Edgar Filing: Atlanticus Holdings Corp

10-Q

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2015

ATLANTICUS HOLDINGS CORPORATION

a Georgia Corporation

IRS Employer Identification No. 58-2336689

SEC File Number 0-53717

Five Concourse Parkway, Suite 300

Atlanta, Georgia 30328

(770) 828-2000

Atlanticus’ common stock, no par value per share, is registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the “Act”).

Atlanticus is not a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.

Atlanticus (1) is required to file reports pursuant to Section 13 of the Act, (2) has filed all reports required to be filed by Section 13 of the Act during the preceding 12 months and (3) has been subject to such filing requirements for the past 90 days.

Atlanticus has submitted electronically and posted on its corporate Web site every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.

Atlanticus is a smaller reporting company and is not a shell company.

As of November 9, 2015, 13,872,808 shares of common stock, no par value, of Atlanticus were outstanding. This excludes 1,459,233 loaned shares to be returned.

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Page
PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements (Unaudited)	1
		Consolidated Balance Sheets	1
		Consolidated Statements of Operations	2
		Consolidated Statements of Comprehensive Income (Loss)	3
		Consolidated Statements 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	27
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
	Item 4.	Controls and Procedures	46

Part II. OTHER INFORMATION
	Item 1.	Legal Proceedings	47
	Item 1A.	Risk Factors	47
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58
	Item 3.	Defaults Upon Senior Securities	58
	Item 4.	Mine Safety Disclosure	58
	Item 5.	Other Information	58
	Item 6.	Exhibits	59
		Signatures	60

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PART I—FINANCIAL INFORMATION



ITEM 1.	FINANCIAL STATEMENTS

Atlanticus Holdings Corporation and Subsidiaries

Consolidated Balance Sheets (Unaudited)

(Dollars in thousands)



	September 30, 2015			December 31, 2014
Assets
Unrestricted cash and cash equivalents	$	38,236		$	39,925
Restricted cash and cash equivalents	21,470			22,741
Loans and fees receivable:
Loans and fees receivable, net (of $16,323 and $15,730 in deferred revenue and $19,682 and $19,957 in allowances for uncollectible loans and fees receivable at September 30, 2015 and December 31, 2014, respectively)	132,932			105,897
Loans and fees receivable, at fair value	8,825			18,255
Loans and fees receivable pledged as collateral under structured financings, at fair value	22,283			34,905
Rental merchandise, net of depreciation	9,230			14,177
Property at cost, net of depreciation	6,143			7,036
Investments in equity-method investees	11,317			15,833
Deposits	987			1,589
Prepaid expenses and other assets	19,593			7,997
Total assets	$	271,016		$	268,355
Liabilities
Accounts payable and accrued expenses	$	44,688		$	39,968
Notes payable, at face value	85,205			78,749
Notes payable to related parties	20,000			20,000
Notes payable associated with structured financings, at fair value	23,225			36,511
Convertible senior notes	64,658			64,752
Income tax liability	20,614			20,933
Total liabilities	258,390			260,913
Commitments and contingencies (Note 9)
Equity
Common stock, no par value, 150,000,000 shares authorized: 15,358,158 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at September 30, 2015; and 15,308,971 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at December 31, 2014	—			—
Additional paid-in capital	210,944			210,519
Accumulated other comprehensive loss	(871		)	(1,841		)
Retained deficit	(197,440		)	(201,237		)
Total shareholders’ equity	12,633			7,441
Noncontrolling interests	(7		)	1
Total equity	12,626			7,442
Total liabilities and equity	$	271,016		$	268,355

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,
	2015			2014			2015			2014
Interest income:
Consumer loans, including past due fees	$	16,863		$	18,481		$	51,175		$	55,825
Other	10			51			52			325
Total interest income	16,873			18,532			51,227			56,150
Interest expense	(4,653		)	(6,106		)	(13,739		)	(18,451		)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable	12,220			12,426			37,488			37,699
Fees and related income on earning assets	16,677			20,669			42,647			75,750
Net recovery of (losses upon) charge off of loans and fees receivable recorded at fair value, net of recoveries	8,375			150			28,738			(1,685		)
Provision for losses on loans and fees receivable recorded at net realizable value	(8,876		)	(8,120		)	(18,005		)	(22,726		)
Net interest income, fees and related income on earning assets	28,396			25,125			90,868			89,038
Other operating income:
Servicing income	1,124			1,058			4,074			3,532
Other income	76			689			435			2,010
Equity in income of equity-method investees	431			1,936			2,213			5,183
Total other operating income	1,631			3,683			6,722			10,725
Other operating expense:
Salaries and benefits	4,700			4,544			13,142			14,306
Card and loan servicing	9,749			11,383			29,628			38,117
Marketing and solicitation	711			529			1,529			1,922
Depreciation, primarily related to rental merchandise	10,372			11,285			33,179			53,566
Other	4,969			5,973			16,402			16,304
Total other operating expense	30,501			33,714			93,880			124,215
(Loss) income before income taxes	(474		)	(4,906		)	3,710			(24,452		)
Income tax benefit (expense)	903			(940		)	81			(3,595		)
Net income (loss)	429			(5,846		)	3,791			(28,047		)
Net loss (income) attributable to noncontrolling interests	4			—			6			(151		)
Net income (loss) attributable to controlling interests	$	433		$	(5,846	)	$	3,797		$	(28,198	)
Net income (loss) attributable to controlling interests per common share—basic	$	0.03		$	(0.42	)	$	0.27		$	(2.01	)
Net income (loss) attributable to controlling interests per common share—diluted	$	0.03		$	(0.42	)	$	0.27		$	(2.01	)

See accompanying notes.

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Atlanticus Holdings Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(Dollars in thousands)



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2015			2014			2015			2014
Net income (loss)	$	429		$	(5,846	)	$	3,791		$	(28,047	)
Other comprehensive income (loss):
Foreign currency translation adjustment	(283		)	(896		)	(143		)	(449		)
Reclassifications of foreign currency translation adjustment to consolidated statements of operations	—			—			1,535			—
Income tax benefit (expense) related to other comprehensive income (loss)	97			73			(422		)	96
Comprehensive income (loss)	243			(6,669		)	4,761			(28,400		)
Comprehensive loss (income) attributable to noncontrolling interests	4			—			6			(151		)
Comprehensive income (loss) attributable to controlling interests	$	247		$	(6,669	)	$	4,767		$	(28,551	)

See accompanying notes.

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Atlanticus Holdings Corporation and Subsidiaries

Consolidated Statements of Equity

For the Nine Months Ended September 30, 2015 (Unaudited)

(Dollars in thousands)



	Common Stock
	Shares Issued		Amount		Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Retained Deficit			Noncontrolling Interests			Total Equity
Balance at December 31, 2014	15,308,971		$	—	$	210,519		$	(1,841	)	$	(201,237	)	$	1		$	7,442
Stock options exercises and proceeds related thereto	3,334		—		8			—			—			—			8
Compensatory stock issuances, net of forfeitures	106,334		—		—			—			—			—			—
Distributions to owners of noncontrolling interests	—		—		—			—			—			(2		)	(2		)
Amortization of deferred stock-based compensation costs	—		—		663			—			—			—			663
Redemption and retirement of shares	(60,481	)	—		(178		)	—			—			—			(178		)
Tax effects of stock-based compensation plans	—		—		(68		)	—			—			—			(68		)
Other comprehensive income	—		—		—			970			3,797			(6		)	4,761
Balance at September 30, 2015	15,358,158		$	—	$	210,944		$	(871	)	$	(197,440	)	$	(7	)	$	12,626

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,
	2015			2014
Operating activities
Net income (loss)	$	3,791		$	(28,047	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation of rental merchandise	31,470			51,064
Depreciation, amortization and accretion, net	1,517			1,545
Losses upon charge off of loans and fees receivable recorded at fair value	6,364			11,646
Provision for losses on loans and fees receivable	18,005			22,726
Interest expense from accretion of discount on convertible senior notes	357			486
Income from accretion of discount associated with receivables purchases	(29,650		)	(24,953		)
Unrealized gain on loans and fees receivable and underlying notes payable held at fair value	(5,878		)	(6,923		)
Income from equity-method investments	(2,213		)	(5,183		)
Changes in assets and liabilities:
(Increase) decrease in uncollected fees on earning assets	(993		)	715
(Decrease) increase in income tax liability	(852		)	3,524
Decrease (increase) in deposits	602			(106		)
Increase (decrease) in accounts payable and accrued expenses	5,231			(11,807		)
Additions to rental merchandise	(26,522		)	(34,479		)
Other	(8,399		)	1,176
Net cash used in operating activities	(7,170		)	(18,616		)
Investing activities
Decrease (increase) in restricted cash	1,258			(4,011		)
Proceeds from equity-method investees	6,729			8,807
Investments in earning assets	(203,041		)	(160,942		)
Proceeds from earning assets	207,848			185,381
Purchases and development of property, net of disposals	(835		)	(3,602		)
Net cash provided by investing activities	11,959			25,633
Financing activities
Noncontrolling interests distributions, net	(2		)	(143		)
Proceeds from exercise of stock options	8			—
Purchase and retirement of outstanding stock	(178		)	(52		)
Proceeds from borrowings	130,614			64,396
Repayment of borrowings	(136,374		)	(83,564		)
Net cash used in financing activities	(5,932		)	(19,363		)
Effect of exchange rate changes on cash	(546		)	(340		)
Net decrease in unrestricted cash	(1,689		)	(12,686		)
Unrestricted cash and cash equivalents at beginning of period	39,925			50,873
Unrestricted cash and cash equivalents at end of period	$	38,236		$	38,187
Supplemental cash flow information
Cash paid for interest	$	14,805		$	20,159
Net cash income tax payments	$	777		$	71
Supplemental non-cash information
Issuance of stock options and restricted stock	$	509		$	931
Notes payable associated with capital leases	$	—		$	160

See accompanying notes.

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Atlanticus Holdings Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015 and 2014


1.	Description of Our Business

Our accompanying consolidated financial statements include the accounts of Atlanticus Holdings Corporation (the “Company”) and those entities we control. We are primarily focused on providing financial services. Through our subsidiaries, we offer an array of financial products and services to consumers who may have been declined under traditional financing options. As discussed further below, we reflect our business lines within two reportable segments: Credit and Other Investments; and Auto Finance. See also Note 3, “Segment Reporting,” for further details.


2.	Significant Accounting Policies and Consolidated Financial Statement Components

The following is a summary of significant accounting policies we follow in preparing our consolidated financial statements, as well as a description of significant components of our consolidated financial statements.

Basis of Presentation and Use of Estimates

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

We have eliminated all significant intercompany balances and transactions for financial reporting purposes.

Loans and Fees Receivable

Our loans and fees receivable include: (1) loans and fees receivable, net; (2) loans and fees receivable, at fair value; and (3) loans and fees receivable pledged as collateral under structured financings, at fair value.

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



	Balance at December 31, 2014			Additions			Subtractions			Balance at September 30, 2015
Loans and fees receivable, gross	$	141.6		$	250.4		$	(223.1	)	$	168.9
Deferred revenue	(15.7		)	(30.3		)	29.7			(16.3		)
Allowance for uncollectible loans and fees receivable	(20.0		)	(18.0		)	18.3			(19.7		)
Loans and fees receivable, net	$	105.9		$	202.1		$	(175.1	)	$	132.9



	Balance at December 31, 2013			Additions			Subtractions			Balance at September 30, 2014
Loans and fees receivable, gross	$	134.7		$	211.8		$	(210.2	)	$	136.3
Deferred revenue	(13.3		)	(26.6		)	25.1			(14.8		)
Allowance for uncollectible loans and fees receivable	(24.2		)	(22.7		)	26.9			(20.0		)
Loans and fees receivable, net	$	97.2		$	162.5		$	(158.2	)	$	101.5

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As of September 30, 2015 and September 30, 2014, the weighted average remaining accretion period for the $16.3 million and $14.8 million, respectively, of deferred revenue reflected in the above tables was 11 months for both periods presented.

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, 2015	Credit Cards			Auto Finance			Other Unsecured Lending Products			Total
Allowance for uncollectible loans and fees receivable:
Balance at beginning of period	$	(1.5	)	$	(1.3	)	$	(13.5	)	$	(16.3	)
Provision for loan losses	(0.3		)	(0.8		)	(7.8		)	(8.9		)
Charge offs	0.9			0.8			4.4			6.1
Recoveries	(0.2		)	(0.2		)	(0.2		)	(0.6		)
Balance at end of period	$	(1.1	)	$	(1.5	)	$	(17.1	)	$	(19.7	)

For the Nine Months Ended September 30, 2015	Credit Cards			Auto Finance			Other Unsecured Lending Products			Total
Allowance for uncollectible loans and fees receivable:
Balance at beginning of period	$	(2.7	)	$	(1.2	)	$	(16.1	)	$	(20.0	)
Provision for loan losses	(1.2		)	(1.4		)	(15.4		)	(18.0		)
Charge offs	3.2			1.7			15.3			20.2
Recoveries	(0.4		)	(0.6		)	(0.9		)	(1.9		)
Balance at end of period	$	(1.1	)	$	(1.5	)	$	(17.1	)	$	(19.7	)



As of September 30, 2015	Credit Cards			Auto Finance			Other Unsecured Lending Products			Total
Allowance for uncollectible loans and fees receivable:
Balance at end of period individually evaluated for impairment	$	—		$	(0.1	)	$	(1.8	)	$	(1.9	)
Balance at end of period collectively evaluated for impairment	$	(1.1	)	$	(1.4	)	$	(15.3	)	$	(17.8	)
Loans and fees receivable:
Loans and fees receivable, gross	$	3.3		$	73.5		$	92.1		$	168.9
Loans and fees receivable individually evaluated for impairment	$	—		$	0.2		$	2.2		$	2.4
Loans and fees receivable collectively evaluated for impairment	$	3.3		$	73.3		$	89.9		$	166.5

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For the Three Months Ended September 30, 2014	Credit Cards			Auto Finance			Other Unsecured Lending Products			Total
Allowance for uncollectible loans and fees receivable:
Balance at beginning of period	$	(8.5	)	$	(1.4	)	$	(10.5	)	$	(20.4	)
Provision for loan losses	(1.2		)	(0.3		)	(6.6		)	(8.1		)
Charge offs	4.8			0.7			3.6			9.1
Recoveries	(0.1		)	(0.3		)	(0.2		)	(0.6		)
Balance at end of period	$	(5.0	)	$	(1.3	)	$	(13.7	)	$	(20.0	)

For the Nine Months Ended September 30, 2014	Credit Cards			Auto Finance			Other Unsecured Lending Products			Total
Allowance for uncollectible loans and fees receivable:
Balance at beginning of period	$	(11.6	)	$	(1.4	)	$	(11.2	)	$	(24.2	)
Provision for loan losses	(8.2		)	(0.2		)	(14.3		)	(22.7		)
Charge offs	15.1			1.2			12.3			28.6
Recoveries	(0.3		)	(0.9		)	(0.5		)	(1.7		)
Balance at end of period	$	(5.0	)	$	(1.3	)	$	(13.7	)	$	(20.0	)



As of December 31, 2014	Credit Cards			Auto Finance			Other Unsecured Lending Products			Total
Allowance for uncollectible loans and fees receivable:
Balance at end of period individually evaluated for impairment	$	—		$	(0.1	)	$	(3.0	)	$	(3.1	)
Balance at end of period collectively evaluated for impairment	$	(2.7	)	$	(1.1	)	$	(13.1	)	$	(16.9	)
Loans and fees receivable:
Loans and fees receivable, gross	$	6.7		$	70.7		$	64.2		$	141.6
Loans and fees receivable individually evaluated for impairment	$	—		$	0.2		$	5.0		$	5.2
Loans and fees receivable collectively evaluated for impairment	$	6.7		$	70.5		$	59.2		$	136.4

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



	September 30, 2015		December 31, 2014
Current loans receivable	$	142.9	$	116.1
Current fees receivable	3.5		3.4
Delinquent loans and fees receivable	22.5		22.1
Loans and fees receivable, gross	$	168.9	$	141.6

An aging of our delinquent loans and fees receivable, gross (in millions) by class of receivable as of September 30, 2015 and December 31, 2014 is as follows:



Balance at September 30, 2015	Credit Cards		Auto Finance		Other Unsecured Lending Products		Total
30-59 days past due	$	0.2	$	6.1	$	3.7	$	10.0
60-89 days past due	0.2		2.0		2.3		4.5
90 or more days past due	0.6		2.0		5.4		8.0
Delinquent loans and fees receivable, gross	1.0		10.1		11.4		22.5
Current loans and fees receivable, gross	2.3		63.4		80.7		146.4
Total loans and fees receivable, gross	$	3.3	$	73.5	$	92.1	$	168.9
Balance of loans 90 or more days past due and still accruing interest and fees	$	—	$	1.7	$	—	$	1.7



Balance at December 31, 2014	Credit Cards		Auto Finance		Other Unsecured Lending Products		Total
30-59 days past due	$	0.4	$	6.3	$	2.8	$	9.5
60-89 days past due	0.4		2.1		2.2		4.7
90 or more days past due	1.6		1.7		4.6		7.9
Delinquent loans and fees receivable, gross	2.4		10.1		9.6		22.1
Current loans and fees receivable, gross	4.3		60.6		54.6		119.5
Total loans and fees receivable, gross	$	6.7	$	70.7	$	64.2	$	141.6
Balance of loans 90 or more days past due and still accruing interest and fees	$	—	$	1.6	$	—	$	1.6

Income Taxes

We experienced an effective income tax benefit rate of 190.5% and a negative effective income tax expense rate of 2.2% for the three and nine months ended September 30, 2015, respectively, compared to negative effective income tax benefit rates of 19.2% and 14.7% for the three and nine months ended September 30, 2014, respectively. Our effective income tax benefit in the three months ended September 30, 2015, was enhanced by the expiration of the statute of limitations for our 2011 tax year. This statute expiration led us to recognize in the three months ended September 30, 2015 previously unrecognized tax benefits associated with an uncertain tax position taken in that 2011 tax year and to reverse in the three months ended September 30, 2015 all prior years’ accruals of interest associated with that uncertain tax position. Our effective income tax benefit rate also was enhanced during the three months ended September 30, 2015 because of our reversal of a portion of the interest and penalty accruals on tax liability assessments associated with our 2007 and 2008 Internal Revenue Service (“IRS”) audits as discussed further below. Our effective negative income tax expense rate for the nine months ended September 30, 2015 benefited from the factors described above and from a favorable effective settlement we reached with the IRS in February, 2015 relative to prior year accruals for uncertain tax positions and interest accruals thereon. We also note that the above favorable effects on our effective tax rates relative to statutory rates were partially offset by interest and penalty accruals on the unpaid tax assessment associated with our 2007 and 2008 IRS audits as discussed further below.

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The negative effective income tax benefit rate for both the three and nine months ended September 30, 2014 resulted principally from the (1) effects of legislative changes enacted during that period in certain state filing jurisdictions, (2) interest accruals on our liabilities for uncertain tax positions and (3) changes in valuation allowances against income statement-oriented federal, foreign and state deferred tax assets.

We report potential accrued interest and penalties related to 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 such accrued interest and penalties within the income tax benefit or expense line item to the extent that we resolve our liabilities for uncertain tax positions or our unpaid tax liabilities in a manner favorable to our accruals therefor. Considering both the aforementioned accruals and reversals, we experienced net charges for interest and penalties of $0.0 million and $0.7 million for the three and nine months ended September 30, 2015, respectively, and $0.6 million and $1.9 million for the three and nine months ended September 30, 2014.

In December 2014, we reached a settlement with the IRS concerning the tax treatment of net operating losses that we incurred in 2007 and 2008 and carried back to obtain refunds of federal income taxes paid in earlier years dating back to 2003. Associated with this settlement, we currently have an unpaid federal income tax assessment of $8.3 million (net of an $0.8 million claim which the settlement permitted us to make through an amended return after the settlement and which was approved by the IRS during the three months ended September 30, 2015). Also as permitted under the settlement, we recently made additional claims on amended returns — claims which, if accepted, would eliminate substantially all of the remaining $8.3 million outstanding assessment. The expected effect of our amended return filings is two-fold. First, based on discussions with legal counsel and the IRS, we do not expect the IRS to pursue collections of the amounts for which we have asserted offsetting claims (i.e., substantially all of the remaining $8.3 million assessment) until the final disposition of our amended return filings. Second, should the IRS accept some or all of the additional claims we have made, we would experience reversals of interest and penalty accruals we are currently making associated with the unpaid tax assessment. In the meantime, however, we continue to accrue interest and penalties associated with the $8.3 million remaining unpaid tax assessment, and as such, as of September 30, 2015, our consolidated balance sheet reflects such accrued interest and penalties in the amount of $2.5 million, including $0.1 million and $0.7 million of net interest and penalty charges taken within our consolidated statement of operations in the three and nine months ended September 30, 2015.

Fees and Related Income on Earning Assets

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



	Three months ended September 30,					Nine months ended September 30,
	2015		2014			2015		2014
Fees on credit products	$	1,759	$	4,223		$	5,824	$	16,017
Changes in fair value of loans and fees receivable recorded at fair value	1,307		6,217			4,519		12,884
Changes in fair value of notes payable associated with structured financings recorded at fair value	2,141		(3,653		)	1,359		(5,961		)
Rental revenue	9,378		11,400			28,765		48,043
Other	2,092		2,482			2,180		4,767
Total fees and related income on earning assets	$	16,677	$	20,669		$	42,647	$	75,750

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

Recent Accounting Pronouncements

In April 2015, the FASB issued updated authoritative guidance related to debt issuance costs. The amendment modifies the presentation of unamortized debt issuance costs to present such amounts as a direct deduction from the face

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amount of the debt, similar to unamortized debt discounts and premiums, rather than as an asset. Amortization of the debt issuance costs continues to be reported as interest expense. The guidance is effective for us beginning January 1, 2016. The impact of adoption of this authoritative guidance is not expected to result in a material impact on our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 establishes a principles-based model under which revenue from a contract is allocated to the distinct performance obligations within the contract and recognized in income as each performance obligation is satisfied. Additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract is also required. In July 2015, the FASB delayed the effective date by one year and the guidance will now be effective for annual and interim periods beginning January 1, 2018 and early adoption is permitted. The Company has not yet determined the potential effects of the adoption of ASU 2014-09 on its consolidated financial statements.

Subsequent Events

We evaluate subsequent events that occur after our consolidated balance sheet date but before our consolidated financial statements are issued. There are two types of subsequent events: (1) recognized, or those that provide additional evidence with respect to conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements; and (2) nonrecognized, or those that provide evidence with respect to conditions that did not exist at the date of the balance sheet but arose subsequent to that date. We have evaluated subsequent events occurring after September 30, 2015, and based on our evaluation we did not identify any recognized or nonrecognized subsequent events that would have required further adjustments to our consolidated financial statements.


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

We measure the profitability of our reportable segments based on their income after allocation of specific costs and corporate overhead; however, our segment results do not reflect any charges for internal capital allocations among our segments. Overhead costs are allocated based on headcounts and other applicable measures to better align costs with the associated revenues.

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



Three months ended September 30, 2015	Credit and Other Investments			Auto Finance			Total
Interest income:
Consumer loans, including past due fees	$	9,902		$	6,961		$	16,863
Other	10			—			10
Total interest income	9,912			6,961			16,873
Interest expense	(4,349		)	(304		)	(4,653		)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable	$	5,563		$	6,657		$	12,220
Fees and related income on earning assets	$	14,577		$	2,100		$	16,677
Servicing income	$	890		$	234		$	1,124
Depreciation of rental merchandise	$	(9,847	)	$	—		$	(9,847	)
Equity in income of equity-method investees	$	431		$	—		$	431
(Loss) income before income taxes	$	(3,853	)	$	3,379		$	(474	)
Income tax benefit (expense)	$	2,067		$	(1,164	)	$	903

Nine months ended September 30, 2015	Credit and Other Investments			Auto Finance			Total
Interest income:
Consumer loans, including past due fees	$	30,520		$	20,655		$	51,175
Other	52			—			52
Total interest income	30,572			20,655			51,227
Interest expense	(12,828		)	(911		)	(13,739		)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable	$	17,744		$	19,744		$	37,488
Fees and related income on earning assets	$	40,333		$	2,314		$	42,647
Servicing income	$	3,428		$	646		$	4,074
Depreciation of rental merchandise	$	(31,470	)	$	—		$	(31,470	)
Equity in income of equity-method investees	$	2,213		$	—		$	2,213
(Loss) income before income taxes	$	(3,246	)	$	6,956		$	3,710
Income tax benefit (expense)	$	2,419		$	(2,338	)	$	81
Total assets	$	201,706		$	69,310		$	271,016

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Three months ended September 30, 2014	Credit and Other Investments			Auto Finance			Total
Interest income:
Consumer loans, including past due fees	$	12,209		$	6,272		$	18,481
Other	51			—			51
Total interest income	12,260			6,272			18,532
Interest expense	(5,773		)	(333		)	(6,106		)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable	$	6,487		$	5,939		$	12,426
Fees and related income on earning assets	$	20,587		$	82		$	20,669
Servicing income	$	909		$	149		$	1,058
Depreciation of rental merchandise	$	(10,318	)	$	—		$	(10,318	)
Equity in income of equity-method investees	$	1,936		$	—		$	1,936
(Loss) income before income taxes	$	(6,231	)	$	1,325		$	(4,906	)
Income tax expense	$	(465	)	$	(475	)	$	(940	)

Nine months ended September 30, 2014	Credit and Other Investments			Auto Finance			Total
Interest income:
Consumer loans, including past due fees	$	38,097		$	17,728		$	55,825
Other	325			—			325
Total interest income	38,422			17,728			56,150
Interest expense	(17,417		)	(1,034		)	(18,451		)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable	$	21,005		$	16,694		$	37,699
Fees and related income on earning assets	$	75,544		$	206		$	75,750
Servicing income	$	3,039		$	493		$	3,532
Depreciation of rental merchandise	$	(51,064	)	$	—		$	(51,064	)
Equity in income of equity-method investees	$	5,183		$	—		$	5,183
(Loss) income before income taxes	$	(27,955	)	$	3,503		$	(24,452	)
Income tax expense	$	(2,436	)	$	(1,159	)	$	(3,595	)
Total assets	$	239,240		$	63,155		$	302,395


4.	Shareholders' Equity

Retired Shares

During the three and nine months ended September 30, 2015, we repurchased and contemporaneously retired 14,176 and 60,481 shares of our common stock at an aggregate cost of $55,718 and $178,270, respectively, pursuant to open market purchases and the return of stock by holders of equity incentive awards to pay tax withholding obligations. During the three and nine months ended September 30, 2014, we repurchased and contemporaneously retired 7,302 and 19,629 shares of our common stock at an aggregate cost of $20,957 and $51,837, pursuant to the return of stock by holders of equity incentive awards to pay tax withholding obligations.

We had 1,459,233 loaned shares outstanding at September 30, 2015 and December 31, 2014, which were originally lent in connection with our November 2005 issuance of convertible senior notes. We retire lent shares as they are returned to us.

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5.	Investments in Equity-Method Investees

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

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



	As of
	September 30, 2015		December 31, 2014
Loans and fees receivable pledged as collateral under structured financings, at fair value	$	16,173	$	22,571
Total assets	$	17,033	$	23,831
Total liabilities	$	59	$	82
Members’ capital	$	16,974	$	23,749



	Three months ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014
Net interest income, fees and related income on earning assets	$	659	$	3,544	$	3,343	$	8,853
Total other operating income	$	—	$	17	$	—	$	110
Net income	$	475	$	3,267	$	2,756	$	7,943
Net income attributable to our equity investment in investee	$	431	$	1,936	$	2,213	$	5,183

The above tables include the economics associated with our aforementioned 50.0% interest in the joint venture that purchased in March 2011 the outstanding notes issued out of our Non-U.S. Acquired Portfolio structured financing trust prior to its consolidation in December 2014. Separate financial data for this entity prior to its consolidation are as follows:



	As of
	December 31, 2014
Investments in non-marketable debt securities, at fair value	$	—
Total assets	$	—
Total liabilities	$	—
Members’ capital	$	—



	Three Months Ended September 30, 2014		Nine Months Ended September 30, 2014
Net interest income, fees and related income on earning assets	$	2,515	$	4,213
Net income	$	2,503	$	4,177
Net income attributable to our equity investment in investee	$	1,252	$	2,089

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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, 2015 and December 31, 2014 fair values and carrying amounts of (1) our assets that are required to be carried at fair value in our consolidated financial statements and (2) our assets not carried at fair value, but for which fair value disclosures are required:



Assets – As of September 30, 2015 (1)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Carrying Amount of Assets
Loans and fees receivable, net for which it is practicable to estimate fair value	$	—	$	—	$	152,427	$	132,932
Loans and fees receivable, at fair value	$	—	$	—	$	8,825	$	8,825
Loans and fees receivable pledged as collateral, at fair value	$	—	$	—	$	22,283	$	22,283



Assets – As of December 31, 2014 (1)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Carrying Amount of Assets
Loans and fees receivable, net for which it is practicable to estimate fair value	$	—	$	—	$	111,010	$	101,753
Loans and fees receivable, net for which it is not practicable to estimate fair value (2)	$	—	$	—	$	—	$	4,144
Loans and fees receivable, at fair value	$	—	$	—	$	18,255	$	18,255
Loans and fees receivable pledged as collateral, at fair value	$	—	$	—	$	34,905	$	34,905


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


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

For those asset classes above that are required to be carried at fair value in our consolidated financial statements, gains and losses associated with fair value changes are detailed on our fees and related income on earning assets table within Note 2, “Significant Accounting Policies and Consolidated Financial Statement Components.”

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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, 2015 and September 30, 2014:



	Loans and Fees Receivable, at Fair Value			Loans and Fees Receivable Pledged as Collateral under Structured Financings, at Fair Value			Total
Balance at January 1, 2015	$	18,255		$	34,905		$	53,160
Total gains—realized/unrealized:
Net revaluations of loans and fees receivable pledged as collateral under structured financings, at fair value	—			1,000			1,000
Net revaluations of loans and fees receivable, at fair value	3,519			—			3,519
Settlements, net	(12,719		)	(13,622		)	(26,341		)
Impact of foreign currency translation	(230		)	—			(230		)
Balance at September 30, 2015	$	8,825		$	22,283		$	31,108
Balance at January 1, 2014	$	12,080		$	88,132		$	100,212
Total gains—realized/unrealized:
Net revaluations of loans and fees receivable pledged as collateral under structured financings, at fair value	—			9,883			9,883
Net revaluations of loans and fees receivable, at fair value	3,001			—			3,001
Settlements, net	(6,074		)	(32,798		)	(38,872		)
Impact of foreign currency translation	—			(246		)	(246		)
Balance at September 30, 2014	$	9,007		$	64,971		$	73,978

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, 2015 and December 31, 2014:



Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurements	Fair Value at September 30, 2015		Valuation Technique	Unobservable Input	Range (Weighted Average)(1)
Loans and fees receivable, at fair value	$	8,825	Discounted cash flows	Gross yield	18.5% to 24.1% (21.5%)
				Principal payment rate	1.7% to 3.3% (2.6%)
				Expected credit loss rate	6.8% to 16.7% (12.1%)
				Servicing rate	8.4% to 12.5% (10.6%)
				Discount rate	16.0% to 16.2% (16.1%)
Loans and fees receivable pledged as collateral under structured financings, at fair value	$	22,283	Discounted cash flows	Gross yield	27.7	%
				Principal payment rate	2.8	%
				Expected credit loss rate	12.6	%
				Servicing rate	12.9	%
				Discount rate	16	%



Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurements	Fair Value at December 31, 2014		Valuation Technique	Unobservable Input	Range (Weighted Average)(1)
Loans and fees receivable, at fair value	$	18,255	Discounted cash flows	Gross yield	17.9% to 25.6% (21.0%)
				Principal payment rate	1.5% to 3.6% (2.3%)
				Expected credit loss rate	7.4% to 13.7% (9.9%)
				Servicing rate	7.4% to 15.1% (10.5%)
				Discount rate	15.9% to 16.2% (16.1%)
Loans and fees receivable pledged as collateral under structured financings, at fair value	$	34,905	Discounted cash flows	Gross yield	27.2	%
				Principal payment rate	2.7	%
				Expected credit loss rate	13.5	%
				Servicing rate	11.0	%
				Discount rate	15.9	%

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

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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, 2015 and December 31, 2014 fair values and carrying amounts of (1) our liabilities that are required to be carried at fair value in our consolidated financial statements and (2) our liabilities not carried at fair value, but for which fair value disclosures are required:



Liabilities – As of September 30, 2015	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Carrying Amount of Liabilities
Liabilities not carried at fair value
CAR revolving credit facility	$	—	$	—	$	28,350	$	28,350
ACC amortizing debt facility	$	—	$	—	$	—	$	—
Amortizing debt facilities	$	—	$	—	$	56,517	$	56,517
Revolving credit facility	$	—	$	—	$	—	$	—
U.K. credit card accounts revolving credit facility	$	—	$	—	$	338	$	338
Senior secured term loan	$	—	$	—	$	20,000	$	20,000
5.875% convertible senior notes	$	—	$	39,178	$	—	$	64,658
Liabilities carried at fair value
Economic sharing arrangement liability	$	—	$	—	$	49	$	49
Notes payable associated with structured financings, at fair value	$	—	$	—	$	23,225	$	23,225



Liabilities - As of December 31, 2014	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Carrying Amount of Liabilities
Liabilities not carried at fair value
CAR revolving credit facility	$	—	$	—	$	28,500	$	28,500
ACC amortizing debt facility	$	—	$	—	$	125	$	125
Amortizing debt facilities	$	—	$	—	$	42,200	$	42,200
Revolving credit facility	$	—	$	—	$	4,000	$	4,000
U.K. credit card accounts revolving credit facility	$	—	$	—	$	3,924	$	3,924
Senior secured term loan	$	—	$	—	$	20,000	$	20,000
5.875% convertible senior notes	$	—	$	37,662	$	—	$	64,302
Liabilities carried at fair value
Economic sharing arrangement liability	$	—	$	—	$	119	$	119
Notes payable associated with structured financings, at fair value	$	—	$	—	$	36,511	$	36,511

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, 2015 and 2014.

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	Notes Payable Associated with Structured Financings, at Fair Value
	2015			2014
Beginning balance, January 1	$	36,511		$	94,523
Total (gains) losses—realized/unrealized:
Net revaluations of notes payable associated with structured financings, at fair value	(1,359		)	5,961
Repayments on outstanding notes payable, net	(11,927		)	(30,596		)
Impact of foreign currency translation	—			(231		)
Ending balance, September 30	$	23,225		$	69,657

The unrealized gains and losses for liabilities within the Level 3 category presented in the tables 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.

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 for the periods ended September 30, 2015 and December 31, 2014:



Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurements