Edgar Filing: Atlanticus Holdings Corp

ATLC-2013.9.30-10Q (1)

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2013

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 or Section 15(d) of the Act, (2) has filed all reports required to be filed by Section 13 or 15(d) 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 October 31, 2013, 13,674,869 shares of common stock, no par value, of Atlanticus were outstanding. This excludes 1,672,656 loaned shares to be returned.

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Page
PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements (Unaudited)
		Consolidated Balance Sheets	1
		Consolidated Statements of Operations	2
		Consolidated Statements of Comprehensive Loss	3
		Consolidated Statement of Shareholders’ Equity	4
		Consolidated Statements of Cash Flows	5
		Notes to Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
	Item 4.	Controls and Procedures	49

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings	50
	Item 1A.	Risk Factors	50
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
	Item 3.	Defaults Upon Senior Securities	60
	Item 4.	Mine Safety Disclosures	60
	Item 5.	Other Information	60
	Item 6.	Exhibits	61
		Signatures	62

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PART I—FINANCIAL INFORMATION



ITEM 1.	FINANCIAL STATEMENTS

Atlanticus Holdings Corporation and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands)



	September 30, 2013			December 31, 2012
	(unaudited)
Assets
Unrestricted cash and cash equivalents	$	59,834		$	67,915
Restricted cash and cash equivalents	18,951			12,921
Loans and fees receivable:
Loans and fees receivable, net (of $11,216 and $8,274 in deferred revenue and $21,505 and $11,151 in allowances for uncollectible loans and fees receivable at September 30, 2013 and December 31, 2012, respectively)	84,250			69,625
Loans and fees receivable, at fair value	14,403			20,378
Loans and fees receivable pledged as collateral under structured financings, at fair value	97,383			133,595
Leased merchandise	16,976			—
Property at cost, net of depreciation	8,017			7,192
Investments in equity-method investees	36,282			37,756
Deposits	6,311			16,397
Prepaid expenses and other assets	14,533			14,647
Total assets	$	356,940		$	380,426
Liabilities
Accounts payable and accrued expenses	$	43,131		$	38,596
Notes payable, at face value	52,302			26,747
Notes payable associated with structured financings, at fair value	106,394			140,127
Convertible senior notes	95,779			95,335
Income tax liability	62,706			60,434
Total liabilities	360,312			361,239
Commitments and contingencies (Note 10)
Equity
Common stock, no par value, 150,000,000 shares authorized: 15,366,125 shares issued and outstanding (including 1,672,656 loaned shares to be returned) at September 30, 2013; and 15,509,179 shares issued and outstanding (including 1,672,656 loaned shares to be returned) at December 31, 2012	—			—
Additional paid-in capital	210,307			211,122
Accumulated other comprehensive loss	(1,262		)	(1,154		)
Retained deficit	(212,414		)	(190,673		)
Total shareholders’ equity	(3,369		)	19,295
Noncontrolling interests	(3		)	(108		)
Total equity	(3,372		)	19,187
Total liabilities and equity	$	356,940		$	380,426

See accompanying notes.

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Atlanticus Holdings Corporation and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(Dollars in thousands, except per share data)



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2013			2012			2013			2012
Interest income:
Consumer loans, including past due fees	$	17,975		$	20,054		$	54,480		$	68,037
Other	33			323			228			731
Total interest income	18,008			20,377			54,708			68,768
Interest expense	(5,999		)	(7,406		)	(17,637		)	(25,582		)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable	12,009			12,971			37,071			43,186
Fees and related income on earning assets	18,382			4,699			35,407			68,997
Losses upon charge off of loans and fees receivable recorded at fair value, net of recoveries	(3,329		)	(8,790		)	(13,478		)	(81,693		)
Provision for losses on loans and fees receivable recorded at net realizable value	(10,681		)	(5,373		)	(20,633		)	(13,828		)
Net interest income, fees and related income on earning assets	16,381			3,507			38,367			16,662
Other operating income:
Servicing income	1,713			1,002			6,918			3,234
Other income	1,069			570			3,521			2,021
Equity in income of equity-method investees	2,080			356			7,344			9,912
Total other operating income	4,862			1,928			17,783			15,167
Other operating expense:
Salaries and benefits	4,421			3,519			13,201			13,986
Card and loan servicing	11,732			10,428			33,260			31,618
Marketing and solicitation	2,059			223			6,580			1,669
Depreciation	5,108			1,518			5,899			2,294
Other	5,365			5,557			16,521			18,755
Total other operating expense	28,685			21,245			75,461			68,322
Loss on continuing operations before income taxes	(7,442		)	(15,810		)	(19,311		)	(36,493		)
Income tax (expense) benefit	(1,443		)	7,418			(2,351		)	10,391
Loss on continuing operations	(8,885		)	(8,392		)	(21,662		)	(26,102		)
Discontinued operations:
Income from discontinued operations before income taxes	—			50,151			—			61,301
Income tax expense	—			(8,835		)	—			(12,737		)
Income from discontinued operations	—			41,316			—			48,564
Net (loss) income	(8,885		)	32,924			(21,662		)	22,462
Net loss (income) attributable to noncontrolling interests in continuing operations	1			287			(79		)	572
Net (loss) income attributable to controlling interests	$	(8,884	)	$	33,211		$	(21,741	)	$	23,034
Loss on continuing operations attributable to controlling interests per common share—basic	$	(0.65	)	$	(0.42	)	$	(1.58	)	$	(1.21	)
Loss on continuing operations attributable to controlling interests per common share—diluted	$	(0.65	)	$	(0.42	)	$	(1.58	)	$	(1.21	)
Income from discontinued operations attributable to controlling interests per common share—basic	$	—		$	2.14		$	—		$	2.30
Income from discontinued operations attributable to controlling interests per common share—diluted	$	—		$	2.14		$	—		$	2.30
Net (loss) income attributable to controlling interests per common share—basic	$	(0.65	)	$	1.72		$	(1.58	)	$	1.09
Net (loss) income attributable to controlling interests per common share—diluted	$	(0.65	)	$	1.72		$	(1.58	)	$	1.09

See accompanying notes.

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Atlanticus Holdings Corporation and Subsidiaries

Consolidated Statements of Comprehensive Loss (Unaudited)

(Dollars in thousands)



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2013			2012			2013			2012
Net (loss) income	$	(8,885	)	$	32,924		$	(21,662	)	$	22,462
Other comprehensive (loss) income:
Foreign currency translation adjustment	1,476			867			(35		)	1,212
Reclassifications of foreign currency translation adjustment to consolidated statements of operations	—			(19		)	—			(19		)
Income tax benefit related to other comprehensive income	(212		)	(48		)	(73		)	(31		)
Comprehensive (loss) income	(7,621		)	33,724			(21,770		)	23,624
Comprehensive (income) loss attributable to noncontrolling interests in continuing operations	1			287			(79		)	572
Comprehensive (loss) income attributable to controlling interests	$	(7,620	)	$	34,011		$	(21,849	)	$	24,196

See accompanying notes.

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Atlanticus Holdings Corporation and Subsidiaries

Consolidated Statements of Equity

For the Nine Months Ended September 30, 2013 (Unaudited)

(Dollars in thousands)



	Common Stock
	Shares Issued		Amount		Additional Paid-In Capital			Treasury Stock		Accumulated Other Comprehensive Loss			Retained Deficit			Noncontrolling Interests			Total Equity
Balance at December 31, 2012	15,509,179		$	—	$	211,122		$	—	$	(1,154	)	$	(190,673	)	$	(108	)	$	19,187
Compensatory stock issuances	172,964		—		—			—		—			—			—			—
Contributions by owners of noncontrolling interests	—		—		—			—		—			—			26			26
Amortization of deferred stock-based compensation costs	—		—		348			—		—			—			—			348
Redemption and retirement of shares	(316,018	)	—		(1,163		)	—		—			—			—			(1,163		)
Net loss	—		—		—			—		—			(21,741		)	79			(21,662		)
Foreign currency translation adjustment, net of tax	—		—		—			—		(108		)	—			—			(108		)
Balance at September 30, 2013	15,366,125		$	—	$	210,307		$	—	$	(1,262	)	$	(212,414	)	$	(3	)	$	(3,372	)

See accompanying notes.

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Atlanticus Holdings Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)



	For the Nine Months Ended September 30,
	2013			2012
Operating activities
Net (loss) income	$	(21,662	)	$	22,462
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation of leased merchandise	4,637			—
Depreciation, amortization and accretion, net	1,060			2,193
Losses upon charge off of loans and fees receivable recorded at fair value	22,480			81,693
Provision for losses on loans and fees receivable	20,633			16,402
Interest expense from accretion of discount on convertible senior notes	445			2,287
Income from accretion of discount associated with receivables purchases	(21,721		)	(23,435		)
Unrealized gain on loans and fees receivable and underlying notes payable held at fair value	(15,251		)	(57,754		)
Income from equity-method investments	(7,344		)	(9,912		)
Net gain on sale of subsidiary operations	—			(49,579		)
Other non-cash adjustments to income	—			287
Changes in assets and liabilities, exclusive of business acquisitions:
(Increase) decrease in uncollected fees on earning assets	(1,887		)	19,386
Increase in income tax liability	2,196			2,294
Decrease (increase) in deposits	10,085			(4,675		)
(Increase) decrease in prepaid expenses	(470		)	5,281
Increase (decrease) in accounts payable and accrued expenses	4,760			(5,087		)
Additions to leased merchandise	(21,613		)	—
Other	3,467			1,351
Net cash (used in) provided by operating activities	(20,185		)	3,194
Investing activities
(Increase) decrease in restricted cash	(6,037		)	9,602
Investment in equity-method investees	(3,750		)	(1,354		)
Proceeds from equity-method investees	12,339			20,310
Investments in earning assets	(139,322		)	(166,706		)
Proceeds from earning assets	181,302			230,177
Investments in subsidiaries	—			(3,514		)
Proceeds from sale of subsidiary	—			99,029
Purchases and development of property, net of disposals	(2,040		)	(1,909		)
Net cash provided by investing activities	42,492			185,635
Financing activities
Noncontrolling interests contributions, net	26			—
Purchase of outstanding stock subject to tender offer	—			(82,500		)
Purchase and retirement of outstanding stock	(1,163		)	(196		)
Proceeds from borrowings	36,187			18,578
Repayment of borrowings	(65,840		)	(221,914		)
Net cash used in financing activities	(30,790		)	(286,032		)
Effect of exchange rate changes on cash	402			215
Net decrease in unrestricted cash	(8,081		)	(96,988		)
Unrestricted cash and cash equivalents at beginning of period	67,915			144,913
Unrestricted cash and cash equivalents at end of period	$	59,834		$	47,925
Supplemental cash flow information
Cash paid for interest	$	19,176		$	25,596
Net cash income tax payments	$	154		$	52
Supplemental non-cash information
Issuance of stock options and restricted stock	$	522		$	227
Notes payable associated with capital leases	$	152		$	218

See accompanying notes.

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Atlanticus Holdings Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2013 and 2012


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 continuing business lines within two reportable segments: Credit Cards and Other Investments; and Auto Finance. See also Note 4, “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 two categories 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 reclassified certain amounts in our prior period consolidated financial statements related to discontinued operations to conform to current period presentation, and 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.

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Components of our aggregated categories of loans and fees receivable, net (in millions) are as follows:



	Balance at December 31, 2012			Additions			Subtractions			Sale of Assets			Balance at September 30, 2013
Loans and fees receivable, gross	$	89.1		$	178.7		$	(150.8	)	—			$	117.0
Deferred revenue	(8.3		)	(24.7		)	21.8			—			(11.2		)
Allowance for uncollectible loans and fees receivable	(11.2		)	(20.6		)	10.3			—			(21.5		)
Loans and fees receivable, net	$	69.6		$	133.4		$	(118.7	)	$	—		$	84.3
	Balance at December 31, 2011			Additions			Subtractions			Sale of Assets			Balance at September 30, 2012
Loans and fees receivable, gross	$	119.3		$	137.9		$	(146.0	)	$	(18.6	)	$	92.6
Deferred revenue	(8.0		)	(20.0		)	19.4			—			(8.6		)
Allowance for uncollectible loans and fees receivable	(14.7		)	(16.4		)	12.7			3.6			(14.8		)
Loans and fees receivable, net	$	96.6		$	101.5		$	(113.9	)	$	(15.0	)	$	69.2

As of September 30, 2013 and September 30, 2012, the weighted average remaining accretion periods for the $11.2 million and $8.6 million, respectively, of deferred revenue reflected in the above tables were 13 months and 13 months, respectively.

A roll-forward (in millions) of our allowance for uncollectible loans and fees receivable by class of receivable is as follows:



For the Three Months Ended September 30, 2013	Credit Cards			Auto Finance			Other Unsecured Lending Products			Total
Allowance for uncollectible loans and fees receivable:
Balance at beginning of period	$	(6.3	)	$	(1.2	)	$	(6.1	)	$	(13.6	)
Provision for loan losses	(5.7		)	(0.5		)	(4.5		)	(10.7		)
Charge offs	1.5			0.6			1.0			3.1
Recoveries	—			(0.3		)	—			(0.3		)
Balance at end of period	$	(10.5	)	$	(1.4	)	$	(9.6	)	$	(21.5	)
Balance at end of period individually evaluated for impairment	$	—		$	—		$	—		$	—
Balance at end of period collectively evaluated for impairment	$	(10.5	)	$	(1.4	)	$	(9.6	)	$	(21.5	)

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For the Nine Months Ended September 30, 2013	Credit Cards			Auto Finance			Other Unsecured Lending Products			Total
Allowance for uncollectible loans and fees receivable:
Balance at beginning of period	$	(4.6	)	$	(3.1	)	$	(3.5	)	$	(11.2	)
Provision for loan losses	(11.6		)	0.2			(9.2		)	(20.6		)
Charge offs	5.8			2.9			3.2			11.9
Recoveries	(0.1		)	(1.4		)	(0.1		)	(1.6		)
Balance at end of period	$	(10.5	)	$	(1.4	)	$	(9.6	)	$	(21.5	)
Balance at end of period individually evaluated for impairment	$	—		$	—		$	—		$	—
Balance at end of period collectively evaluated for impairment	$	(10.5	)	$	(1.4	)	$	(9.6	)	$	(21.5	)
Loans and fees receivable:
Loans and fees receivable, gross	$	19.6		$	59.2		$	38.2		$	117.0
Loans and fees receivable individually evaluated for impairment	$	—		$	—		$	—		$	—
Loans and fees receivable collectively evaluated for impairment	$	19.6		$	59.2		$	38.2		$	117.0



For the Three Months Ended September 30, 2012	Credit Cards			Auto Finance			Other Unsecured Lending Products			Total
Allowance for uncollectible loans and fees receivable:
Balance at beginning of period	$	(10.5	)	$	(4.5	)	$	(2.0	)	$	(17.0	)
Provision for loan losses (includes $0.7 million of provision netted within income from discontinued operations)	(4.1		)	(0.3		)	(1.7		)	(6.1		)
Charge offs	3.4			1.4			0.7			5.5
Recoveries	(0.1		)	(0.7		)	—			(0.8		)
Sale of assets	3.6			—			—			3.6
Balance at end of period	$	(7.7	)	$	(4.1	)	$	(3.0	)	$	(14.8	)
Balance at end of period individually evaluated for impairment	$	—		$	—		$	—		$	—
Balance at end of period collectively evaluated for impairment	$	(7.7	)	$	(4.1	)	$	(3.0	)	$	(14.8	)

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For the Nine Months Ended September 30, 2012	Credit Cards			Auto Finance			Other Unsecured Lending Products			Total
Allowance for uncollectible loans and fees receivable:
Balance at beginning of period	$	(4.0	)	$	(8.4	)	$	(2.3	)	$	(14.7	)
Provision for loan losses (includes $2.6 million of provision netted within income from discontinued operations)	(13.0		)	1.0			(4.4		)	(16.4		)
Charge offs	6.4			6.1			3.7			16.2
Recoveries	(0.7		)	(2.8		)	—			(3.5		)
Sale of assets	3.6			—			—			3.6
Balance at end of period	$	(7.7	)	$	(4.1	)	$	(3.0	)	$	(14.8	)
Balance at end of period individually evaluated for impairment	$	—		$	—		$	—		$	—
Balance at end of period collectively evaluated for impairment	$	(7.7	)	$	(4.1	)	$	(3.0	)	$	(14.8	)
Loans and fees receivable:
Loans and fees receivable, gross	$	9.9		$	68.4		$	14.3		$	92.6
Loans and fees receivable individually evaluated for impairment	$	—		$	0.1		$	—		$	0.1
Loans and fees receivable collectively evaluated for impairment	$	9.9		$	68.3		$	14.3		$	92.5

The components (in millions) of loans and fees receivable, net as of the date of each of our consolidated balance sheets are as follows:



	September 30, 2013		December 31, 2012
Current loans receivable	$	91.7	$	71.4
Current fees receivable	5.4		0.8
Delinquent loans and fees receivable	19.9		16.9
Loans and fees receivable, gross	$	117.0	$	89.1

Delinquent loans and fees receivable reflect the principal, fee and interest components of loans we did not collect on or prior to the contractual due date. Amounts we believe we will not ultimately collect are included as a component in our overall allowance for uncollectible loans and fees receivable. We typically charge off these loans and fees receivable 180 days from the point they become delinquent for our credit card, auto finance and other unsecured lending product receivables, or sooner if facts and circumstances earlier indicate non-collectibility. Recoveries on accounts previously charged off are credited to the allowance for uncollectible loans and fees receivable and effectively offset our provision for losses on loans and fees receivable recorded at net realizable value on our consolidated statements of operations. (All of the above discussion relates only to our loans and fees receivable for which we use net realizable value (i.e., as opposed to fair value) accounting. For loans and fees receivable recorded at fair value, recoveries offset losses upon charge off of loans and fees receivable recorded at fair value, net of recoveries on our consolidated statement of operations.)

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We consider loan delinquencies a key indicator of credit quality because this measure provides the best ongoing estimate of how a particular class of receivables is performing. An aging of our delinquent loans and fees receivable, gross (in millions) by class of receivable as of September 30, 2013 and December 31, 2012 is as follows:



Balance at September 30, 2013	Credit Cards		Auto Finance		Other Unsecured Lending Products		Total
30-59 days past due	$	1.8	$	4.8	$	1.6	$	8.2
60-89 days past due	1.9		1.6		1.2		4.7
90 or more days past due	3.7		0.9		2.4		7.0
Delinquent loans and fees receivable, gross	7.4		7.3		5.2		19.9
Current loans and fees receivable, gross	12.2		51.9		33.0		97.1
Total loans and fees receivable, gross	$	19.6	$	59.2	$	38.2	$	117.0
Balance of loans 90 or more days past due and still accruing interest and fees	$	—	$	0.1	$	—	$	0.1
Balance at December 31, 2012	Credit Cards		Auto Finance		Other Unsecured Lending Products		Total
30-59 days past due	$	0.7	$	5.4	$	0.6	$	6.7
60-89 days past due	1.0		2.0		0.5		3.5
90 or more days past due	4.2		1.6		0.9		6.7
Delinquent loans and fees receivable, gross	5.9		9.0		2.0		16.9
Current loans and fees receivable, gross	1.3		55.2		15.7		72.2
Total loans and fees receivable, gross	$	7.2	$	64.2	$	17.7	$	89.1
Balance of loans 90 or more days past due and still accruing interest and fees	$	—	$	0.5	$	—	$	0.5

Investments in Equity-Method Investees

We account for investments using the equity method of accounting if we have the ability to exercise significant influence, but not control, over the investees. Significant influence is generally deemed to exist if we have an ownership interest in the voting stock of an incorporated investee of between 20% and 50%, although other factors, such as representation on an investee’s board of managers, specific voting and veto rights held by each investor and the effects of commercial arrangements, are considered in determining whether equity method accounting is appropriate. We record our interests in the income of our equity-method investees within the equity in income of equity-method investees category on our consolidated statements of operations.

We use the equity method for our investments in a limited liability company formed in 2004 to acquire a portfolio of credit card receivables. In June 2013, we increased, from 50.0% to 66.7%, our overall ownership in this limited liability company. We continue to account for this investment using the equity method of accounting due to specific voting and veto rights held by each investor, which do not allow us to control this investee. We also use the equity method to account for our March 2011 investment to acquire a 50.0% interest in a joint venture with an unrelated third party that purchased the outstanding notes issued out of the structured financing trust underlying our non-U.S. acquired credit card receivables (the “Non-U.S. Acquired Portfolio”).

We evaluate our investments in the equity-method investees for impairment each quarter by comparing the carrying amount of each investment to its fair value. Because no active market exists for the investees’ limited liability company membership interests, we evaluate our investments for impairment based on our evaluation of the fair value of the equity-method investees’ net assets relative to their carrying values. If we ever were to determine that the carrying values of our investments in equity-method investees were greater than their fair values, we would write the investments down to their fair values.

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Leased Merchandise

Our leased merchandise consists of consumer electronics and furniture that we initially record on our consolidated balance sheets at our cost (net of any purchase price discounts or rebates we receive in connection with our purchases of the leased merchandise). After our initial recording of the leased merchandise at cost, we reduce its carrying value for depreciation thereof. We typically depreciate our leased merchandise based on the ratio of rental receipts received in a period (net of prepayments) to projected rental receipts over contract lease periods, generally 12 months (monthly agreements) or 24 periods (bi-weekly agreements) under a $-0- salvage value assumption. These assumptions are periodically adjusted based on actual results and impairments as they occur. We follow this method to match, as closely as practicable, the recognition of depreciation expense with revenues associated with our customers' use of the leased merchandise. Currently, we do not maintain any levels of leased merchandise beyond what actually has been leased to our customers under our contracts with them. We include a "leased merchandise revenue" line item within our table below detailing our fees and related income on earning assets category on our consolidated statements of operations. Depreciation associated with our leased merchandise totaled $4.6 million for the nine months ended September 30, 2013 with no amounts in prior periods.

The following summarizes our revenue recognition policies for the revenue from our leased merchandise program. Our lease terms with our customers typically provide for 24, non-refundable, bi-weekly rental payments over a 12 months contract lease period. Generally, the customer can take ownership of the leased merchandise by exercising a purchase option or making all required rental payments. We accrue periodic billed leased merchandise 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 lease payments until the rental period in which they are properly recognizable under the terms of the lease contract. Additionally, we do not recognize revenues for future periods' rental obligations due to us from our customers; after a minimum fixed lease term of generally three months, our customers can terminate their rental agreements at any time with no further obligation to us. We include leased merchandise billed rental receivable amounts (net of allowances for uncollectible billings) within our loans and fees receivable, net consolidated balance sheet category.

Income Taxes

Computed considering results for only our continuing operations before income taxes, we experienced negative effective income tax benefit rates of 19.4% and 12.2% for the three and nine months ended September 30, 2013, versus our effective income tax benefit rates of 46.9% and 28.5% for the three and nine months ended September 30, 2012. Our negative effective income tax benefit rates for the three and nine months ended September 30, 2013 result principally from interest accruals on our liabilities for uncertain tax positions. Variations in our effective tax rates between the periods principally bear the effects of (1) changes in valuation allowances against income statement-oriented federal, foreign and state deferred tax assets and (2) intra-period tax allocations associated with our discontinued operations in 2012 as required under GAAP.

We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. We recognized $1.5 million and $2.4 million in potential interest and penalties associated with uncertain tax positions during the three and nine months ended September 30, 2013, respectively, compared to $0.6 million and $1.5 million during the three and nine months ended September 30, 2012, respectively. To the extent such interest and penalties are not assessed as a result of a resolution of the underlying tax positions, amounts accrued are reduced and reflected as a reduction of income tax expense. We recognized no such reductions in each of the three and nine months ended September 30, 2013 and 2012.

Fees and Related Income on Earning Assets

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

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	Three months ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
Fees on credit products	$	7,165		$	6,312		$	16,466		$	13,306
Changes in fair value of loans and fees receivable recorded at fair value	9,296			10,742			34,361			93,613
Changes in fair value of notes payable associated with structured financings recorded at fair value	(3,535		)	(10,469		)	(19,110		)	(35,859		)
Leased merchandise revenue	5,446			—			5,446			—
Other	10			(1,886		)	(1,756		)	(2,063		)
Total fees and related income on earning assets	$	18,382		$	4,699		$	35,407		$	68,997

The above changes in fair value of loans and fees receivable recorded at fair value category excludes the impact of charge offs associated with these receivables which are separately stated on our consolidated statements of operations. See Note 7, “Fair Values of Assets and Liabilities,” for further discussion of these receivables and their effects on our consolidated statements of operations. Included within our Other category above during the nine months ended September 30, 2013 is a $2.4 million write-off of a note we had received from buyers of our JRAS buy-here, pay-here dealer operations that we sold in February 2011.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued guidance that requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on respective line items in consolidated statements of income if an amount being reclassified is required to be reclassified in its entirety to net income. For amounts not required to be reclassified to net income in their entirety in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about those amounts. The new reporting requirements do not change the way in which net income or comprehensive income is derived. The new standard applies to both interim and annual financial statements beginning on or after January 1, 2013. Our adoption of the guidance on January 1, 2013 had no effect on our financial condition, results of operations or liquidity since it impacts disclosures only.

In December 2011, the FASB issued guidance requiring entities to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on an entity's financial position. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with current literature or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with current literature. The guidance is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. Our adoption of the guidance on January 1, 2013 had no effect on our financial condition, results of operations or liquidity since it impacts disclosures only.

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, 2013, 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.

We note, however, that in October 2013, we received $4.4 million of cash that previously was held in escrow and reflected on our September 30, 2013 consolidated balance sheet as a deposit within our prepaid expenses and other assets category pending the resolution of now-favorably resolved third-party contingencies.


3.	Discontinued Operations

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In August 2012, we sold our Investments in Previously Charged-Off Receivables segment along with our balance transfer card operations. Accordingly, their results of operations are shown as discontinued operations within our consolidated statements of operations for all periods presented. Key components of discontinued operations on our consolidated statements of operations are as follows for the three and nine months ended September 30, 2012:



	Three months ended September 30, 2012			Nine months ended September 30, 2012
Net interest income, fees and related income on earning assets	$	5,605		$	34,810
Other operating income	167			2,327
Other operating expense	(5,200		)	(25,415		)
Gain on sale of assets	49,579			49,579
Income before income taxes	50,151			61,301
Income tax expense	(8,835		)	(12,737		)
Net income	$	41,316		$	48,564
Net income attributable to noncontrolling interests	$	—		$	—


4.	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 Cards and Other Investments; and Auto Finance.

As of both September 30, 2013 and December 31, 2012, we did not have a material amount of long-lived assets located outside of the U.S., and only a negligible portion of our 2013 and 2012 revenues were generated outside of the U.S.

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Summary operating segment information (in thousands) is as follows:



Three months ended September 30, 2013	Credit Cards and Other Investments			Auto Finance			Total
Interest income:
Consumer loans, including past due fees	$	12,223		$	5,752		$	17,975
Other	33			—			33
Total interest income	12,256			5,752			18,008
Interest expense	(5,640		)	(359		)	(5,999		)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable	$	6,616		$	5,393		$	12,009
Fees and related income on earning assets	$	18,323		$	59		$	18,382
Servicing income	$	1,476		$	237		$	1,713
Equity in income of equity-method investees	$	2,080		$	—		$	2,080
(Loss on) income from continuing operations before income taxes	$	(8,194	)	$	752		$	(7,442	)
Income tax expense	$	(1,157	)	$	(286	)	$	(1,443	)
Total assets	$	299,199		$	57,741		$	356,940



Nine months ended September 30, 2013	Credit Cards and Other Investments			Auto Finance			Total
Interest income:
Consumer loans, including past due fees	$	37,133		$	17,347		$	54,480
Other	111			117			228
Total interest income	37,244			17,464			54,708
Interest expense	(16,582		)	(1,055		)	(17,637		)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable	$	20,662		$	16,409		$	37,071
Fees and related income (loss) on earning assets	$	37,644		$	(2,237	)	$	35,407
Servicing income	$	6,280		$	638		$	6,918
Equity in income of equity-method investees	$	7,344		$	—		$	7,344
(Loss on) income from continuing operations before income taxes	$	(20,959	)	$	1,648		$	(19,311	)
Income tax expense	$	(1,336	)	$	(1,015	)	$	(2,351	)
Total assets	$	299,199		$	57,741		$	356,940

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Three months ended September 30, 2012	Credit Cards and Other Investments			Auto Finance			Total
Interest income:
Consumer loans, including past due fees	$	14,190		$	5,864		$	20,054
Other	256			67			323
Total interest income	14,446			5,931			20,377
Interest expense	(5,497		)	(1,909		)	(7,406		)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable	$	8,949		$	4,022		$	12,971
Fees and related income on earning assets	$	698		$	4,001		$	4,699
Servicing income	$	858		$	144		$	1,002
Equity in income of equity-method investees	$	356		$	—		$	356
Loss on continuing operations before income taxes	$	(15,660	)	$	(150	)	$	(15,810	)
Income tax benefit	$	7,849		$	(431	)	$	7,418
Total assets	$	340,106		$	66,506		$	406,612



Nine months ended September 30, 2012	Credit Cards and Other Investments			Auto Finance			Total
Interest income:
Consumer loans, including past due fees	$	49,360		$	18,677		$	68,037
Other	531			200			731
Total interest income	49,891			18,877			68,768
Interest expense	(20,034		)	(5,548		)	(25,582		)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable	$	29,857		$	13,329		$	43,186
Fees and related income on earning assets	$	53,780		$	15,217		$	68,997
Servicing income	$	2,784		$	450		$	3,234
Equity in income of equity-method investees	$	9,912		$	—		$	9,912
(Loss on) income from continuing operations before income taxes	$	(37,292	)	$	799		$	(36,493	)
Income tax benefit	$	11,822		$	(1,431	)	$	10,391
Total assets	$	340,106		$	66,506		$	406,612


5.	Shareholders' Equity

Retired Shares

During the three and nine months ended September 30, 2013, we repurchased and contemporaneously retired 78,455 and 316,018 shares of our common stock at an aggregate cost of $0.3 million and $1.2 million, respectively.

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6.	Investments in Equity-Method Investees

In the following tables, we summarize (in thousands) combined balance sheet and results of operations data for our equity-method investees:



	As of
	September 30, 2013		December 31, 2012
Loans and fees receivable pledged as collateral under structured financings, at fair value	$	39,013	$	53,375
Investments in non-marketable debt securities, at fair value	$	38,218	$	46,564
Total assets	$	97,336	$	114,375
Notes payable associated with structured financings, at fair value	$	16,211	$	29,279
Total liabilities	$	16,444	$	29,558
Members’ capital	$	80,892	$	84,817



	Three months ended September 30,					Nine months ended September 30,
	2013		2012			2013		2012
Net interest income, fees and related income on earning assets	$	3,026	$	695		$	13,600	$	22,066
Total other operating income (loss)	$	2,057	$	(618	)	$	2,571	$	311
Net income (loss)	$	4,648	$	(569	)	$	14,693	$	20,135
Net income attributable to our equity investment in investee	$	2,080	$	356		$	7,344	$	9,912

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

The above tables include our aforementioned 50.0% interest in the joint venture that purchased in March 2011 the outstanding notes issued out of our Non-U.S. Acquired Portfolio structured financing trust. Separate financial data for this entity are as follows:



	As of
	September 30, 2013		December 31, 2012
Investments in non-marketable debt securities, at fair value	$	38,218	$	46,564
Total assets	$	39,245	$	47,125
Total liabilities	$	—	$	—
Members’ capital	$	39,245	$	47,125



	Three months ended September 30,					Nine months ended September 30,
	2013			2012		2013		2012
Net interest income, fees and related (loss) income on earning assets	$	(407	)	$	2,081	$	5,859	$	6,638
Net (loss) income	$	(418	)	$	2,069	$	5,825	$	6,593
Net (loss) income attributable to our equity investment in investee	$	(210	)	$	1,035	$	2,912	$	3,297

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As noted in Note 8, “Notes Payable,” notes payable with a fair value of $38.2 million correspond with the $38.2 million investment in non-marketable debt securities, at fair value held by our equity method investee as noted in the above table.


7.	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, 2013 and December 31, 2012 fair values and carrying amounts (1) of our assets that are required to be carried at fair value in our consolidated financial statements and (2) of our assets not carried at fair value, but for which fair value disclosures are required:



Assets – As of September 30, 2013 (1)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Carrying Amount of Assets
Loans and fees receivable, net for which it is practicable to estimate fair value	$	—	$	—	$	90,580	$	79,329
Loans and fees receivable, net for which it is not practicable to estimate fair value (2)	$	—	$	—	$	—	$	4,921
Loans and fees receivable, at fair value	$	—	$	—	$	14,403	$	14,403
Loans and fees receivable pledged as collateral, at fair value	$	—	$	—	$	97,383	$	97,383



Assets – As of December 31, 2012 (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	$	—	$	—	$	76,384	$	65,198
Loans and fees receivable, net for which it is not practicable to estimate fair value (2)	$	—	$	—	$	—	$	4,427
Loans and fees receivable, at fair value	$	—	$	—	$	20,378	$	20,378
Loans and fees receivable pledged as collateral, at fair value	$	—	$	—	$	133,595	$	133,595


(1)	For cash, deposits and other short-term investments, the carrying amount is a reasonable estimate of fair value.


(2)	We do not disclose fair value for this portion of our loans and fees receivable, net because it is not practicable to do so. These loans and fees receivable consist of a variety of receivables that are largely start-up in nature and for which we have neither sufficient history nor a comparable peer group from which we can calculate fair value.

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.”

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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, 2013 and September 30, 2012:



	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, 2013	$	20,378		$	133,595		$	153,973
Total gains—realized/unrealized:
Net revaluations of loans and fees receivable pledged as collateral under structured financings, at fair value	—			26,967			26,967
Net revaluations of loans and fees receivable, at fair value	7,394			—			7,394
Settlements, net	(13,369		)	(62,621		)	(75,990		)
Impact of foreign currency translation	—			(558		)	(558		)
Net transfers in and/or out of Level 3	—			—			—
Balance at September 30, 2013	$	14,403		$	97,383		$	111,786
Balance at January 1, 2012	$	28,226		$	238,763		$	266,989
Total gains—realized/unrealized:
Net revaluations of loans and fees receivable pledged as collateral under structured financings, at fair value	—			83,041			83,041
Net revaluations of loans and fees receivable, at fair value	10,572			—			10,572
Settlements, net	(19,513		)	(156,730		)	(176,243		)
Impact of foreign currency translation	—			3,333			3,333
Net transfers in and/or out of Level 3	—			—			—
Balance at September 30, 2012	$	19,285		$	168,407		$	187,692

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.

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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, 2013:



Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurements	Fair Value at September 30, 2013		Valuation Technique	Unobservable Input	Range (Weighted Average)(1)
Loans and fees receivable, at fair value	$	14,403	Discounted cash flows	Gross yield	23.9	%
				Principal payment rate	3.6	%
				Expected credit loss rate	15.2	%
				Servicing rate	11.0	%
				Discount rate	15.9	%
Loans and fees receivable pledged as collateral under structured financings, at fair value	$	97,383	Discounted cash flows	Gross yield	9.8% to 27.5% (20.4%)
				Principal payment rate	1.5% to 3.2% (2.5%)
				Expected credit loss rate	14.2% to 18.0% (16.5%)
				Servicing rate	7.4% to 8.3% (7.9%)
				Discount rate	15.9% to 16.2% (16.0%)

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

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, 2013 and December 31, 2012 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:

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Liabilities – As of September 30, 2013	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Carrying Amount of Liabilities
Liabilities not carried at fair value
CAR revolving credit facility	$	—	$	—	$	20,000	$	20,000
ACC amortizing debt facility	$	—	$	—	$	1,348	$	1,348
Amortizing debt facility	$	—	$	—	$	18,731	$	18,731
Revolving credit facility	$	—	$	—	$	4,000	$	4,000
U.K. credit card accounts revolving credit facility	$	—	$	—	$	8,071