Edgar Filing: Atlanticus Holdings Corp

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2016

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 August 5, 2016, 13,746,852 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	3
		Consolidated Statements of 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	26
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
	Item 4.	Controls and Procedures	44

Part II. OTHER INFORMATION
	Item 1.	Legal Proceedings	45
	Item 1A.	Risk Factors	45
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
	Item 3.	Defaults Upon Senior Securities	54
	Item 4.	Mine Safety Disclosure	54
	Item 5.	Other Information	54
	Item 6.	Exhibits	55
		Signatures	56

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PART I—FINANCIAL INFORMATION



ITEM 1.	FINANCIAL STATEMENTS

Atlanticus Holdings Corporation and Subsidiaries

Consolidated Balance Sheets (Unaudited)

(Dollars in thousands)



	June 30, 2016			December 31, 2015
Assets
Unrestricted cash and cash equivalents	$	30,446		$	51,033
Restricted cash and cash equivalents	16,883			20,547
Loans and fees receivable:
Loans and fees receivable, net (of $20,348 and $16,721 in deferred revenue and $24,213 and $21,474 in allowances for uncollectible loans and fees receivable at June 30, 2016 and December 31, 2015, respectively)	198,188			141,949
Loans and fees receivable, at fair value	5,255			6,353
Loans and fees receivable pledged as collateral under structured financings, at fair value	15,265			20,353
Rental merchandise, net of depreciation	588			4,666
Property at cost, net of depreciation	4,319			5,686
Investment in equity-method investee	8,351			10,123
Deposits	538			825
Prepaid expenses and other assets	20,475			19,194
Total assets	$	300,308		$	280,729
Liabilities
Accounts payable and accrued expenses	$	60,544		$	51,722
Notes payable, at face value	103,611			90,000
Notes payable to related parties	20,000			20,000
Notes payable associated with structured financings, at fair value	15,626			20,970
Convertible senior notes	61,903			64,783
Income tax liability	22,490			22,303
Total liabilities	284,174			269,778
Commitments and contingencies (Note 9)
Equity
Common stock, no par value, 150,000,000 shares authorized: 15,209,198 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at June 30, 2016; and 15,332,041 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at December 31, 2015	—			—
Additional paid-in capital	210,837			211,083
Accumulated other comprehensive loss	—			(600		)
Retained deficit	(194,694		)	(199,524		)
Total shareholders’ equity	16,143			10,959
Noncontrolling interests	(9		)	(8		)
Total equity	16,134			10,951
Total liabilities and equity	$	300,308		$	280,729

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 June 30,						For the Six Months Ended June 30,
	2016			2015			2016			2015
Interest income:
Consumer loans, including past due fees	$	21,462		$	16,869		$	39,610		$	34,312
Other	60			10			152			42
Total interest income	21,522			16,879			39,762			34,354
Interest expense	(4,792		)	(4,529		)	(9,436		)	(9,086		)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable	16,730			12,350			30,326			25,268
Fees and related income on earning assets	5,878			12,751			13,765			25,970
Net recovery of charge off of loans and fees receivable recorded at fair value	6,140			9,991			11,051			20,363
Provision for losses on loans and fees receivable recorded at net realizable value	(10,811		)	(5,961		)	(15,542		)	(9,129		)
Net interest income, fees and related income on earning assets	17,937			29,131			39,600			62,472
Other operating income:
Servicing income	981			1,390			2,428			2,950
Other income	75			92			145			359
Gain on repurchase of convertible senior notes	1,037			—			1,037			—
Equity in income of equity-method investee	325			707			1,327			1,782
Total other operating income	2,418			2,189			4,937			5,091
Other operating expense:
Salaries and benefits	6,181			4,322			11,913			8,442
Card and loan servicing	7,285			9,608			16,273			19,879
Marketing and solicitation	932			332			1,787			818
Depreciation, primarily related to rental merchandise	2,099			9,961			6,255			22,807
Other	2,928			4,261			2,629			11,433
Total other operating expense	19,425			28,484			38,857			63,379
Income before income taxes	930			2,836			5,680			4,184
Income tax expense	(657		)	(1,440		)	(855		)	(822		)
Net income	273			1,396			4,825			3,362
Net loss attributable to noncontrolling interests	4			1			5			2
Net income attributable to controlling interests	$	277		$	1,397		$	4,830		$	3,364
Net income attributable to controlling interests per common share—basic	$	0.02		$	0.10		$	0.35		$	0.24
Net income attributable to controlling interests per common share—diluted	$	0.02		$	0.10		$	0.35		$	0.24

See accompanying notes.

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Atlanticus Holdings Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)



	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2016		2015			2016		2015
Net income	$	273	$	1,396		$	4,825	$	3,362
Other comprehensive income:
Foreign currency translation adjustment	—		583			—		140
Reclassifications of foreign currency translation adjustment to consolidated statements of operations	300		—			600		1,535
Income tax expense related to other comprehensive income	—		(200		)	—		(519		)
Comprehensive income	573		1,779			5,425		4,518
Comprehensive loss attributable to noncontrolling interests	4		1			5		2
Comprehensive income attributable to controlling interests	$	577	$	1,780		$	5,430	$	4,520

See accompanying notes.

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Atlanticus Holdings Corporation and Subsidiaries

Consolidated Statements of Equity

For the Six Months Ended June 30, 2016 (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, 2015	15,332,041		$	—	$	211,083		$	(600	)	$	(199,524	)	$	(8	)	$	10,951
Stock options exercises and proceeds related thereto	1,666		—		4			—			—			—			4
Compensatory stock issuances, net of forfeitures	122,134		—		—			—			—			—			—
Contributions from owners of noncontrolling interests	—		—		—			—			—			4			4
Amortization of deferred stock-based compensation costs	—		—		532			—			—			—			532
Redemption and retirement of shares	(246,643	)	—		(745		)	—			—			—			(745		)
Tax effects of stock-based compensation plans	—		—		(37		)	—			—			—			(37		)
Other comprehensive income	—		—		—			600			4,830			(5		)	5,425
Balance at June 30, 2016	15,209,198		$	—	$	210,837		$	—		$	(194,694	)	$	(9	)	$	16,134

See accompanying notes.

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Atlanticus Holdings Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)



	For the Six Months Ended June 30,
	2016			2015
Operating activities
Net income	$	4,825		$	3,362
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation of rental merchandise	4,714			21,623
Depreciation, amortization and accretion, net	1,541			1,056
Losses upon charge off of loans and fees receivable recorded at fair value	3,361			3,050
Provision for losses on loans and fees receivable	15,542			9,129
Interest expense from accretion of discount on convertible senior notes	258			235
Income from accretion of discount associated with receivables purchases	(19,867		)	(18,914		)
Unrealized gain on loans and fees receivable and underlying notes payable held at fair value	(4,529		)	(2,430		)
Income from equity-method investments	(1,327		)	(1,782		)
Gain on repurchase of convertible senior notes	(1,037		)	—
Changes in assets and liabilities:
Decrease in uncollected fees on earning assets	(1,877		)	(394		)
Increase in income tax liability	149			90
Decrease in deposits	287			608
Increase in accounts payable and accrued expenses	11,622			515
Additions to rental merchandise	(636		)	(19,451		)
Other	(299		)	(6,904		)
Net cash provided by (used in) operating activities	12,727			(10,207		)
Investing activities
Decrease in restricted cash	3,613			5,889
Proceeds from equity-method investee	3,099			4,714
Investments in earning assets	(191,023		)	(127,418		)
Proceeds from earning assets	144,461			137,397
Purchases and development of property, net of disposals	(177		)	(616		)
Net cash (used in) provided by investing activities	(40,027		)	19,966
Financing activities
Noncontrolling interests contributions (distributions), net	4			(2		)
Proceeds from exercise of stock options	4			4
Purchase and retirement of outstanding stock	(745		)	(123		)
Proceeds from borrowings	84,655			88,802
Repayment of borrowings	(76,332		)	(91,960		)
Net cash provided by (used in) financing activities	7,586			(3,279		)
Effect of exchange rate changes on cash	(873		)	(77		)
Net (decrease) increase in unrestricted cash	(20,587		)	6,403
Unrestricted cash and cash equivalents at beginning of period	51,033			39,925
Unrestricted cash and cash equivalents at end of period	$	30,446		$	46,328
Supplemental cash flow information
Cash paid for interest	$	9,209		$	8,941
Net cash income tax payments	$	705		$	737
Supplemental non-cash information
Issuance of stock options and restricted stock	$	1,710		$	281

See accompanying notes.

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Atlanticus Holdings Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2016 and 2015


1.	Description of Our Business

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

Within our Credit and Other Investments segment, we support lenders who originate consumer loans through multiple channels, including retail point-of-sale and direct mail solicitation. These products are all offered under the Fortiva brand. In the Fortiva Retail Credit (the "point-of-sale" operations) channel, we partner with retailers and service providers in various industries across the United States ("U.S.") to enable them to provide credit to their customers for the purchase of goods and services. These services are often extended to consumers who may have been declined under traditional financing options. We specialize in supporting this "second look" credit service in various industries across the U.S. Additionally, we support lenders who market general purpose Fortiva Personal Loans and Fortiva Credit Cards (collectively, the "direct-to-consumer" operations) directly to consumers through additional channels enabling them to reach consumers through a diverse origination platform which includes direct mail, Internet-based marketing and through partnerships. Using our infrastructure and technology platform, we also provide loan servicing activities, including risk management and customer service outsourcing for third parties.

Beyond these activities within our Credit and Other Investments segment, we continue to service portfolios of credit card receivables. One of our portfolios of credit card receivables is encumbered by non-recourse structured financing, and for this portfolio our principal remaining economic interest is the servicing compensation we receive as an offset against our servicing costs given that the likely future collections on the portfolio are insufficient to allow for full repayment of the financing.

Additionally, we report within our Credit and Other Investments segment the income earned from an investment in an equity-method investee that holds credit card receivables for which we are the servicer.

Lastly, we report within our Credit and Other Investments segment gains associated with investments previously made in consumer finance technology platforms. These include investments in companies engaged in mobile technologies, marketplace lending and other financial technologies. These investments are carried at the lower of cost or market valuation as of June 30, 2016. Some of these investees have raised, and continue to seek, capital at valuations substantially in excess of our associated book value. However, none of these companies are publicly-traded, there are no pending liquidity events, and ascribing value to these investments at this time would be speculative. Based on the performance and/or marketability of these investments in future periods, we could have material gains for our remaining ownership in these or other investment assets.

Within our Auto Finance segment, our CAR subsidiary operations principally purchase and service loans secured by automobiles from or for, and also provide floor plan financing for, a pre-qualified network of independent automotive dealers and automotive finance companies in the buy-here, pay-here, used car business. We purchase auto loans at a discount and with dealer retentions or holdbacks that provide risk protection. Also within our Auto Finance segment, we are providing certain installment lending products in addition to our traditional loans secured by automobiles.


2.	Significant Accounting Policies and Consolidated Financial Statement Components

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

Basis of Presentation and Use of Estimates

We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the U.S. (“GAAP”), 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

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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, 2015			Additions			Subtractions			Balance at June 30, 2016
Loans and fees receivable, gross	$	180.1		$	227.3		$	(164.7	)	$	242.7
Deferred revenue	(16.7		)	(23.5		)	19.9			(20.3		)
Allowance for uncollectible loans and fees receivable	(21.5		)	(15.5		)	12.8			(24.2		)
Loans and fees receivable, net	$	141.9		$	188.3		$	(132.0	)	$	198.2



	Balance at December 31, 2014			Additions			Subtractions			Balance at June 30, 2015
Loans and fees receivable, gross	$	141.6		$	159.2		$	(146.2	)	$	154.6
Deferred revenue	(15.7		)	(21.4		)	18.9			(18.2		)
Allowance for uncollectible loans and fees receivable	(20.0		)	(9.1		)	12.8			(16.3		)
Loans and fees receivable, net	$	105.9		$	128.7		$	(114.5	)	$	120.1

As of June 30, 2016 and June 30, 2015, the weighted average remaining accretion period for the $20.3 million and $18.2 million, respectively, of deferred revenue reflected in the above tables was 11 months and 10 months, respectively.

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



For the Three Months Ended June 30, 2016	Credit Cards			Auto Finance			Other Unsecured Lending Products			Total
Allowance for uncollectible loans and fees receivable:
Balance at beginning of period	$	(1.3	)	$	(1.8	)	$	(16.8	)	$	(19.9	)
Provision for loan losses	0.4			(0.8		)	(10.4		)	(10.8		)
Charge offs	0.6			0.9			6.6			8.1
Recoveries	(0.8		)	(0.3		)	(0.5		)	(1.6		)
Balance at end of period	$	(1.1	)	$	(2.0	)	$	(21.1	)	$	(24.2	)

For the Six Months Ended June 30, 2016	Credit Cards			Auto Finance			Other Unsecured Lending Products			Total
Allowance for uncollectible loans and fees receivable:
Balance at beginning of period	$	(1.2	)	$	(1.7	)	$	(18.6	)	$	(21.5	)
Provision for loan losses	0.6			(1.4		)	(14.7		)	(15.5		)
Charge offs	1.0			1.7			13.2			15.9
Recoveries	(1.5		)	(0.6		)	(1.0		)	(3.1		)
Balance at end of period	$	(1.1	)	$	(2.0	)	$	(21.1	)	$	(24.2	)



As of June 30, 2016	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	$	—		$	(0.2	)	$	(0.7	)	$	(0.9	)
Balance at end of period collectively evaluated for impairment	$	(1.1	)	$	(1.8	)	$	(20.4	)	$	(23.3	)
Loans and fees receivable:
Loans and fees receivable, gross	$	5.4		$	78.6		$	158.7		$	242.7
Loans and fees receivable individually evaluated for impairment	$	—		$	0.3		$	0.8		$	1.1
Loans and fees receivable collectively evaluated for impairment	$	5.4		$	78.3		$	157.9		$	241.6

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For the Three Months Ended June 30, 2015	Credit Cards			Auto Finance			Other Unsecured Lending Products			Total
Allowance for uncollectible loans and fees receivable:
Balance at beginning of period	$	(1.9	)	$	(1.2	)	$	(12.5	)	$	(15.6	)
Provision for loan losses	(0.4		)	(0.4		)	(5.2		)	(6.0		)
Charge offs	0.9			0.4			4.4			5.7
Recoveries	(0.1		)	(0.1		)	(0.2		)	(0.4		)
Balance at end of period	$	(1.5	)	$	(1.3	)	$	(13.5	)	$	(16.3	)

For the Six Months Ended June 30, 2015	Credit Cards			Auto Finance			Other Unsecured Lending Products			Total
Allowance for uncollectible loans and fees receivable:
Balance at beginning of period	$	(2.7	)	$	(1.2	)	$	(16.1	)	$	(20.0	)
Provision for loan losses	(0.9		)	(0.6		)	(7.6		)	(9.1		)
Charge offs	2.3			0.9			10.9			14.1
Recoveries	(0.2		)	(0.4		)	(0.7		)	(1.3		)
Balance at end of period	$	(1.5	)	$	(1.3	)	$	(13.5	)	$	(16.3	)



As of December 31, 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	)	$	(1.3	)	$	(1.4	)
Balance at end of period collectively evaluated for impairment	$	(1.2	)	$	(1.6	)	$	(17.3	)	$	(20.1	)
Loans and fees receivable:
Loans and fees receivable, gross	$	5.2		$	76.0		$	98.9		$	180.1
Loans and fees receivable individually evaluated for impairment	$	—		$	0.2		$	1.5		$	1.7
Loans and fees receivable collectively evaluated for impairment	$	5.2		$	75.8		$	97.4		$	178.4

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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:



	June 30, 2016		December 31, 2015
Current loans receivable	$	213.2	$	150.0
Current fees receivable	4.9		4.5
Delinquent loans and fees receivable	24.6		25.6
Loans and fees receivable, gross	$	242.7	$	180.1

An aging of our delinquent loans and fees receivable, gross (in millions) by class of receivable as of June 30, 2016 and December 31, 2015 is as follows:



Balance at June 30, 2016	Credit Cards		Auto Finance		Other Unsecured Lending Products		Total
30-59 days past due	$	0.1	$	6.8	$	5.0	$	11.9
60-89 days past due	0.1		1.9		3.3		5.3
90 or more days past due	0.5		1.3		5.6		7.4
Delinquent loans and fees receivable, gross	0.7		10.0		13.9		24.6
Current loans and fees receivable, gross	4.7		68.6		144.8		218.1
Total loans and fees receivable, gross	$	5.4	$	78.6	$	158.7	$	242.7
Balance of loans 90 or more days past due and still accruing interest and fees	$	—	$	1.0	$	—	$	1.0



Balance at December 31, 2015	Credit Cards		Auto Finance		Other Unsecured Lending Products		Total
30-59 days past due	$	0.2	$	6.9	$	4.4	$	11.5
60-89 days past due	0.1		2.2		3.1		5.4
90 or more days past due	0.4		1.8		6.5		8.7
Delinquent loans and fees receivable, gross	0.7		10.9		14.0		25.6
Current loans and fees receivable, gross	4.5		65.1		84.9		154.5
Total loans and fees receivable, gross	$	5.2	$	76.0	$	98.9	$	180.1
Balance of loans 90 or more days past due and still accruing interest and fees	$	—	$	1.5	$	—	$	1.5

Income Taxes

We experienced effective income tax expense rates of 70.6% and 15.1% for the three and six months ended June 30, 2016, respectively, compared to effective income tax expense rates of 50.8% and 19.6% for the three and six months ended June 30, 2015, respectively. Our effective income tax expense rate for the three months ended June 30, 2016 differs from the statutory rate principally due to the significance of our accruals of interest and penalties on unpaid tax liabilities relative to our $0.9 million of pre-tax income during this period. Our effective income tax expense rate for the six months ended June 30, 2016 differs from the statutory rate principally due to the income of our U.K. subsidiary (1) that is not subject to tax in the U.S., and (2) the U.K. tax on which was fully offset by the release of U.K. valuation allowances. Our effective income tax expense rate for the six months ended June 30, 2015 is significantly below statutory rates principally due to a favorable effective settlement we reached with the Internal Revenue Service (“IRS”) in February, 2015 relative to prior year accruals for uncertain tax positions and interest accruals thereon.

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

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extent that we resolve our liabilities for uncertain tax positions or unpaid tax liabilities in a manner favorable to our accruals therefor. During the three and six months ended June 30, 2016, our income tax expense includes $0.2 million and $0.4 million, respectively, for income tax-related interest and penalties. During the three and six months ended June 30, 2015, our income tax expense included $0.5 million and $0.7 million, respectively, accrued for income tax-related interest and penalties.

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. Our net unpaid income tax assessment associated with that settlement was $7.3 million at June 30, 2016; this amount excludes unpaid interest and penalties on the tax assessment, the accruals for which aggregated $3.1 million at June 30, 2016. The IRS is currently examining amended return claims we have made, which, if ultimately approved by the IRS or the courts, would eliminate the $7.3 million assessment and cause the reversal of the $3.1 million accrual we have made for interest and penalties thereon.

Fees and Related Income on Earning Assets

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



	Three months ended June 30,					Six months ended June 30,
	2016		2015			2016		2015
Fees on credit products	$	856	$	1,891		$	1,655	$	4,065
Changes in fair value of loans and fees receivable recorded at fair value	527		1,981			2,425		3,212
Changes in fair value of notes payable associated with structured financings recorded at fair value	939		(420		)	2,104		(782		)
Rental revenue	3,119		9,278			7,333		19,387
Other	437		21			248		88
Total fees and related income on earning assets	$	5,878	$	12,751		$	13,765	$	25,970

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 June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments. The guidance requires an assessment of credit losses based on expected rather than incurred losses. This generally will result in the recognition of allowances for losses earlier than under current accounting guidance for trade and other receivables, held to maturity debt securities and other instruments. The standard will be adopted on a prospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company has not yet determined the potential effects of adopting ASU 2016-13 on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting. The ASU eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively, as if the equity method had been in effect during all previous periods that the investment had been held. The ASU requires that the cost of acquiring the additional interest in the investee should be combined with the current basis of the investor’s previously held interest and the equity method of accounting should be adopted as of the date the investment becomes qualified for equity method accounting. No retroactive adjustment of the investment is required. The ASU also requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings, the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The ASU is effective for us January 1, 2017. The impact of adoption of this authoritative guidance is not expected to result in a material impact on our consolidated financial statements.

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In February 2016, the FASB issued ASU No. 2016-02, Leases, which would require lessees to recognize assets and liabilities for most leases, changing certain aspects of current lessor accounting, among other things. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. We have not yet determined the potential effects of adopting ASU 2016-02 on our consolidated financial statements.

In April 2015, the FASB issued updated authoritative guidance related to debt issuance costs. The amendment modifies the presentation of unamortized debt issuance costs to present such amounts as a direct deduction from the face amount of the debt, similar to unamortized debt discounts and premiums, rather than as an asset. Amortization of the debt issuance costs continues to be reported as interest expense. The guidance was effective for us beginning January 1, 2016. The impact of adoption of this authoritative guidance did not 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 August 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. We do not plan to early adopt the guidance. We have not yet determined the potential effects of the adoption of ASU 2014-09 on our consolidated financial statements.

Subsequent Events

We evaluate subsequent events that occur after our consolidated balance sheet date but before our consolidated financial statements are issued. There are two types of subsequent events: (1) recognized, or those that provide additional evidence with respect to conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements; and (2) nonrecognized, or those that provide evidence with respect to conditions that did not exist at the date of the balance sheet but arose subsequent to that date. We have evaluated subsequent events occurring after June 30, 2016, 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 June 30, 2016 and December 31, 2015, we did not have a material amount of long-lived assets located outside of the U.S., and only a negligible portion of our revenues for the six months ended June 30, 2016 and 2015 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 June 30, 2016	Credit and Other Investments			Auto Finance			Total
Interest income:
Consumer loans, including past due fees	$	14,132		$	7,330		$	21,462
Other	60			—			60
Total interest income	14,192			7,330			21,522
Interest expense	(4,454		)	(338		)	(4,792		)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable	$	9,738		$	6,992		$	16,730
Fees and related income on earning assets	$	5,840		$	38		$	5,878
Servicing income	$	732		$	249		$	981
Gain on repurchase of convertible senior notes	$	1,037		$	—		$	1,037
Depreciation of rental merchandise	$	(1,335	)	$	—		$	(1,335	)
Equity in income of equity-method investee	$	325		$	—		$	325
(Loss) income before income taxes	$	(664	)	$	1,594		$	930
Income tax expense	$	(113	)	$	(544	)	$	(657	)

Six months ended June 30, 2016	Credit and Other Investments			Auto Finance			Total
Interest income:
Consumer loans, including past due fees	$	25,317		$	14,293		$	39,610
Other	152			—			152
Total interest income	25,469			14,293			39,762
Interest expense	(8,791		)	(645		)	(9,436		)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable	$	16,678		$	13,648		$	30,326
Fees and related income on earning assets	$	13,669		$	96		$	13,765
Servicing income	$	1,924		$	504		$	2,428
Gain on repurchase of convertible senior notes	$	1,037		$	—		$	1,037
Depreciation of rental merchandise	$	(4,714	)	$	—		$	(4,714	)
Equity in income of equity-method investee	$	1,327		$	—		$	1,327
Income before income taxes	$	2,662		$	3,018		$	5,680
Income tax benefit (expense)	$	204		$	(1,059	)	$	(855	)
Total assets	$	228,729		$	71,579		$	300,308

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Three months ended June 30, 2015	Credit and Other Investments			Auto Finance			Total
Interest income:
Consumer loans, including past due fees	$	9,898		$	6,971		$	16,869
Other	10			—			10
Total interest income	9,908			6,971			16,879
Interest expense	(4,228		)	(301		)	(4,529		)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable	$	5,680		$	6,670		$	12,350
Fees and related income on earning assets	$	12,683		$	68		$	12,751
Servicing income	$	1,179		$	211		$	1,390
Depreciation of rental merchandise	$	(9,370	)	$	—		$	(9,370	)
Equity in income of equity-method investee	$	707		$	—		$	707
Income before income taxes	$	1,186		$	1,650		$	2,836
Income tax expense	$	(896	)	$	(544	)	$	(1,440	)

Six months ended June 30, 2015	Credit and Other Investments			Auto Finance			Total
Interest income:
Consumer loans, including past due fees	$	20,618		$	13,694		$	34,312
Other	42			—			42
Total interest income	20,660			13,694			34,354
Interest expense	(8,479		)	(607		)	(9,086		)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable	$	12,181		$	13,087		$	25,268
Fees and related income on earning assets	$	25,756		$	214		$	25,970
Servicing income	$	2,538		$	412		$	2,950
Depreciation of rental merchandise	$	(21,623	)	$	—		$	(21,623	)
Equity in income of equity-method investee	$	1,782		$	—		$	1,782
Income before income taxes	$	607		$	3,577		$	4,184
Income tax benefit (expense)	$	352		$	(1,174	)	$	(822	)
Total assets	$	202,510		$	69,422		$	271,932


4.	Shareholders' Equity

Retired Shares

During the three months ended June 30, 2016 and 2015, we repurchased and contemporaneously retired 123,662 and 24,498 shares of our common stock at an aggregate cost of $374,000 and $68,299, respectively, pursuant to both open market and private purchases and the return of stock by holders of equity incentive awards to pay tax withholding obligations. During the six months ended June 30, 2016 and 2015, we repurchased and contemporaneously retired 246,643 and 46,305 shares of our common stock at an aggregate cost of $745,000 and $122,552, respectively, pursuant to both open market and private purchases and the return of stock by holders of equity incentive awards to pay tax withholding obligations.

We had 1,459,233 loaned shares outstanding at June 30, 2016 and December 31, 2015, 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.	Investment in Equity-Method Investee

Our equity-method investment outstanding at June 30, 2016 consists of our 66.7% interest in a joint venture formed to purchase a credit card receivable portfolio.

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



	As of
	June 30, 2016		December 31, 2015
Loans and fees receivable pledged as collateral under structured financings, at fair value	$	12,013	$	14,470
Total assets	$	12,571	$	15,237
Total liabilities	$	44	$	54
Members’ capital	$	12,527	$	15,183



	Three months ended June 30,				Six months ended June 30,
	2016		2015		2016		2015
Net interest income, fees and related income on earning assets	$	496	$	1,067	$	2,008	$	2,684
Net income	$	355	$	874	$	1,715	$	2,281
Net income attributable to our equity investment in investee	$	325	$	707	$	1,327	$	1,782


6.	Fair Values of Assets and Liabilities

Valuations and Techniques for Assets

Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The table below summarizes (in thousands) by fair value hierarchy the June 30, 2016 and December 31, 2015 fair values and carrying amounts of (1) our assets that are required to be carried at fair value in our consolidated financial statements and (2) our assets not carried at fair value, but for which fair value disclosures are required:



Assets – As of June 30, 2016 (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	$	—	$	—	$	217,680	$	198,188
Loans and fees receivable, at fair value	$	—	$	—	$	5,255	$	5,255
Loans and fees receivable pledged as collateral, at fair value	$	—	$	—	$	15,265	$	15,265

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Assets – As of December 31, 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	$	—	$	—	$	161,199	$	141,949
Loans and fees receivable, at fair value	$	—	$	—	$	6,353	$	6,353
Loans and fees receivable pledged as collateral, at fair value	$	—	$	—	$	20,353	$	20,353


(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.

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

For Level 3 assets carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) a reconciliation of the beginning and ending balances for the six months ended June 30, 2016 and June 30, 2015:



	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, 2016	$	6,353		$	20,353		$	26,706
Total gains—realized/unrealized:
Net revaluations of loans and fees receivable pledged as collateral under structured financings, at fair value	—			806			806
Net revaluations of loans and fees receivable, at fair value	1,619			—			1,619
Settlements, net	(2,528		)	(5,894		)	(8,422		)
Impact of foreign currency translation	(189		)	—			(189		)
Balance at June 30, 2016	$	5,255		$	15,265		$	20,520
Balance at January 1, 2015	$	18,255		$	34,905		$	53,160
Total gains—realized/unrealized:
Net revaluations of loans and fees receivable pledged as collateral under structured financings, at fair value	—			2,462			2,462
Net revaluations of loans and fees receivable, at fair value	750			—			750
Settlements, net	(7,449		)	(9,903		)	(17,352		)
Impact of foreign currency translation	(44		)	—			(44		)
Balance at June 30, 2015	$	11,512		$	27,464		$	38,976

The unrealized gains and losses for assets within the Level 3 category presented in the tables above include changes in fair value that are attributable to both observable and unobservable inputs. Impacts related to foreign currency translation are included as a component of other operating expense on the consolidated statements of operations.

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

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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 June 30, 2016 and December 31, 2015:



Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurements	Fair Value at June 30, 2016		Valuation Technique	Unobservable Input	Range (Weighted Average)(1)
Loans and fees receivable, at fair value	$	5,255	Discounted cash flows	Gross yield	27.9% to 33.1% (29.7%)
				Principal payment rate	1.9% to 3.5% (2.9%)
				Expected credit loss rate	11.8% to 25.5% (16.5%)
				Servicing rate	8.0% to 8.3% (8.2%)
				Discount rate	16.1% to 16.2% (16.1%)
Loans and fees receivable pledged as collateral under structured financings, at fair value	$	15,265	Discounted cash flows	Gross yield	24.0	%
				Principal payment rate	2.6	%
				Expected credit loss rate	11.1	%
				Servicing rate	8.0	%
				Discount rate	16.1	%



Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurements	Fair Value at December 31, 2015		Valuation Technique	Unobservable Input	Range (Weighted Average)(1)
Loans and fees receivable, at fair value	$	6,353	Discounted cash flows	Gross yield	15.8% to 22.7% (20.0%)
				Principal payment rate	2.1% to 3.0% (2.7%)
				Expected credit loss rate	12.9% to 22.7% (16.7%)
				Servicing rate	8.4% to 12.5% (10.9%)
				Discount rate	16.0% to 16.2% (16.1%)
Loans and fees receivable pledged as collateral under structured financings, at fair value	$	20,353	Discounted cash flows	Gross yield	28.5	%
				Principal payment rate	2.9	%
				Expected credit loss rate	12.5	%
				Servicing rate	12.9	%
				Discount rate	16.0	%

(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 June 30, 2016 and December 31, 2015 fair values and carrying amounts of (1) our liabilities that are required to be carried at fair value in our consolidated financial statements and (2) our liabilities not carried at fair value, but for which fair value disclosures are required:



Liabilities – As of June 30, 2016	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
Revolving credit facilities	$	—	$	—	$	64,992	$	64,992
Amortizing debt facilities	$	—	$	—	$	38,619	$	38,619
Senior secured term loan	$	—	$	—	$	20,000	$	20,000
5.875% convertible senior notes	$	—	$	36,844	$	—	$	61,903
Liabilities carried at fair value
Economic sharing arrangement liability	$	—	$	—	$	26	$	26
Notes payable associated with structured financings, at fair value	$	—	$	—	$	15,626	$	15,626



Liabilities - As of December 31, 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
Revolving credit facilities	$	—	$	—	$	28,900	$	28,900
Amortizing debt facilities	$	—	$	—	$	61,100	$	61,100
Senior secured term loan	$	—	$	—	$	20,000	$	20,000
5.875% convertible senior notes	$	—	$	42,734	$	—	$	64,783
Liabilities carried at fair value
Economic sharing arrangement liability	$	—	$	—	$	42	$	42
Notes payable associated with structured financings, at fair value	$	—	$	—	$	20,970	$	20,970

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 six months ended June 30, 2016 and 2015.



	Notes Payable Associated with Structured Financings, at Fair Value
	2016			2015
Beginning balance, January 1	$	20,970		$	36,511
Total (gains) losses—realized/unrealized:
Net revaluations of notes payable associated with structured financings, at fair value	(2,104		)	782
Repayments on outstanding notes payable, net	(3,240		)	(8,608		)
Ending balance, June 30	$	15,626		$	28,685

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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 as of June 30, 2016 and December 31, 2015:



Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurements	Fair Value at June 30, 2016 (in Thousands)		Valuation Technique	Unobservable Input	Weighted Average
Notes payable associated with structured financings, at fair value	$	15,626	Discounted cash flows	Gross yield	24.0	%
				Principal payment rate	2.6	%
				Expected credit loss rate	11.1	%
				Discount rate	16.1	%



Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurements	Fair Value at December 31, 2015 (in Thousands)		Valuation Technique	Unobservable Input	Weighted Average
Notes payable associated with structured financings, at fair value	$	20,970	Discounted cash flows	Gross yield	28.5	%
				Principal payment rate	2.9	%
				Expected credit loss rate	12.5	%
				Discount rate	16.0	%

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Other Relevant Data

Other relevant data (in thousands) as of June 30, 2016 and December 31, 2015 concerning certain assets and liabilities we carry at fair value are as follows:



As of June 30, 2016	Loans and Fees Receivable at Fair Value		Loans and Fees Receivable Pledged as Collateral under Structured Financings at Fair Value
Aggregate unpaid principal balance within loans and fees receivable that are reported at fair value	$	6,011	$	20,504
Aggregate fair value of loans and fees receivable that are reported at fair value	$