(22.7
)
Charge offs
 
15.1

 
1.2

 
12.3

 
28.6

Recoveries
 
(0.3
)
 
(0.9
)
 
(0.5
)
 
(1.7
)
Balance at end of period
 
$
(5.0
)
 
$
(1.3
)
 
$
(13.7
)
 
$
(20.0
)
Balance at end of period individually evaluated for impairment
 
$

 
$
(0.1
)
 
$
(0.3
)
 
$
(0.4
)
Balance at end of period collectively evaluated for impairment
 
$
(5.0
)
 
$
(1.2
)
 
$
(13.4
)
 
$
(19.6
)
Loans and fees receivable:
 
 

 
 

 
 

 
 

Loans and fees receivable, gross
 
$
9.6

 
$
68.1

 
$
58.6

 
$
136.3

Loans and fees receivable individually evaluated for impairment
 
$

 
$
0.2

 
$
0.3

 
$
0.5

Loans and fees receivable collectively evaluated for impairment
 
$
9.6

 
$
67.9

 
$
58.3

 
$
135.8



8



For the Three Months Ended September 30, 2013
 
Credit Cards
 
Auto Finance
 
Other Unsecured Lending Products
 
Total
Allowance for uncollectible loans and fees receivable:
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
(6.3
)
 
$
(1.2
)
 
$
(6.1
)
 
$
(13.6
)
Provision for loan losses
 
(5.7
)
 
(0.5
)
 
(4.5
)
 
(10.7
)
Charge offs
 
1.5

 
0.6

 
1.0

 
3.1

Recoveries
 

 
(0.3
)
 

 
(0.3
)
Balance at end of period
 
$
(10.5
)
 
$
(1.4
)
 
$
(9.6
)
 
$
(21.5
)

For the Nine Months Ended September 30, 2013
 
Credit Cards
 
Auto Finance
 
Other Unsecured Lending Products
 
Total
Allowance for uncollectible loans and fees receivable:
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
(4.6
)
 
$
(3.1
)
 
$
(3.5
)
 
$
(11.2
)
Provision for loan losses
 
(11.6
)
 
0.2

 
(9.2
)
 
(20.6
)
Charge offs
 
5.8

 
2.9

 
3.2

 
11.9

Recoveries
 
(0.1
)
 
(1.4
)
 
(0.1
)
 
(1.6
)
Balance at end of period
 
$
(10.5
)
 
$
(1.4
)
 
$
(9.6
)
 
$
(21.5
)
Balance at end of period individually evaluated for impairment
 
$

 
$

 
$

 
$

Balance at end of period collectively evaluated for impairment
 
$
(10.5
)
 
$
(1.4
)
 
$
(9.6
)
 
$
(21.5
)
Loans and fees receivable:
 
 

 
 

 
 

 
 

Loans and fees receivable, gross
 
$
19.6

 
$
59.2

 
$
38.2

 
$
117.0

Loans and fees receivable individually evaluated for impairment
 
$

 
$

 
$

 
$

Loans and fees receivable collectively evaluated for impairment
 
$
19.6

 
$
59.2

 
$
38.2

 
$
117.0


    

9


The components (in millions) of loans and fees receivable, net as of the date of each of our consolidated balance sheets are as follows:
 
September 30, 2014
 
December 31, 2013
Current loans receivable
$
109.2

 
$
103.3

Current fees receivable
3.9

 
6.0

Delinquent loans and fees receivable
23.2

 
25.4

Loans and fees receivable, gross
$
136.3

 
$
134.7

 
An aging of our delinquent loans and fees receivable, gross (in millions) by class of receivable as of September 30, 2014 and December 31, 2013 is as follows:
Balance at September 30, 2014
 
Credit Cards
 
Auto Finance
 
Other Unsecured Lending Products
 
Total
30-59 days past due
 
$
0.6

 
$
5.8

 
$
2.7

 
$
9.1

60-89 days past due
 
0.7

 
2.0

 
2.3

 
5.0

90 or more days past due
 
2.9

 
1.8

 
4.4

 
9.1

Delinquent loans and fees receivable, gross
 
4.2

 
9.6

 
9.4

 
23.2

Current loans and fees receivable, gross
 
5.4

 
58.5

 
49.2

 
113.1

Total loans and fees receivable, gross
 
$
9.6

 
$
68.1

 
$
58.6

 
$
136.3

Balance of loans 90 or more days past due and still accruing interest and fees
 
$

 
$
1.8

 
$
4.4

 
$
6.2

 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
 
Credit Cards
 
Auto Finance
 
Other Unsecured Lending Products
 
Total
30-59 days past due
 
$
1.6

 
$
5.6

 
$
2.5

 
$
9.7

60-89 days past due
 
1.9

 
1.7

 
2.2

 
5.8

90 or more days past due
 
5.6

 
1.1

 
3.2

 
9.9

Delinquent loans and fees receivable, gross
 
9.1

 
8.4

 
7.9

 
25.4

Current loans and fees receivable, gross
 
12.8

 
55.1

 
41.4

 
109.3

Total loans and fees receivable, gross
 
$
21.9

 
$
63.5

 
$
49.3

 
$
134.7

Balance of loans 90 or more days past due and still accruing interest and fees
 
$

 
$
0.1

 
$
3.2

 
$
3.3


Income taxes

We experienced negative effective income tax benefit rates of 19.2% and 14.7% for the three and nine months ended September 30, 2014, respectively versus 19.4% and 12.2% for the three and nine months ended September 30, 2013, respectively.  Our negative effective income tax benefit rates resulted principally from (1) the effects of legislative changes enacted during 2014 in certain state filing jurisdictions, (2) interest accruals on our liabilities for uncertain tax positions in both the three and nine months ended September 30, 2014 and 2013, and (3) changes in valuation allowances against income statement-oriented federal, foreign and state deferred tax assets in both the three and nine months ended September 30, 2014 and 2013.
 
We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.  We recognized $0.6 million and $1.9 million of potential interest and penalties associated with these uncertain tax positions during the three and nine months ended September 30, 2014, respectively, compared to $1.5 million and $2.4 million during the three and nine months ended September 30, 2013, respectively. To the extent interest and penalties are not assessed as a result of resolution of an uncertain tax position, amounts accrued are reduced and reflected as a reduction of income tax expense. We recognized no such reductions in either of the three and nine months ended September 30, 2014 and 2013.


10


Currently, we are awaiting Joint Committee on Taxation review and approval of a tentative settlement we have reached with the Appeals Division of the Internal Revenue Service. The settlement is with respect to uncertain tax positions reflected within net operating losses that we incurred in 2007 and 2008 and that we carried back to obtain tentative refunds of federal taxes paid in earlier years dating back to 2003. If approved in its current form, the tentative settlement will result in a material release of liabilities that are reflected on our consolidated balance sheet. Nevertheless, given prevailing uncertainties and the unpredictability of the Joint Committee on Taxation review process, we have not recorded the potential impact of this release, although we believe that upon effective settlement, it could be material to our results of operations and financial position.
Fees and Related Income on Earning Assets

The components (in thousands) of our fees and related income on earning assets are as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Fees on credit products
$
4,223

 
$
7,165

 
$
16,017

 
$
16,466

Changes in fair value of loans and fees receivable recorded at fair value
6,217

 
9,296

 
12,884

 
34,361

Changes in fair value of notes payable associated with structured financings recorded at fair value
(3,653
)
 
(3,535
)
 
(5,961
)
 
(19,110
)
Rental revenue
11,400

 
5,446

 
48,043

 
5,446

Other
2,482

 
10

 
4,767

 
(1,756
)
Total fees and related income on earning assets
$
20,669

 
$
18,382

 
$
75,750

 
$
35,407


The above changes in fair value of loans and fees receivable recorded at fair value category exclude the impact of charge offs associated with these receivables which are separately stated on our consolidated statements of operations.  See Note 6, “Fair Values of Assets and Liabilities,” for further discussion of these receivables and their effects on our consolidated statements of operations.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 establishes a principles-based model under which revenue from a contract is allocated to the distinct performance obligations within the contract and recognized in income as each performance obligation is satisfied. Additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract is also required. ASU 2014-09 is effective for annual and interim reporting periods beginning after December 15, 2016 and early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. The Company has not yet determined the potential effects of the adoption of ASU 2014-09 on its consolidated financial statements.

Subsequent Events
 
We evaluate subsequent events that occur after our consolidated balance sheet date but before our consolidated financial statements are issued. There are two types of subsequent events:  (1) recognized, or those that provide additional evidence with respect to conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements; and (2) nonrecognized, or those that provide evidence with respect to conditions that did not exist at the date of the balance sheet but arose subsequent to that date.  We have evaluated subsequent events occurring after September 30, 2014, and based on our evaluation, other than as disclosed below, we did not identify any recognized or nonrecognized subsequent events that would have required further adjustments to our consolidated financial statements.

In November 2014, we agreed to purchase $44.6 million aggregate principal amount of 5.875% convertible senior notes due 2035 (“5.875% convertible senior notes”) for $18.5 million plus accrued interest from unrelated third parties.  Our purchase of the notes is subject to obtaining financing and other closing conditions.  Upon acquisition, the notes will be retired.

3.
Segment Reporting

11


 
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. We renamed our Credit Cards and Other Investments segment as the Credit and Other Investments segment to encompass ancillary investments and product offerings that are largely start-up in nature and do not qualify for separate segment reporting.  All prior period data have been reclassified to this new current period presentation.

As of both September 30, 2014 and December 31, 2013, we did not have a material amount of long-lived assets located outside of the U.S., and only a negligible portion of our 2014 and 2013 revenues were generated outside of the U.S.


Summary operating segment information (in thousands) is as follows:
Three months ended September 30, 2014
 
Credit and Other Investments
 
Auto Finance
 
Total
Interest income:
 
 
 
 
 
 
Consumer loans, including past due fees
 
$
12,209

 
$
6,272

 
$
18,481

Other
 
51

 

 
51

Total interest income
 
12,260

 
6,272

 
18,532

Interest expense
 
(5,773
)
 
(333
)
 
(6,106
)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
 
$
6,487

 
$
5,939

 
$
12,426

Fees and related income on earning assets
 
$
20,587

 
$
82

 
$
20,669

Servicing income
 
$
909

 
$
149

 
$
1,058

Depreciation of rental merchandise
 
(10,318
)
 

 
(10,318
)
Equity in income of equity-method investees
 
$
1,936

 
$

 
$
1,936

(Loss) income before income taxes
 
$
(6,231
)
 
$
1,325

 
$
(4,906
)
Income tax expense
 
$
(465
)
 
$
(475
)
 
$
(940
)
Nine months ended September 30, 2014
 
Credit and Other Investments
 
Auto Finance
 
Total
Interest income:
 
 
 
 
 
 
Consumer loans, including past due fees
 
$
38,097

 
$
17,728

 
$
55,825

Other
 
325

 

 
325

Total interest income
 
38,422

 
17,728

 
56,150

Interest expense
 
(17,417
)
 
(1,034
)
 
(18,451
)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
 
$
21,005

 
$
16,694

 
$
37,699

Fees and related income on earning assets
 
$
75,544

 
$
206

 
$
75,750

Servicing income
 
$
3,039

 
$
493

 
$
3,532

Depreciation of rental merchandise
 
(51,064
)
 

 
(51,064
)
Equity in income of equity-method investees
 
$
5,183

 
$

 
$
5,183

(Loss) income before income taxes
 
$
(27,955
)
 
$
3,503

 
$
(24,452
)
Income tax expense
 
$
(2,436
)
 
$
(1,159
)
 
$
(3,595
)
Total assets
 
$
239,240

 
$
63,155

 
$
302,395


12


Three months ended September 30, 2013
 
Credit and Other Investments
 
Auto Finance
 
Total
Interest income:
 
 
 
 
 
 
Consumer loans, including past due fees
 
$
12,223

 
$
5,752

 
$
17,975

Other
 
33

 

 
33

Total interest income
 
12,256

 
5,752

 
18,008

Interest expense
 
(5,640
)
 
(359
)
 
(5,999
)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
 
$
6,616

 
$
5,393

 
$
12,009

Fees and related income on earning assets
 
$
18,323

 
$
59

 
$
18,382

Servicing income
 
$
1,476

 
$
237

 
$
1,713

Depreciation of rental merchandise
 
4,637

 

 
4,637

Equity in income of equity-method investees
 
$
2,080

 
$

 
$
2,080

(Loss) income before income taxes
 
$
(8,194
)
 
$
752

 
$
(7,442
)
Income tax expense
 
$
(1,157
)
 
$
(286
)
 
$
(1,443
)


Nine months ended September 30, 2013
 
Credit and Other Investments
 
Auto Finance
 
Total
Interest income:
 
 
 
 
 
 
Consumer loans, including past due fees
 
$
37,133

 
$
17,347

 
$
54,480

Other
 
111

 
117

 
228

Total interest income
 
37,244

 
17,464

 
54,708

Interest expense
 
(16,582
)
 
(1,055
)
 
(17,637
)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
 
$
20,662

 
$
16,409

 
$
37,071

Fees and related income on earning assets
 
$
37,644

 
$
(2,237
)
 
$
35,407

Servicing income
 
$
6,280

 
$
638

 
$
6,918

Depreciation of rental merchandise
 
4,637

 

 
4,637

Equity in income of equity-method investees
 
$
7,344

 
$

 
$
7,344

(Loss) income before income taxes
 
$
(20,959
)
 
$
1,648

 
$
(19,311
)
Income tax expense
 
$
(1,336
)
 
$
(1,015
)
 
$
(2,351
)
Total assets
 
$
299,199

 
$
57,741

 
$
356,940


4.
Shareholders' Equity
 
Retired Shares
 
During the three and nine months ended September 30, 2014, we repurchased and contemporaneously retired 7,302 and 19,629 shares of our common stock at an aggregate cost of $20,957 and $51,837, respectively, pursuant to the return of stock by holders of equity incentive awards to pay tax withholding obligations. During the three and nine months ended September 30, 2013, we repurchased and contemporaneously retired 78,455 and 316,018 shares of our common stock at an aggregate cost of $0.3 million and $1.2 million, respectively, pursuant to open market purchases and the return of stock by holders of equity incentive awards.

We had 1,459,233 loaned shares outstanding at September 30, 2014 (1,672,656 shares as of December 31, 2013), which were originally lent in connection with our November 2005 issuance of convertible senior notes. Lent shares are retired as they are returned to us.



13


5.
Investments in Equity-Method Investees
 
Our equity-method investments outstanding at September 30, 2014 consist of our 66.7% interest in a joint venture formed to purchase a credit card receivable portfolio and our 50.0% interest in a joint venture that was formed to purchase the outstanding notes issued out of the structured financing trust underlying our non-U.S. acquired credit card receivables (the “Non-U.S. Acquired Portfolio”).

In the following tables, we summarize (in thousands) combined balance sheet and results of operations data for our equity-method investees:
 
As of
 
September 30, 2014
 
December 31, 2013
Loans and fees receivable pledged as collateral under structured financings, at fair value
$
25,467

 
$
35,241

Investments in non-marketable debt securities, at fair value
$
28,005

 
$
36,158

Total assets
$
55,806

 
$
74,145

Notes payable associated with structured financings, at fair value
$
1,461

 
$
12,125

Total liabilities
$
1,551

 
$
12,251

Members’ capital
$
54,255

 
$
61,894

 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Net interest income, fees and related income on earning assets
$
3,544

 
$
3,026

 
$
8,853

 
$
13,600

Total other operating income
$
17

 
$
2,057

 
$
110

 
$
2,571

Net income
$
3,267

 
$
4,648

 
$
7,943

 
$
14,693

Net income attributable to our equity investment in investee
$
1,936

 
$
2,080

 
$
5,183

 
$
7,344

 
In June 2013, we increased, from 50.0% to 66.7% our overall ownership in the above mentioned joint venture formed in 2004 to purchase a credit card receivables portfolio. We continue to account for this investment using the equity method of accounting due to specific voting and veto rights held by each investor, which do not allow us to control this investee. The additional June 2013 investment in this investee was made at a discount to the fair value of the investee's assets, thereby resulting in a gain of approximately $0.9 million for us in the three months ended June 30, 2013 based on the investee's reporting of substantially all of its assets at their fair values under its fair value option election.

The above tables include our aforementioned 50.0% interest in the joint venture that purchased in March 2011 the outstanding notes issued out of our Non-U.S. Acquired Portfolio structured financing trust.  Separate financial data for this entity are as follows:
 
As of
 
September 30, 2014
 
December 31, 2013
Investments in non-marketable debt securities, at fair value
$
28,005

 
$
36,158

Total assets
$
28,606

 
$
36,770

Total liabilities
$

 
$

Members’ capital
$
28,606

 
$
36,770



14


 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Net interest income, fees and related income on earning assets
$
2,515

 
$
(407
)
 
$
4,213

 
$
5,859

Net (loss) income
$
2,503

 
$
(418
)
 
$
4,177

 
$
5,825

Net (loss) income attributable to our equity investment in investee
$
1,252

 
$
(210
)
 
$
2,089

 
$
2,912


As noted in Note 7, “Notes Payable,” notes payable with a fair value of $28.0 million correspond with the $28.0 million investment in non-marketable debt securities, at fair value held by our equity method investee as noted in the above table.

6.
Fair Values of Assets and Liabilities
 
Valuations and Techniques for Assets
 
Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The table below summarizes (in thousands) by fair value hierarchy the September 30, 2014 and December 31, 2013 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, 2014 (1)
 
Quoted Prices in Active
Markets for Identical Assets (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Significant
Unobservable Inputs (Level 3)
 
Carrying Amount of Assets
Loans and fees receivable, net for which it is practicable to estimate fair value
 
$

 
$

 
$
110,692

 
$
96,541

Loans and fees receivable, net for which it is not practicable to estimate fair value (2)
 
$

 
$

 
$

 
$
4,945

Loans and fees receivable, at fair value
 
$

 
$

 
$
9,007

 
$
9,007

Loans and fees receivable pledged as collateral, at fair value
 
$

 
$

 
$
64,971

 
$
64,971


Assets – As of December 31, 2013 (1)
 
Quoted Prices in Active
Markets for Identical Assets (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Significant
Unobservable Inputs (Level 3)
 
Carrying Amount of Assets
Loans and fees receivable, net for which it is practicable to estimate fair value
 
$

 
$

 
$
94,579

 
$
92,924

Loans and fees receivable, net for which it is not practicable to estimate fair value (2)
 
$

 
$

 
$

 
$
4,284

Loans and fees receivable, at fair value
 
$

 
$

 
$
12,080

 
$
12,080

Loans and fees receivable pledged as collateral, at fair value
 
$

 
$

 
$
88,132

 
$
88,132

  
(1)
For cash, deposits and other short-term investments (including our investments in rental merchandise), the carrying amount is a reasonable estimate of fair value.
(2)
We do not disclose fair value for this portion of our loans and fees receivable, net because it is not practicable to do so.  These loans and fees receivable consist of a variety of receivables that are largely start-up in nature and for which we have neither sufficient history nor a comparable peer group from which we can calculate fair value.


15


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 and fees receivable included in the above table, 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, 2014 and September 30, 2013:
 
Loans and Fees
Receivable, at
Fair Value
 
Loans and Fees
Receivable Pledged as
Collateral under
Structured
Financings, at Fair
Value
 
Total
Balance at January 1, 2014
$
12,080

 
$
88,132

 
$
100,212

Total gains—realized/unrealized:


 


 


Net revaluations of loans and fees receivable pledged as collateral under structured financings, at fair value

 
9,883

 
9,883

Net revaluations of loans and fees receivable, at fair value
3,001

 

 
3,001

Settlements, net
(6,074
)
 
(32,798
)
 
(38,872
)
Impact of foreign currency translation

 
(246
)
 
(246
)
Net transfers in and/or out of Level 3

 

 

Balance at September 30, 2014
$
9,007

 
$
64,971

 
$
73,978

Balance at January 1, 2013
$
20,378

 
$
133,595

 
$
153,973

Total gains—realized/unrealized:
 

 
 

 
 

Net revaluations of loans and fees receivable pledged as collateral under structured financings, at fair value

 
26,967

 
26,967

Net revaluations of loans and fees receivable, at fair value
7,394

 

 
7,394

Settlements, net
(13,369
)
 
(62,621
)
 
(75,990
)
Impact of foreign currency translation

 
(558
)
 
(558
)
Net transfers in and/or out of Level 3

 

 

Balance at September 30, 2013
$
14,403

 
$
97,383

 
$
111,786

  
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.
 
Net Revaluation of Loans and Fees Receivable. We record the net revaluation of loans and fees receivable (including those pledged as collateral) in the fees and related income on earning assets category in our consolidated statements of operations, specifically as changes in fair value of loans and fees receivable recorded at fair value.

16



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, 2014 and December 31, 2013:
Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurements
 
Fair Value at September 30, 2014
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)(1)
Loans and fees receivable, at fair value
 
$
9,007

 
Discounted cash flows
 
Gross yield
 
24.5
%
 
 
 

 
 
 
Principal payment rate
 
3.6
%
 
 
 

 
 
 
Expected credit loss rate
 
12.5
%
 
 
 

 
 
 
Servicing rate
 
11.4
%
 
 
 

 
 
 
Discount rate
 
15.9
%
Loans and fees receivable pledged as collateral under structured financings, at fair value
 
$
64,971

 
Discounted cash flows
 
Gross yield
 
16.0% to 27.6% (22.6%)

 
 
 

 
 
 
Principal payment rate
 
1.5% to 3.0% (2.4%)

 
 
 

 
 
 
Expected credit loss rate
 
6.9% to 14.0% (11.0%)

 
 
 

 
 
 
Servicing rate
 
8.8% to 12.3% (10.3%)

 
 
 

 
 
 
Discount rate
 
15.9% to 16.2% (16.0%)


Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurements
 
Fair Value at December 31, 2013
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)(1)
Loans and fees receivable, at fair value
 
$
12,080

 
Discounted cash flows
 
Gross yield
 
23.7
%
 
 
 

 
 
 
Principal payment rate
 
3.5
%
 
 
 

 
 
 
Expected credit loss rate
 
14.6
%
 
 
 

 
 
 
Servicing rate
 
14.0
%
 
 
 

 
 
 
Discount rate
 
15.9
%
Loans and fees receivable pledged as collateral under structured financings, at fair value
 
$
88,132

 
Discounted cash flows
 
Gross yield
 
17.0% to 27.5% (23.4%)

 
 
 

 
 
 
Principal payment rate
 
1.7% to 3.2% (2.6%)

 
 
 

 
 
 
Expected credit loss rate
 
9.9% to 18.0% (14.9%)

 
 
 

 
 
 
Servicing rate
 
9.4% to 11.8% (10.3%)

 
 
 

 
 
 
Discount rate
 
15.9% to 16.2% (16.0%)


 
(1) Our loans and fees receivable, at fair value consist of a single portfolio with one set of assumptions.  As such, no range is given.


17


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, 2014 and December 31, 2013 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, 2014
 
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
 
 
 
 
 
 
 
 
CAR revolving credit facility
 
$

 
$

 
$
27,500

 
$
27,500

ACC amortizing debt facility
 
$

 
$

 
$
259

 
$
259

Amortizing debt facilities
 
$

 
$

 
$
34,156

 
$
34,156

Revolving credit facility
 
$

 
$

 
$
4,000

 
$
4,000

U.K. credit card accounts revolving credit facility
 
$

 
$

 
$
5,229

 
$
5,229

5.875% convertible senior notes
 
$

 
$
57,178

 
$

 
$
95,915

Liabilities carried at fair value
 
 

 
 

 
 

 
 

Interest rate swap underlying CAR facility
 
$

 
$

 
$

 
$

Economic sharing arrangement liability
 
$

 
$

 
$
152

 
$
152

Notes payable associated with structured financings, at fair value
 
$

 
$

 
$
69,657

 
$
69,657



Liabilities - As of December 31, 2013
 
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
 
 

 
 

 
 

 
 

CAR revolving credit facility
 
$

 
$

 
$
22,000

 
$
22,000

ACC amortizing debt facility
 
$

 
$

 
$
928

 
$
928

Amortizing debt facilities
 
$

 
$

 
$
21,411

 
$
21,411

Revolving credit facility
 
$

 
$

 
$
4,000

 
$
4,000

U.K. credit card accounts revolving credit facility
 
$

 
$

 
$
8,245

 
$
8,245

5.875% convertible senior notes
 
$

 
$
57,007

 
$

 
$
95,484

Liabilities carried at fair value
 
 

 
 

 
 

 
 

Interest rate swap underlying CAR facility
 
$