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EX-31.1 - CERT CEO - Atlanticus Holdings Corpatlc-exhibit31163015.htm
EX-32.1 - CERT CEO CFO - Atlanticus Holdings Corpatlc-exhibit32163015.htm
EX-31.2 - CERT CFO - Atlanticus Holdings Corpatlc-exhibit31263015.htm

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
  
FORM 10-Q
 
For the quarterly period ended June 30, 2015
 
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 August 7, 2015, 13,911,011 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 Income
 
 
Consolidated Statements 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
 


i


PART I—FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
 
Atlanticus Holdings Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands)
 
June 30,
2015
 
December 31,
2014
Assets
 
 
 
Unrestricted cash and cash equivalents
$
46,328

 
$
39,925

Restricted cash and cash equivalents
16,859

 
22,741

Loans and fees receivable:
 

 
 

Loans and fees receivable, net (of $18,198 and $15,730 in deferred revenue and $16,295 and $19,957 in allowances for uncollectible loans and fees receivable at June 30, 2015 and December 31, 2014, respectively)
120,085

 
105,897

Loans and fees receivable, at fair value
11,512

 
18,255

Loans and fees receivable pledged as collateral under structured financings, at fair value
27,464

 
34,905

Rental merchandise, net of depreciation
12,006

 
14,177

Property at cost, net of depreciation
6,472

 
7,036

Investments in equity-method investees
12,901

 
15,833

Deposits
981

 
1,589

Prepaid expenses and other assets
17,324

 
7,997

Total assets
$
271,932

 
$
268,355

Liabilities
 

 
 

Accounts payable and accrued expenses
$
40,401

 
$
39,968

Notes payable, at face value
84,514

 
78,749

Notes payable to related parties
20,000

 
20,000

Notes payable associated with structured financings, at fair value
28,685

 
36,511

Convertible senior notes
64,537

 
64,752

Income tax liability
21,594

 
20,933

Total liabilities
259,731

 
260,913

Commitments and contingencies (Note 9)


 


Equity
 

 
 

Common stock, no par value, 150,000,000 shares authorized: 15,370,667 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at June 30, 2015; and 15,308,971 shares issued and outstanding  (including 1,459,233 loaned shares to be returned) at December 31, 2014

 

Additional paid-in capital
210,762

 
210,519

Accumulated other comprehensive loss
(685
)
 
(1,841
)
Retained deficit
(197,873
)
 
(201,237
)
Total shareholders’ equity
12,204

 
7,441

Noncontrolling interests
(3
)
 
1

Total equity
12,201

 
7,442

Total liabilities and equity
$
271,932

 
$
268,355


 
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 June 30,
 
For the Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Interest income:
 
 
 
 
 
 
 
Consumer loans, including past due fees
$
16,869

 
$
17,387

 
$
34,312

 
$
37,344

Other
10

 
37

 
42

 
274

Total interest income
16,879

 
17,424

 
34,354

 
37,618

Interest expense
(4,529
)
 
(6,158
)
 
(9,086
)
 
(12,345
)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
12,350

 
11,266

 
25,268

 
25,273

Fees and related income on earning assets
12,751

 
22,196

 
25,970

 
55,081

Net recovery of (losses upon) charge off of loans and fees receivable recorded at fair value, net of recoveries
9,991

 
50

 
20,363

 
(1,835
)
Provision for losses on loans and fees receivable recorded at net realizable value
(5,961
)
 
(6,731
)
 
(9,129
)
 
(14,606
)
Net interest income, fees and related income on earning assets
29,131

 
26,781

 
62,472

 
63,913

Other operating income:
 

 
 

 
 
 
 
Servicing income
1,390

 
1,234

 
2,950

 
2,474

Other income
92

 
254

 
359

 
1,321

Equity in income of equity-method investees
707

 
841

 
1,782

 
3,247

Total other operating income
2,189

 
2,329

 
5,091

 
7,042

Other operating expense:
 

 
 

 
 
 
 
Salaries and benefits
4,322

 
4,664

 
8,442

 
9,762

Card and loan servicing
9,608

 
12,956

 
19,879

 
26,734

Marketing and solicitation
332

 
631

 
818

 
1,393

Depreciation, primarily related to rental merchandise
9,961

 
16,573

 
22,807

 
42,281

Other
4,261

 
4,791

 
11,433

 
10,331

Total other operating expense
28,484

 
39,615

 
63,379

 
90,501

Income (loss) before income taxes
2,836

 
(10,505
)
 
4,184

 
(19,546
)
Income tax expense
(1,440
)
 
(673
)
 
(822
)
 
(2,655
)
Net income (loss)
1,396

 
(11,178
)
 
3,362

 
(22,201
)
Net loss (income) attributable to noncontrolling interests
1

 

 
2

 
(151
)
Net income (loss) attributable to controlling interests
$
1,397

 
$
(11,178
)
 
$
3,364

 
$
(22,352
)
Net income (loss) attributable to controlling interests per common share—basic
$
0.10

 
$
(0.80
)
 
$
0.24

 
$
(1.59
)
Net income (loss) attributable to controlling interests per common share—diluted
$
0.10

 
$
(0.80
)
 
$
0.24

 
$
(1.59
)

 
See accompanying notes.

2


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

 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net income (loss)
$
1,396

 
$
(11,178
)
 
$
3,362

 
$
(22,201
)
Other comprehensive income (loss):
 

 
 

 
 
 
 
Foreign currency translation adjustment
583

 
386

 
140

 
447

Reclassifications of foreign currency translation adjustment to consolidated statements of operations

 

 
1,535

 

Income tax (expense) benefit related to other comprehensive income (loss)
(200
)
 
(11
)
 
(519
)
 
23

Comprehensive income (loss)
1,779

 
(10,803
)
 
4,518

 
(21,731
)
Comprehensive loss (income) attributable to noncontrolling interests
1

 

 
2

 
(151
)
Comprehensive income (loss) attributable to controlling interests
$
1,780

 
$
(10,803
)
 
$
4,520

 
$
(21,882
)

 

 

 

 

 

 

 

 

 

 

 

 

 
See accompanying notes.

3


Atlanticus Holdings Corporation and Subsidiaries
Consolidated Statements of Equity
For the Six Months Ended June 30, 2015 (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, 2014
15,308,971

 
$

 
$
210,519

 
$
(1,841
)
 
$
(201,237
)
 
$
1

 
$
7,442

Stock options exercises and proceeds related thereto
1,667

 

 
4

 

 

 

 
4

Compensatory stock issuances, net of forfeitures
106,334

 

 

 

 

 

 

Distributions to owners of noncontrolling interests

 

 

 

 

 
(2
)
 
(2
)
Amortization of deferred stock-based compensation costs

 

 
437

 

 

 

 
437

Redemption and retirement of shares
(46,305
)
 

 
(123
)
 

 

 

 
(123
)
Tax effects of stock-based compensation plans

 

 
(75
)
 

 

 

 
(75
)
Other comprehensive income

 

 

 
1,156

 
3,364

 
(2
)
 
4,518

Balance at June 30, 2015
15,370,667

 
$

 
$
210,762

 
$
(685
)
 
$
(197,873
)
 
$
(3
)
 
$
12,201



See accompanying notes.

4


Atlanticus Holdings Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
 
For the Six Months Ended June 30,
 
2015
 
2014
Operating activities
 
 
 
Net income (loss)
$
3,362

 
$
(22,201
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 

 
 

Depreciation of rental merchandise
21,623

 
40,746

Depreciation, amortization and accretion, net
1,056

 
643

Losses upon charge off of loans and fees receivable recorded at fair value
3,050

 
8,719

Provision for losses on loans and fees receivable
9,129

 
14,606

Interest expense from accretion of discount on convertible senior notes
235

 
321

Income from accretion of discount associated with receivables purchases
(18,914
)
 
(16,438
)
Unrealized gain on loans and fees receivable and underlying notes payable held at fair value
(2,430
)
 
(4,359
)
Income from equity-method investments
(1,782
)
 
(3,247
)
Changes in assets and liabilities:
 

 
 

(Increase) decrease in uncollected fees on earning assets
(394
)
 
121

Increase in income tax liability
90

 
2,589

Decrease (increase) in deposits
608

 
(494
)
Increase (decrease) in accounts payable and accrued expenses
515

 
(11,502
)
Additions to rental merchandise
(19,451
)
 
(22,975
)
Other
(6,904
)
 
(1,096
)
Net cash used in operating activities
(10,207
)
 
(14,567
)
Investing activities
 

 
 

Decrease (increase) in restricted cash
5,889

 
(207
)
Proceeds from equity-method investees
4,714

 
6,332

Investments in earning assets
(127,418
)
 
(100,915
)
Proceeds from earning assets
137,397

 
122,617

Purchases and development of property, net of disposals
(616
)
 
(3,183
)
Net cash provided by investing activities
19,966

 
24,644

Financing activities
 

 
 

Noncontrolling interests distributions, net
(2
)
 
(145
)
Proceeds from exercise of stock options
4



Purchase and retirement of outstanding stock
(123
)
 
(31
)
Proceeds from borrowings
88,802

 
28,322

Repayment of borrowings
(91,960
)
 
(56,445
)
Net cash used in financing activities
(3,279
)
 
(28,299
)
Effect of exchange rate changes on cash
(77
)
 
270

Net decrease (increase) in unrestricted cash
6,403

 
(17,952
)
Unrestricted cash and cash equivalents at beginning of period
39,925

 
50,873

Unrestricted cash and cash equivalents at end of period
$
46,328

 
$
32,921

Supplemental cash flow information
 

 
 

Cash paid for interest
$
8,941

 
$
18,602

Net cash income tax payments
$
737

 
$
66

Supplemental non-cash information
 

 
 

Issuance of stock options and restricted stock
$
281

 
$
931

Notes payable associated with capital leases
$

 
$
159


See accompanying notes.

5


Atlanticus Holdings Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2015 and 2014
 
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, 2014
 
Additions
 
Subtractions
 
Balance at June 30, 2015
Loans and fees receivable, gross
$
141.6

 
$
159.2

 
$
(146.2
)
 
$
154.6

Deferred revenue
(15.7
)
 
(21.4
)
 
18.9

 
(18.2
)
Allowance for uncollectible loans and fees receivable
(20.0
)
 
(9.1
)
 
12.8

 
(16.3
)
Loans and fees receivable, net
$
105.9

 
$
128.7

 
$
(114.5
)
 
$
120.1

 
 
Balance at December 31, 2013
 
Additions
 
Subtractions
 
Balance at June 30, 2014
Loans and fees receivable, gross
$
134.7

 
$
134.9

 
$
(140.0
)
 
$
129.6

Deferred revenue
(13.3
)
 
(17.0
)
 
16.5

 
(13.8
)
Allowance for uncollectible loans and fees receivable
(24.2
)
 
(14.6
)
 
18.4

 
(20.4
)
Loans and fees receivable, net
$
97.2

 
$
103.3

 
$
(105.1
)
 
$
95.4



6



As of June 30, 2015 and June 30, 2014, the weighted average remaining accretion periods for the $18.2 million and $13.8 million, respectively, of deferred revenue reflected in the above tables were 10 months and 11 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 June 30, 2015

Credit Cards

Auto Finance

Other Unsecured Lending Products

Total
Allowance for uncollectible loans and fees receivable:

 

 

 

 
Balance at beginning of period

$
(1.9
)

$
(1.2
)

$
(12.5
)

$
(15.6
)
Provision for loan losses

(0.4
)

(0.4
)

(5.2
)

(6.0
)
Charge offs

0.9


0.4


4.4


5.7

Recoveries

(0.1
)

(0.1
)

(0.2
)

(0.4
)
Balance at end of period

$
(1.5
)

$
(1.3
)

$
(13.5
)

$
(16.3
)









For the Six Months Ended June 30, 2015

Credit Cards

Auto Finance

Other Unsecured Lending Products

Total
Allowance for uncollectible loans and fees receivable:

 

 

 

 
Balance at beginning of period

$
(2.7
)

$
(1.2
)

$
(16.1
)

$
(20.0
)
Provision for loan losses

(0.9
)

(0.6
)

(7.6
)

(9.1
)
Charge offs

2.3


0.9


10.9


14.1

Recoveries

(0.2
)

(0.4
)

(0.7
)

(1.3
)
Balance at end of period

$
(1.5
)

$
(1.3
)

$
(13.5
)

$
(16.3
)
As of June 30, 2015
 
Credit Cards
 
Auto Finance
 
Other Unsecured Lending Products
 
Total
Allowance for uncollectible loans and fees receivable:
 
 
 
 
 
 
 
 
Balance at end of period individually evaluated for impairment
 
$

 
$
(0.1
)
 
$
(1.1
)
 
$
(1.2
)
Balance at end of period collectively evaluated for impairment
 
$
(1.5
)
 
$
(1.2
)
 
$
(12.4
)
 
$
(15.1
)
Loans and fees receivable:
 
 

 
 

 
 

 
 

Loans and fees receivable, gross
 
$
4.1

 
$
78.3

 
$
72.2

 
$
154.6

Loans and fees receivable individually evaluated for impairment
 
$

 
$
0.1

 
$
2.9

 
$
3.0

Loans and fees receivable collectively evaluated for impairment
 
$
4.1

 
$
78.2

 
$
69.3

 
$
151.6



7


For the Three Months Ended June 30, 2014

Credit Cards

Auto Finance

Other Unsecured Lending Products

Total
Allowance for uncollectible loans and fees receivable:

 

 

 

 
Balance at beginning of period

$
(10.9
)

$
(1.4
)

$
(10.8
)

$
(23.1
)
Provision for loan losses

(2.8
)

(0.1
)

(3.8
)

(6.7
)
Charge offs

5.3


0.4


4.2


9.9

Recoveries

(0.1
)

(0.3
)

(0.1
)

(0.5
)
Balance at end of period

$
(8.5
)

$
(1.4
)

$
(10.5
)

$
(20.4
)









For the Six Months Ended June 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

(7.0
)

0.1


(7.7
)

(14.6
)
Charge offs

10.3


0.5


8.7


19.5

Recoveries

(0.2
)

(0.6
)

(0.3
)

(1.1
)
Balance at end of period

$
(8.5
)

$
(1.4
)

$
(10.5
)

$
(20.4
)

As of December 31, 2014
 
Credit Cards
 
Auto Finance
 
Other Unsecured Lending Products
 
Total
Allowance for uncollectible loans and fees receivable:
 
 
 
 
 
 
 
 
Balance at end of period individually evaluated for impairment
 
$

 
$
(0.1
)
 
$
(3.0
)
 
$
(3.1
)
Balance at end of period collectively evaluated for impairment
 
$
(2.7
)
 
$
(1.1
)
 
$
(13.1
)
 
$
(16.9
)
Loans and fees receivable:
 
 

 
 

 
 

 
 

Loans and fees receivable, gross
 
$
6.7

 
$
70.7

 
$
64.2

 
$
141.6

Loans and fees receivable individually evaluated for impairment
 
$

 
$
0.2

 
$
5.0

 
$
5.2

Loans and fees receivable collectively evaluated for impairment
 
$
6.7

 
$
70.5

 
$
59.2

 
$
136.4

    

8


The components (in millions) of loans and fees receivable, net as of the date of each of our consolidated balance sheets are as follows:
 
June 30, 2015
 
December 31, 2014
Current loans receivable
$
130.0

 
$
116.1

Current fees receivable
3.3

 
3.4

Delinquent loans and fees receivable
21.3

 
22.1

Loans and fees receivable, gross
$
154.6

 
$
141.6

 
An aging of our delinquent loans and fees receivable, gross (in millions) by class of receivable as of June 30, 2015 and December 31, 2014 is as follows:
Balance at June 30, 2015
 
Credit Cards
 
Auto Finance
 
Other Unsecured Lending Products
 
Total
30-59 days past due
 
$
0.2

 
$
6.5

 
$
3.0

 
$
9.7

60-89 days past due
 
0.2

 
2.2

 
2.3

 
4.7

90 or more days past due
 
0.8

 
1.8

 
4.3

 
6.9

Delinquent loans and fees receivable, gross
 
1.2

 
10.5

 
9.6

 
21.3

Current loans and fees receivable, gross
 
2.9

 
67.8

 
62.6

 
133.3

Total loans and fees receivable, gross
 
$
4.1

 
$
78.3

 
$
72.2

 
$
154.6

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

 
$
1.8

 
$

 
$
1.8


Balance at December 31, 2014
Credit Cards
 
Auto Finance
 
Other Unsecured Lending Products
 
Total
30-59 days past due
$
0.4

 
$
6.3

 
$
2.8

 
$
9.5

60-89 days past due
0.4

 
2.1

 
2.2

 
4.7

90 or more days past due
1.6

 
1.7

 
4.6

 
7.9

Delinquent loans and fees receivable, gross
2.4

 
10.1

 
9.6

 
22.1

Current loans and fees receivable, gross
4.3

 
60.6

 
54.6

 
119.5

Total loans and fees receivable, gross
$
6.7

 
$
70.7

 
$
64.2

 
$
141.6

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

 
$
1.6

 
$

 
$
1.6


Income Taxes
    
We experienced effective income tax expense rates of 50.8% and 19.6% for the three and six months ended June 30, 2015, respectively compared to negative effective income tax benefit rates of 6.4% and 13.6% for the three and six months ended June 30, 2014, respectively.  Our accruals of interest and penalties associated with assessed and unpaid prior year tax liabilities account for the excess of our effective income tax expense rate for the three months ended June 30, 2015 over statutory rates.  Although these interest and penalties were also present in the first quarter of this year, our effective income tax expense rate for the six months ended June 30, 2015 is significantly below statutory rates principally due to a favorable effective settlement we reached with the Internal Revenue Service (“IRS”) in February, 2015 relative to prior year accruals for uncertain tax positions and interest accruals thereon. The negative effective income tax benefit rate for both the three and six months ended June 30, 2014 resulted principally from the (1) effects of legislative changes enacted during that period in certain state filing jurisdictions, (2) interest accruals on our liabilities for uncertain tax positions and (3) changes in valuation allowances against income statement-oriented federal, foreign and state deferred tax assets.
 
 We report potential accrued interest and penalties related to our accrued liabilities for uncertain tax positions within our income tax benefit or expense line item on our consolidated statements of operations.  We likewise report the reversal of

9


such accrued interest and penalties within the income tax benefit or expense line item to the extent that we resolve our liabilities for uncertain tax positions in a manner favorable to our accruals therefor. During the three and six months ended June 30, 2015, we accrued no material amounts of interest and penalties associated with uncertain tax positions. In contrast, however, net interest and penalty accruals of $0.6 million and $1.2 million increased our respective negative effective income tax benefit rates in the three and six months ended June 30, 2014.

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 June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Fees on credit products
$
1,891

 
$
6,407

 
$
4,065

 
$
11,794

Changes in fair value of loans and fees receivable recorded at fair value
1,981

 
1,975

 
3,212

 
6,667

Changes in fair value of notes payable associated with structured financings recorded at fair value
(420
)
 
(1,151
)
 
(782
)
 
(2,308
)
Rental revenue
9,278

 
14,710

 
19,387

 
36,643

Other
21

 
255

 
88

 
2,285

Total fees and related income on earning assets
$
12,751

 
$
22,196

 
$
25,970

 
$
55,081


The above changes in the 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 in Net recovery of (losses upon) charge off of loans and fees receivable recorded at fair value, net of recoveries 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 April 2015, the FASB issued updated authoritative guidance related to debt issuance costs. The amendment modifies the presentation of unamortized debt issuance costs to present such amounts as a direct deduction from the face amount of the debt, similar to unamortized debt discounts and premiums, rather than as an asset. Amortization of the debt issuance costs continues to be reported as interest expense. The guidance is effective for us beginning January 1, 2016. The impact of adoption of this authoritative guidance is not expected to result in a material impact on our consolidated financial statements.
        
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 establishes a principles-based model under which revenue from a contract is allocated to the distinct performance obligations within the contract and recognized in income as each performance obligation is satisfied. Additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract is also required. In July 2015, the FASB delayed the effective date by one year and the guidance will now be effective for annual and interim periods beginning January 1, 2018 and early adoption is permitted. 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 June 30, 2015, 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 as discussed below.


10


In August 2015 we resolved an outstanding dispute that resulted in the recovery of approximately $2.0 million associated with a receivable which was fully reserved in a prior period. The income associated with this recovery will be reflected in the Fees and related income on earning assets category of our consolidated statements of operations in the third quarter of 2015.

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 June 30, 2015 and December 31, 2014, we did not have a material amount of long-lived assets located outside of the U.S., and only a negligible portion of our 2015 and 2014 revenues 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.


11


Summary operating segment information (in thousands) is as follows:
Three months ended June 30, 2015
 
 Credit and Other Investments
 
Auto Finance
 
Total
Interest income:
 
 
 
 
 
 
Consumer loans, including past due fees
 
$
9,898

 
$
6,971

 
$
16,869

Other
 
10

 

 
10

Total interest income
 
9,908

 
6,971

 
16,879

Interest expense
 
(4,228
)
 
(301
)
 
(4,529
)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
 
$
5,680

 
$
6,670

 
$
12,350

Fees and related income on earning assets
 
$
12,683

 
$
68

 
$
12,751

Servicing income
 
$
1,179

 
$
211

 
$
1,390

Depreciation of rental merchandise
 
(9,370
)
 

 
(9,370
)
Equity in income of equity-method investees
 
$
707

 
$

 
$
707

Income before income taxes
 
$
1,186

 
$
1,650

 
$
2,836

Income tax expense
 
$
(896
)
 
$
(544
)
 
$
(1,440
)
 
 
 
 
 
 
 
Six months ended June 30, 2015
 
Credit and Other Investments
 
Auto Finance
 
Total
Interest income:
 
 
 
 
 
 
Consumer loans, including past due fees
 
$
20,618

 
$
13,694

 
$
34,312

Other
 
42

 

 
42

Total interest income
 
20,660

 
13,694

 
34,354

Interest expense
 
(8,479
)
 
(607
)
 
(9,086
)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
 
$
12,181

 
$
13,087

 
$
25,268

Fees and related income on earning assets
 
$
25,756

 
$
214

 
$
25,970

Servicing income
 
$
2,538

 
$
412

 
$
2,950

Depreciation of rental merchandise
 
$
(21,623
)
 
$

 
$
(21,623
)
Equity in income of equity-method investees
 
$
1,782

 
$

 
$
1,782

Income before income taxes
 
$
607

 
$
3,577

 
$
4,184

Income tax benefit (expense)
 
$
352

 
$
(1,174
)
 
$
(822
)
Total assets
 
$
202,510

 
$
69,422

 
$
271,932



12



Three months ended June 30, 2014
 
Credit and Other Investments
 
Auto Finance
 
Total
Interest income:
 
 
 
 
 
 
Consumer loans, including past due fees
 
$
11,492

 
$
5,895

 
$
17,387

Other
 
37

 

 
37

Total interest income
 
11,529

 
5,895

 
17,424

Interest expense
 
(5,812
)
 
(346
)
 
(6,158
)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
 
$
5,717

 
$
5,549

 
$
11,266

Fees and related income on earning assets
 
$
22,155

 
$
41

 
$
22,196

Servicing income
 
$
1,075

 
$
159

 
$
1,234

Depreciation of rental merchandise
 
(15,735
)
 

 
(15,735
)
Equity in income of equity-method investees
 
$
841

 
$

 
$
841

(Loss) income before income taxes
 
$
(11,661
)
 
$
1,156

 
$
(10,505
)
Income tax expense
 
$
(316
)
 
$
(357
)
 
$
(673
)
 
 
 
 
 
 
 
Six months ended June 30, 2014
 
Credit and Other Investments
 
Auto Finance
 
Total
Interest income:
 
 
 
 
 
 
Consumer loans, including past due fees
 
$
25,888

 
$
11,456

 
$
37,344

Other
 
274

 

 
274

Total interest income
 
26,162

 
11,456

 
37,618

Interest expense
 
(11,644
)
 
(701
)
 
(12,345
)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
 
$
14,518

 
$
10,755

 
$
25,273

Fees and related income on earning assets
 
$
54,957

 
$
124

 
$
55,081

Servicing income
 
$
2,130

 
$
344

 
$
2,474

Depreciation of rental merchandise
 
$
(40,746
)
 
$

 
$
(40,746
)
Equity in income of equity-method investees
 
$
3,247

 
$

 
$
3,247

(Loss) income before income taxes
 
$
(21,724
)
 
$
2,178

 
$
(19,546
)
Income tax expense
 
$
(1,971
)
 
$
(684
)
 
$
(2,655
)
Total assets
 
$
237,163

 
$
62,089

 
$
299,252


4.
Shareholders' Equity
 
Retired Shares
 
During the three and six months ended June 30, 2015, we repurchased and contemporaneously retired 24,498 and 46,305 shares of our common stock at an aggregate cost of $68,299 and $122,552, respectively, pursuant to open market purchases and the return of stock by holders of equity incentive awards to pay tax withholding obligations. During the three and six months ended June 30, 2014, we repurchased and contemporaneously retired 1,546 and 12,327 shares of our common stock at an aggregate cost of $4,252 and $30,881, pursuant to the return of stock by holders of equity incentive awards to pay tax withholding obligations.

We had 1,459,233 loaned shares outstanding at June 30, 2015 and December 31, 2014, 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.


13



5.
Investments in Equity-Method Investees
 
Our equity-method investment outstanding at June 30, 2015 consists of our 66.7% interest in a joint venture formed to purchase a credit card receivable portfolio. Our 50.0% interest in a joint venture, which was formed to purchase the outstanding notes issued out of the structured financing trust underlying our Non-U.S. Acquired Portfolio, was consolidated as of December 31, 2014. This was a result of our distribution of certain assets to an unrelated third-party partner in that entity for their interest. Accordingly, as of June 30, 2015 and December 31, 2014 only one equity-method investee was included in our financial statements. The results of operations associated with the joint venture prior to consolidation are included in the tables below.

In the following tables, we summarize (in thousands) combined balance sheet and results of operations data for our equity-method investees:
 
As of
 
June 30, 2015
 
December 31, 2014
Loans and fees receivable pledged as collateral under structured financings, at fair value
$
18,425

 
$
22,571

Total assets
$
19,410

 
$
23,831

Total liabilities
$
61

 
$
82

Members’ capital
$
19,349

 
$
23,749


 
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Net interest income, fees and related income on earning assets
$
1,067

 
$
1,193

 
$
2,684

 
$
5,309

Total other operating income
$

 
$
44

 
$

 
$
93

Net income
$
874

 
$
896

 
$
2,281

 
$
4,676

Net income attributable to our equity investment in investee
$
707

 
$
841

 
$
1,782

 
$
3,247

 
The above tables include the economics associated with 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 prior to its consolidation in December 2014.  Separate financial data for this entity prior to its consolidation are as follows:
 
As of
 
December 31, 2014
Investments in non-marketable debt securities, at fair value
$

Total assets
$

Total liabilities
$

Members’ capital
$

 
 
Three Months Ended June 30, 2014
 
Six Months Ended June 30, 2014
Net interest (cost) income, fees and related income on earning assets
 
$
(287
)
 
$
1,698

Net (loss) income
 
$
(300
)
 
$
1,674

Net (loss) income attributable to our equity investment in investee
 
$
(150
)
 
$
837

    





14


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 June 30, 2015 and December 31, 2014 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 June 30, 2015 (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
 
$

 
$

 
$
122,581

 
$
117,390

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

 
$

 
$

 
$
2,695

Loans and fees receivable, at fair value
 
$

 
$

 
$
11,512

 
$
11,512

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

 
$

 
$
27,464

 
$
27,464


Assets – As of December 31, 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
 
$

 
$

 
$
111,010

 
$
101,753

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

 
$

 
$

 
$
4,144

Loans and fees receivable, at fair value
 
$

 
$

 
$
18,255

 
$
18,255

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

 
$

 
$
34,905

 
$
34,905

  
(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 provide 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.

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.”


15


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 six months ended June 30, 2015 and June 30, 2014:
 
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, 2015
$
18,255

 
$
34,905

 
$
53,160

Total gains—realized/unrealized:


 


 


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

 
2,462

 
2,462

Net revaluations of loans and fees receivable, at fair value
750

 

 
750

Settlements, net
(7,449
)
 
(9,903
)
 
(17,352
)
Impact of foreign currency translation
(44
)
 

 
(44
)
Balance at June 30, 2015
$
11,512

 
$
27,464

 
$
38,976

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

 
4,867

 
4,867

Net revaluations of loans and fees receivable, at fair value
1,800

 

 
1,800

Settlements, net
(4,391
)
 
(22,315
)
 
(26,706
)
Impact of foreign currency translation

 
1,004

 
1,004

Balance at June 30, 2014
$
9,489

 
$
71,688

 
$
81,177

  
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 June 30, 2015 and December 31, 2014:
Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurements
 
Fair Value at June 30, 2015
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)(1)
Loans and fees receivable, at fair value
 
$
11,512

 
Discounted cash flows
 
Gross yield
 
17.4% to 25.9% (21.0%)

 
 
 

 
 
 
Principal payment rate
 
1.0% to 3.8% (2.2%)

 
 
 

 
 
 
Expected credit loss rate
 
5.1% to 15.8% (9.7%)

 
 
 

 
 
 
Servicing rate
 
5.5% to 15.6% (9.8%)

 
 
 

 
 
 
Discount rate
 
15.9% to 16.2% (16.1%)

Loans and fees receivable pledged as collateral under structured financings, at fair value
 
$
27,464

 
Discounted cash flows
 
Gross yield
 
29.2
%
 
 
 

 
 
 
Principal payment rate
 
2.7
%
 
 
 

 
 
 
Expected credit loss rate
 
12.7
%
 
 
 

 
 
 
Servicing rate
 
11.2
%
 
 
 

 
 
 
Discount rate
 
15.9
%

Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurements
 
Fair Value at December 31, 2014
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)(1)
Loans and fees receivable, at fair value
 
$
18,255

 
Discounted cash flows
 
Gross yield
 
17.9% to 25.6% (21.0%)

 
 
 

 
 
 
Principal payment rate
 
1.5% to 3.6% (2.3%)

 
 
 

 
 
 
Expected credit loss rate
 
7.4% to 13.7% (9.9%)

 
 
 

 
 
 
Servicing rate
 
7.4% to 15.1% (10.5%)

 
 
 

 
 
 
Discount rate
 
15.9% to 16.2% (16.1%)

Loans and fees receivable pledged as collateral under structured financings, at fair value
 
$
34,905

 
Discounted cash flows
 
Gross yield
 
27.2
%
 
 
 

 
 
 
Principal payment rate
 
2.7
%
 
 
 

 
 
 
Expected credit loss rate
 
13.5
%
 
 
 

 
 
 
Servicing rate
 
11.0
%
 
 
 

 
 
 
Discount rate
 
15.9
%

 
(1) Our loans and fees receivable, pledged as collateral under structured financings, 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 June 30, 2015 and December 31, 2014 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 June 30, 2015
 
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
 
$

 
$

 
$
31,700

 
$
31,700

ACC amortizing debt facility
 
$

 
$

 
$

 
$

Amortizing debt facilities
 
$

 
$

 
$
51,290

 
$
51,290

Revolving credit facility
 
$

 
$

 
$

 
$

U.K. credit card accounts revolving credit facility
 
$

 
$

 
$
1,524

 
$
1,524

Senior secured term loan
 
$

 
$

 
$
20,000

 
$
20,000

5.875% convertible senior notes
 
$

 
$
38,828

 
$

 
$
64,537

Liabilities carried at fair value
 
 

 
 

 
 

 
 

Economic sharing arrangement liability
 
$

 
$

 
$
82

 
$
82

Notes payable associated with structured financings, at fair value
 
$

 
$

 
$
28,685

 
$
28,685


Liabilities - As of December 31, 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
 
$

 
$

 
$
28,500

 
$
28,500

ACC amortizing debt facility
 
$

 
$

 
$
125

 
$
125

Amortizing debt facilities
 
$

 
$

 
$
42,200

 
$
42,200

Revolving credit facility
 
$

 
$

 
$
4,000

 
$
4,000

U.K. credit card accounts revolving credit facility
 
$

 
$

 
$
3,924

 
$
3,924

Senior secured term loan
 
$

 
$

 
$
20,000

 
$
20,000

5.875% convertible senior notes
 
$

 
$
37,662

 
$

 
$
64,302