Atlanticus Holdings Corp - Quarter Report: 2018 September (Form 10-Q)

 

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		September 30,				December 31,
		2018				2017
Assets
Unrestricted cash and cash equivalents		$	29,296			$	41,484
Restricted cash and cash equivalents			30,109				29,174
Loans and fees receivable:
Loans and fees receivable, at fair value			7,125				11,109
Loans and fees receivable, gross			480,891				393,898
Allowances for uncollectible loans and fees receivable			(68,258	)			(62,970	)
Deferred revenue			(40,615	)			(36,956	)
Net loans and fees receivable			379,143				305,081
Property at cost, net of depreciation			2,724				3,229
Investments in equity-method investees			2,852				4,244
Deposits			488				252
Prepaid expenses and other assets			16,113				42,149
Income tax asset			284				—
Total assets		$	461,009			$	425,613
Liabilities
Accounts payable and accrued expenses		$	107,254			$	115,737
Notes payable, at face value			293,298				226,238
Notes payable to related parties			40,000				40,000
Notes payable associated with structured financings, at fair value			6,220				9,240
Convertible senior notes			61,975				61,393
Income tax liability			—				9,132
Total liabilities			508,747				461,740
Commitments and contingencies (Note 9)
Equity
Common stock, no par value, 150,000,000 shares authorized: 15,372,542 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at September 30, 2018; and 15,291,884 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at December 31, 2017			—				—
Additional paid-in capital			212,808				212,785
Accumulated other comprehensive loss			1,502				(2,178	)
Retained deficit			(261,772	)			(246,640	)
Total shareholders’ equity			(47,462	)			(36,033	)
Noncontrolling interests			(276	)			(94	)
Total equity			(47,738	)			(36,127	)
Total liabilities and equity		$	461,009			$	425,613

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		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2018				2017				2018				2017
Interest income:
Consumer loans, including past due fees		$	41,901			$	28,985			$	115,325			$	81,457
Other			51				34				137				178
Total interest income			41,952				29,019				115,462				81,635
Interest expense			(9,281	)			(7,268	)			(26,241	)			(19,504	)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable			32,671				21,751				89,221				62,131
Fees and related income on earning assets			9,536				4,166				22,844				10,938
Net recovery of (losses upon) charge off of loans and fees receivable recorded at fair value			(1,957	)			2,393				(2,396	)			10,763
Provision for losses on loans and fees receivable recorded at net realizable value			(32,798	)			(24,087	)			(65,265	)			(50,484	)
Net interest income, fees and related income on earning assets			7,452				4,223				44,404				33,348
Other operating income:
Servicing income			382				1,034				1,646				2,984
Other Income			898				590				2,185				939
Equity in income (loss) of equity-method investees			(49	)			164				491				902
Total other operating income			1,231				1,788				4,322				4,825
Other operating expense:
Salaries and benefits			5,838				5,589				17,738				17,102
Card and loan servicing			9,286				8,394				27,378				23,078
Marketing and solicitation			3,649				2,930				8,088				9,544
Depreciation			234				236				698				789
Other			5,725				3,352				14,871				14,029
Total other operating expense			24,732				20,501				68,773				64,542
Loss before income taxes			(16,049	)			(14,490	)			(20,047	)			(26,369	)
Income tax benefit (expense)			(121	)			22				4,733				3,847
Net loss			(16,170	)			(14,468	)			(15,314	)			(22,522	)
Net (income) loss attributable to noncontrolling interests			78				1				182				(1	)
Net loss attributable to controlling interests		$	(16,092	)		$	(14,467	)		$	(15,132	)		$	(22,523	)
Net loss attributable to controlling interests per common share—basic		$	(1.16	)		$	(1.04	)		$	(1.09	)		$	(1.61	)
Net loss attributable to controlling interests per common share—diluted		$	(1.16	)		$	(1.04	)		$	(1.09	)		$	(1.61	)

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		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2018				2017				2018				2017
Net loss		$	(16,170	)		$	(14,468	)		$	(15,314	)		$	(22,522	)
Other comprehensive income:
Foreign currency translation adjustment			1,154				(1,721	)			3,680				(1,721	)
Reclassifications of foreign currency translation adjustment to Other operating expense on the consolidated statements of operations			—				—				—				—
Income tax expense related to other comprehensive income			—				625				—				625
Comprehensive loss			(15,016	)			(15,564	)			(11,634	)			(23,618	)
Comprehensive loss (income) attributable to noncontrolling interests			78				1				182				(1	)
Comprehensive loss attributable to controlling interests		$	(14,938	)		$	(15,563	)		$	(11,452	)		$	(23,619	)

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		Common Stock
		Shares Issued				Amount				Additional Paid-In Capital				Accumulated Other Comprehensive Income (Loss)				Retained Deficit				Noncontrolling Interests				Total Equity
Balance at December 31, 2017			15,291,884			$	—			$	212,785			$	(2,178	)		$	(246,640	)		$	(94	)		$	(36,127	)
Stock options exercises and proceeds related thereto			14,000				—				32				—				—				—				32
Compensatory stock issuances, net of forfeitures			346,177				—				—				—				—				—				—
Amortization of deferred stock-based compensation costs			—				—				708				—				—				—				708
Redemption and retirement of shares			(279,519	)			—				(717	)			—				—				—				(717	)
Other comprehensive income (loss)			—				—				—				3,680				(15,132	)			(182	)			(11,634	)
Balance at September 30, 2018			15,372,542			$	—			$	212,808			$	1,502			$	(261,772	)		$	(276	)		$	(47,738	)

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		For the Nine Months Ended September 30,
		2018				2017
Operating activities
Net loss		$	(15,314	)		$	(22,522	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, amortization and accretion, net			698				789
(Net recovery of) losses upon charge off of loans and fees receivable recorded at fair value			2,396				(10,763	)
Provision for losses on loans and fees receivable			65,265				50,484
Interest expense from accretion of discount on notes			661				592
Income from accretion of discount associated with receivables purchases			(55,445	)			(41,961	)
Unrealized gain on loans and fees receivable and underlying notes payable held at fair value			(5,617	)			(4,504	)
Amortization of deferred loan costs			1,131				628
Income from equity-method investments			(491	)			(902	)
Changes in assets and liabilities:
(Increase) decrease in uncollected fees on earning assets			(6,744	)			12,206
Decrease in income tax liability			(9,417	)			(4,084	)
(Increase) decrease in deposits			(237	)			199
(Decrease) increase in accounts payable and accrued expenses			(5,680	)			21,846
Other			27,143				(14,023	)
Net cash used in operating activities			(1,651	)			(12,015	)
Investing activities
Proceeds from equity-method investees			1,883				2,882
Investments in earning assets			(429,899	)			(335,664	)
Proceeds from earning assets			352,948				282,064
Purchases and development of property, net of disposals			(193	)			(229	)
Net cash used in investing activities			(75,261	)			(50,947	)
Financing activities
Noncontrolling interests contributions, net			—				7
Proceeds from exercise of stock options			32				—
Purchase and retirement of outstanding stock			(717	)			(286	)
Proceeds from borrowings			337,565				243,945
Repayment of borrowings			(271,715	)			(176,417	)
Net cash provided by financing activities			65,165				67,249
Effect of exchange rate changes on cash			494				313
Net (decrease) increase in cash and cash equivalents			(11,253	)			4,600
Cash and cash equivalents at beginning of period			70,658				92,641
Cash and cash equivalents at end of period		$	59,405			$	97,241
Supplemental cash flow information
Cash paid for interest		$	25,528			$	19,214
Net cash income tax payments		$	4,684			$	238
Supplemental non-cash information
Issuance of stock options and restricted stock		$	678			$	1,364
Notes payable associated with capital leases		$	—			$	—

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1.	Description of Our Business

 

Our accompanying consolidated financial statements include the accounts of Atlanticus Holdings Corporation (the “Company”) and those entities we control. We are primarily focused on providing 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 under traditional financing options. In most cases, we invest in the receivables originated by lenders who utilize our technology platform and other related services. 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 partners to originate consumer loans through multiple channels, including retail point-of-sale, direct mail solicitation, on-line 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 lending partners are often extended to consumers who may have been declined under traditional financing options. We specialize in supporting this “second look” credit service in various industries across the U.S. Additionally, we support lenders who market general purpose personal loans and credit cards directly to consumers (collectively, the “direct-to-consumer” operations) through additional channels enabling them to reach consumers through a diverse origination platform that includes retail point-of-sale, direct mail solicitation and partnerships with third parties. Using our infrastructure and technology platform, we also provide loan servicing, including risk management and customer service outsourcing, for third parties.

 

Beyond these activities within our Credit and Other Investments segment, we continue to service portfolios of historical credit card receivables. One of our historical 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.

 

 

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.

 

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.

 

 

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 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 loans and fees receivable, at fair value and loans and fees receivable, gross.

 

We show both an allowance for uncollectible loans and fees receivable and unearned fees (or “deferred revenue”) for our loans and fees receivable (i.e., as opposed to those carried at fair value). Our loans 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 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 our customers; changes in underwriting criteria; and estimated recoveries. 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 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).

 

As of September 30, 2018 and December 31, 2017, the weighted average remaining accretion period for the $40.6 million and $37.0 million of deferred revenue reflected in the consolidated balance sheets was 12 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: 

 

 

 

 

 

 

 

 

    

An aging of our delinquent loans and fees receivable, gross (in millions) by class of receivable as of September 30, 2018 and December 31, 2017 is as follows:

 

 

 

Troubled Debt Restructurings. As part of ongoing collection efforts, once an account in our Credit and Other Investments segment is 90 days or more past due, the account is placed on a non-accrual status. Placement on a non-accrual status results in the elimination of the annual percentage rate ( “APR”) charged to an account and a cessation of fee billing. Following this adjustment, if a customer demonstrates a willingness and ability to resume making monthly payments and meets certain additional criteria, we will re-age the customer’s account. When we re-age an account, we adjust the status of the account to bring a delinquent account current, but generally do not make any further modifications to the payment terms or amount owed. Once an account is placed on a non-accrual status, it is closed for further purchases. Accounts that are placed on a non-accrual status and thereafter make at least one payment qualify as troubled debt restructurings (“TDRs”).

 

 

The 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, 2018 and December 31, 2017:

 

*“TDRs - Performing” include accounts that are current on all amounts owed, while “TDRs - Nonperforming” include all accounts with past due amounts owed.

 

Given that the above TDRs have a high reserve rate prior to modification as TDRs, we do not separately reserve or impair these receivables outside of our general reserve process.

 

The following table details by class of receivable, the number of accounts and carrying value of loans that completed a modification (including those that were classified as TDRs) within the prior twelve months and subsequently charged off.

 

 

Prepaid Expenses and Other Assets

 

Prepaid expenses and other assets include amounts paid to third parties for marketing and other services as well as amounts owed to us by third parties. Prepaid amounts are expensed as the underlying related services are performed.  Also included are (1) commissions paid associated with our various office leases which we amortize into expense over the lease terms, (2) amounts due from a third party in respect of a servicing agreement totaling $5.2 million as of September 30, 2018, (3) ongoing deferred costs associated with service contracts and (4) investments in consumer finance technology platforms carried at the lower of cost or market valuation.

 

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. Also included within accounts payable and accrued expenses are amounts which may be owed in respect of one of our portfolios.

 

Income Taxes

 

We experienced a negative effective income tax expense rate of 0.8% for the three months ended September 30, 2018, and an effective income tax benefit rate of 23.6% for the nine months ended September 30, 2018; this compares to effective income tax benefit rates of 0.2% and 14.6% for the three and nine months ended September 30, 2017, respectively. Our negative effective income tax expense rate for the three months ended September 30, 2018 differs from the statutory rate, primarily due to the unfavorable effects of our (1) accruals of local, state and foreign income taxes, (2) accruals of interest on liabilities for uncertain tax positions and unpaid taxes, and (3) increase in our valuation allowance associated with net federal deferred tax assets that arose due to our net loss incurred in this period.  A variety of factors influenced our effective income tax benefit rate for the nine months ended September 30, 2018, including (1) an increase in our valuation allowance for the net losses incurred during the period, (2) our accruals of local, state and foreign taxes, and (3) significant net reductions in our accruals of interest on liabilities for uncertain tax positions and unpaid taxes, primarily due to the favorable effects of our settlement in such period of the IRS examination of our 2008 tax return and the carryback of its resulting net operating losses to pre-2008 tax years. Our effective income tax benefit rates for the three and nine months ended September 30, 2017 were below the statutory rate principally due to (1) interest and penalties we accrued on unpaid federal tax liabilities and (2) our establishment of, and increases in, our valuation allowances during such periods against our net federal deferred tax assets that arose during such periods associated with our net loss incurred during such periods.  

 

               

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 benefit or expense line item on our consolidated statements of operations.  We likewise report the reversal of income tax-related interest and penalties within such line item to the extent that we resolve our liabilities for uncertain tax positions or unpaid tax liabilities in a manner favorable to our accruals therefor. During the three and nine months ended September 30, 2018, we accrued a net $0.2 million and $0.6 million of income tax-related interest and penalties, respectively. In June 2018, we reached a favorable settlement with the IRS concerning the level of our 2008 net operating losses eligible to be carried back to pre-2008 tax years for refunds. As a result, for the nine months ended September 30, 2018, we reduced income tax expense based on the reversal of $1.6 million of accrued interest on over-assessed taxes we will not be required to pay under the terms of our June 2018 settlement with the IRS, further background on which is set forth below.

 

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. At March 31, 2018 (i.e., prior to our June 2018 settlement with the IRS), our net unpaid income tax assessment associated with the December 2014 settlement was $7.4 million, such amount excluding unpaid interest and penalties on the tax assessment, the accruals for which aggregated $4.3 million at March 31, 2018. Prior to our filing amended return claims that, if accepted, would have eliminated the $7.4 million assessment (and corresponding interest and penalties) under a negotiated provision of the December 2014 IRS settlement, the IRS filed a lien (as is customarily the case), associated with the assessment.  Subsequently, an IRS examination team denied our amended return claims, and we filed a protest with IRS Appeals. Following correspondence and conferences held with IRS Appeals, we received and accepted a settlement offer from IRS Appeals in June 2018 that reduced our $7.4 million net unpaid income tax assessment referenced above to $3.7 million. In July 2018, we paid $5.4 million to the IRS to cover the $3.7 million unpaid income tax assessment and most of the interest that had accrued thereon; subsequently, during the three months ended September 30, 2018, the IRS refunded $0.5 million of our $5.4 million payment. Accordingly, although we have paid all assessed income taxes related to this matter, we still have an outstanding accrued liability for some of the interest and for failure-to-pay penalties related to this matter. We are pursuing complete abatement of the failure-to-pay penalties and removal of the aforementioned lien.

 

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 and discounts paid or received associated with a loan are generally deferred and amortized over the average life of the related loans using the effective interest method. Finance charges and fees, net of amounts that we consider uncollectible, are included in loans and fees receivable and revenue when the fees are earned.

 

Fees and Related Income on Earning Assets

 

Fees and related income on earning assets primarily include: (1) fees associated with our credit products, including the receivables underlying our U.S. point-of-sale finance and direct-to-consumer activities, and our historical credit card receivables; (2) changes in the fair value of loans and fees receivable recorded at fair value; (3) changes in fair value of notes payable associated with structured financings recorded at fair value; (4) revenues associated with rent payments on rental merchandise; and (5) gains or losses associated with our investments in securities. 

 

We assess fees on credit card accounts underlying our credit card receivables according to the terms of the related cardholder agreements and, except for annual membership fees, we recognize these fees as income when they are charged to the customers’ accounts. We accrete annual membership fees associated with our credit card receivables into income on a straight-line basis over the cardholder privilege period. Similarly, fees on our other credit products are recognized when earned, which coincides with the time they are charged to the customer’s account. Fees and related income on earning assets, net of amounts that we consider uncollectible, are included in loans and fees receivable and revenue when the fees are earned.

 

In periods where applicable, we accrue periodic billed rental amounts (net of allowances for uncollectible billings) into revenues over the rental period to which the billed amounts relate, and we defer recognition in revenues of any advanced customer rental payments until the rental period in which they are properly recognizable under the terms of the contract.

 

 

The components (in thousands) of our fees and related income on earning assets are as follows:

 

 

The above changes in the fair value of loans and fees receivable recorded at fair value category exclude the impact of current period charge offs associated with these receivables which are separately stated in Net (losses upon) recovery of charge off of loans and fees receivable recorded at fair value 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.

 

Revenue from Contracts with Customers

 

In the first quarter of 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” under the modified retrospective transition method. 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. Revenue from these contracts with customers is included as a component of Other income on our consolidated statements of operations. Components (in thousands) of our revenue from contracts with customers is as follows:

 

 

(1) Interchange revenue is presented net of customer reward expense.

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued 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 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 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. We are currently in the process of reviewing accounting interpretations, 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 given the change to expected losses for the estimated life of the financial asset. The extent of the increase will depend on the asset quality of the portfolio, and economic conditions and forecasts at adoption.

 

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires lessees to recognize assets and liabilities for most leases and changes certain aspects of current lessor accounting, among other things. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The adoption of ASU 2016-02 will result in the Company recognizing a right-of-use asset and lease liability on the consolidated balance sheet based on the present value of remaining operating lease payments. Net future minimum lease payments totaled $12.2 million as of December 31, 2017. We do not expect the adoption of ASU 2016-02 to have a material impact on our consolidated financial statements due to the limited lease activity we are involved in.

        

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 August 2015, the FASB delayed the effective date by one year and the guidance was effective for annual and interim periods beginning January 1, 2018. Most revenue associated with financial instruments, including interest income, loan origination fees and credit card fees, is outside the scope of the guidance. We adopted this standard as of January 1, 2018 using the modified retrospective method of adoption. Our adoption of this standard did not have a material impact on our 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, 2018, 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 the disclosure related to the sale of asset backed securities as described in Note 7, "Notes Payable".

 

 

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, 2018 and December 31, 2017, 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, 2018 and 2017 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:

 

 

 

 

 

 

 

4.	Shareholders’ Equity

 

During the three and nine months ended September 30, 2018, we repurchased and contemporaneously retired 260,060 and 279,519 shares of our common stock at an aggregate cost of $676,000 and $717,000, 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, 2017, we repurchased and contemporaneously retired 107,916 and 114,618 shares of our common stock at an aggregate cost of $268,000 and $286,000, 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, 2018 and December 31, 2017, 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.

 

 

 

5.	Investment in Equity-Method Investee

 

Our equity-method investment outstanding at September 30, 2018 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:

 

 

         

 

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, 2018 and December 31, 2017 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:

 

 

  

(1)

For cash, deposits and other short-term investments, 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 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, 2018 and 2017:

 

  

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.

 

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. The net revaluation of loans and fees receivable is based on the present value of future cash flows using a valuation model of expected cash flows and the estimated cost to service and collect those cash flows. We estimate the present value of these future cash flows using a valuation model consisting of internally developed estimates of assumptions third-party market participants would use in determining fair value, including estimates of net collected yield, principal payment rates, expected principal credit loss rates, costs of funds, discount rates and servicing costs. Accrued 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, 2018 and December 31, 2017:

 

Quantitative Information about Level 3 Fair Value Measurements

 

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

 

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, 2018 and December 31, 2017 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:

 

 

 

 

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, 2018 and 2017.

 

 

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 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 net collected yield, principal payment rates and expected principal credit loss rates on the credit card receivables that secure the non-recourse notes payable; costs of funds; discount rates; and contractual servicing fees. 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, 2018 and December 31, 2017:

Quantitative Information about Level 3 Fair Value Measurements

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

 

 

 

Other Relevant Data

 

Other relevant data (in thousands) as of September 30, 2018 and December 31, 2017 concerning certain assets and liabilities we carry at fair value are as follows:

 

 

 

 

 

 

7.	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, 2018 and December 31, 2017, (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, 2018 and December 31, 2017, 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, 2018 and December 31, 2017.

 

 

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 $6.2 million in fair value of the structured financing facility included in the above table is $6.2 million, which means that we have no aggregate exposure to pre-tax equity loss associated with the above structured financing arrangement at September 30, 2018.

 

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, 2018 and December 31, 2017 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:

 

 

(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)	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.

(3)	These notes reflect modifications to either extend the maturity date, increase the loaned amount or both.
(4)	Loans were paid down subsequent to September 30, 2018 as part of securitization discussed below.

(5)	See below for additional information.

(6)	Loans are comprised of five tranches with the same lenders. Terms and conditions are substantially identical with the exception of maturity date as indicated in the table above.

    

 

On November 26, 2014, we and certain of our subsidiaries entered into a Loan and Security Agreement with Dove Ventures, LLC, a Nevada limited liability company (“Dove”). The agreement provides for a senior secured term loan facility in an amount of up to $40.0 million at any time outstanding. The Loan and Security Agreement was fully drawn with $40.0 million outstanding as of September 30, 2018. In November 2017, the agreement was amended to extend the maturity date of the term loan to November 21, 2018. All other terms remain unchanged.

 

Our obligations under the agreement are guaranteed by certain subsidiary guarantors and secured by a pledge of certain assets of ours and the subsidiary guarantors. The loans bear interest at the rate of 9.0% per annum, payable monthly in arrears. The principal amount of these loans is payable in a single installment on November 21, 2018 (as amended). The agreement includes customary affirmative and negative covenants, as well as customary representations, warranties and events of default. Subject to certain conditions, we can prepay the principal amounts of these loans without premium or penalty.

 

Dove is a limited liability company owned by three trusts. David G. Hanna is the sole shareholder and the President of the corporation that serves as the sole trustee of one of the trusts, and David G. Hanna and members of his immediate family are the beneficiaries of this trust. Frank J. Hanna, III is the sole shareholder and the President of the corporation that serves as the sole trustee of the other two trusts, and Frank J. Hanna, III and members of his immediate family are the beneficiaries of these other two trusts.

 

In February 2017, we (through a wholly owned subsidiary) established a program under which we sell certain receivables to a consolidated trust in exchange for notes issued by the trust. The notes are secured by the receivables and other assets of the trust. Simultaneously with the establishment of the program, the trust issued a series of variable funding notes and sold an aggregate amount of up to $90.0 million (of which $47.0 million was outstanding as of September 30, 2018) 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 range from 8.0% to 14.0%.

 

In June 2018, we (through a wholly owned subsidiary) expanded the above mentioned program to sell up to an additional $100.0 million of notes which are secured by the receivables and other assets of the trust (of which $68.8 million was outstanding as of September 30, 2018) to a separate 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 based on commercial paper rates plus 4.25%.

 

The facilities mature on February 8, 2022 and June 11, 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, 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 5.76%.