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 March 31, 2017

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”) and is listed on the NASDAQ Global Select Market.

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 or an emerging growth company.

As of May 8, 2017, 13,984,151 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	22
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
	Item 4.	Controls and Procedures	39

Part II. OTHER INFORMATION
	Item 1.	Legal Proceedings	40
	Item 1A.	Risk Factors	40
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
	Item 3.	Defaults Upon Senior Securities	48
	Item 4.	Mine Safety Disclosure	48
	Item 5.	Other Information	50
	Item 6.	Exhibits	51
		Signatures	52

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PART I—FINANCIAL INFORMATION



ITEM 1.	FINANCIAL STATEMENTS

Atlanticus Holdings Corporation and Subsidiaries

Consolidated Balance Sheets (Unaudited)

(Dollars in thousands)



	March 31, 2017			December 31, 2016
Assets
Unrestricted cash and cash equivalents	$	78,309		$	76,052
Restricted cash and cash equivalents	16,234			16,589
Loans and fees receivable:
Loans and fees receivable, at fair value	13,591			15,648
Loans and fees receivable, gross	297,768			290,697
Allowances for uncollectible loans and fees receivable	(39,541		)	(43,275		)
Deferred revenue	(25,233		)	(23,639		)
Net loans and fees receivable	246,585			239,431
Rental merchandise, net of depreciation	—			27
Property at cost, net of depreciation	3,568			3,829
Investment in equity-method investee	5,993			6,725
Deposits	305			505
Prepaid expenses and other assets	20,129			19,389
Total assets	$	371,123		$	362,547
Liabilities
Accounts payable and accrued expenses	$	91,027		$	86,768
Notes payable, at face value, net	144,808			141,166
Notes payable to related parties	40,000			40,000
Notes payable associated with structured financings, at fair value	11,131			12,276
Convertible senior notes	60,937			60,791
Income tax liability	16,207			15,769
Total liabilities	364,110			356,770
Commitments and contingencies (Note 9)
Equity
Common stock, no par value, 150,000,000 shares authorized: 15,398,384 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at March 31, 2017; and 15,348,086 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at December 31, 2016	—			—
Additional paid-in capital	212,155			211,646
Accumulated other comprehensive loss	—			—
Retained deficit	(205,131		)	(205,859		)
Total shareholders’ equity	7,024			5,787
Noncontrolling interests	(11		)	(10		)
Total equity	7,013			5,777
Total liabilities and equity	$	371,123		$	362,547

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 March 31,
	2017			2016
Interest income:
Consumer loans, including past due fees	$	25,859		$	18,148
Other	101			92
Total interest income	25,960			18,240
Interest expense	(5,817		)	(4,644		)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable	20,143			13,596
Fees and related income on earning assets	2,801			7,887
Net recovery of charge off of loans and fees receivable recorded at fair value	7,851			4,911
Provision for losses on loans and fees receivable recorded at net realizable value	(10,653		)	(4,731		)
Net interest income, fees and related income on earning assets	20,142			21,663
Other operating income:
Servicing income	1,089			1,447
Other income	109			70
Equity in income of equity-method investee	334			1,002
Total other operating income	1,532			2,519
Other operating expense:
Salaries and benefits	5,532			5,732
Card and loan servicing	7,385			8,988
Marketing and solicitation	1,532			855
Depreciation	310			4,156
Other	5,570			(299		)
Total other operating expense	20,329			19,432
Income before income taxes	1,345			4,750
Income tax expense	(618		)	(198		)
Net income	727			4,552
Net loss attributable to noncontrolling interests	1			1
Net income attributable to controlling interests	$	728		$	4,553
Net income attributable to controlling interests per common share—basic	$	0.05		$	0.33
Net income attributable to controlling interests per common share—diluted	$	0.05		$	0.33

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 March 31,
	2017		2016
Net income	$	727	$	4,552
Other comprehensive income:
Foreign currency translation adjustment	—		—
Reclassifications of foreign currency translation adjustment to consolidated statements of operations	—		300
Income tax expense related to other comprehensive income	—		—
Comprehensive income	727		4,852
Comprehensive loss attributable to noncontrolling interests	1		1
Comprehensive income attributable to controlling interests	$	728	$	4,853

See accompanying notes.

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Atlanticus Holdings Corporation and Subsidiaries

Consolidated Statements of Equity

For the Three Months Ended March 31, 2017 (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, 2016	15,348,086		$	—	$	211,646		$	—	$	(205,859	)	$	(10	)	$	5,777
Compensatory stock issuances, net of forfeitures	57,000		—		—			—		—			—			—
Amortization of deferred stock-based compensation costs	—		—		527			—		—			—			527
Redemption and retirement of shares	(6,702	)	—		(18		)	—		—			—			(18		)
Other comprehensive income (loss)	—		—		—			—		728			(1		)	727
Balance at March 31, 2017	15,398,384		$	—	$	212,155		$	—	$	(205,131	)	$	(11	)	$	7,013

See accompanying notes.

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Atlanticus Holdings Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)



	For the Three Months Ended March 31,
	2017			2016
Operating activities
Net income	$	727		$	4,552
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of rental merchandise	27			3,379
Depreciation, amortization and accretion, net	283			777
Losses upon charge off of loans and fees receivable recorded at fair value	1,093			1,682
Provision for losses on loans and fees receivable	10,653			4,731
Interest expense from accretion of discount on convertible senior notes	132			127
Income from accretion of discount associated with receivables purchases	(12,263		)	(9,610		)
Unrealized gain on loans and fees receivable and underlying notes payable held at fair value	(1,269		)	(3,063		)
Income from equity-method investments	(334		)	(1,002		)
Changes in assets and liabilities:
(Increase) decrease in uncollected fees on earning assets	(983		)	76
Increase (decrease) in income tax liability	438			(64		)
Decrease in deposits	200			205
Increase in accounts payable and accrued expenses	3,576			6,403
Additions to rental merchandise	—			(546		)
Other	117			1,123
Net cash provided by operating activities	2,397			8,770
Investing activities
Decrease in restricted cash	361			2,352
Proceeds from equity-method investee	1,066			1,600
Investments in earning assets	(99,045		)	(77,041		)
Proceeds from earning assets	93,961			73,704
Purchases and development of property, net of disposals	(22		)	(40		)
Net cash (used in) provided by investing activities	(3,679		)	575
Financing activities
Noncontrolling interests contributions, net	—			4
Purchase and retirement of outstanding stock	(18		)	(371		)
Proceeds from borrowings	64,761			26,345
Repayment of borrowings	(61,248		)	(37,249		)
Net cash provided by (used in) financing activities	3,495			(11,271		)
Effect of exchange rate changes on cash	44			(252		)
Net increase (decrease) in unrestricted cash	2,257			(2,178		)
Unrestricted cash and cash equivalents at beginning of period	76,052			51,033
Unrestricted cash and cash equivalents at end of period	$	78,309		$	48,855
Supplemental cash flow information
Cash paid for interest	$	6,698		$	5,894
Net cash income tax payments	$	180		$	262
Supplemental non-cash information
Issuance of stock options and restricted stock	$	1,005		$	1,549

See accompanying notes.

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Atlanticus Holdings Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2017 and 2016


1.	Description of Our Business

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

Within our Credit and Other Investments segment, we facilitate consumer finance programs offered by our bank partners to originate consumer loans through multiple channels, including retail point-of-sale, direct mail solicitation, on-line and partnerships. In the retail credit (the “point-of-sale” operations) channel, we partner with retailers and service providers in various industries across the United States (“U.S.”) to enable them to provide credit to their customers for the purchase of goods and services. These services of our lending partners, are often extended to consumers who may have been declined under traditional financing options. We specialize in supporting this “second look” credit service in various industries across the U.S. Additionally, we support lenders who market general purpose personal loans and credit cards directly to consumers (collectively, the “direct-to-consumer” operations) through additional channels enabling them to reach consumers through a diverse origination platform 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 March 31, 2017. Some of these investees have raised capital at valuations substantially in excess of our associated book value. However, none of these companies are publicly-traded, there are no material pending liquidity events, and ascribing value to these investments at this time would be speculative.

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”). The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our consolidated financial statements, as well as the reported amounts of revenues and expenses during each reporting

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period. We base these estimates on information available to us as of the date of the financial statements. Actual results could differ materially from these estimates. Certain estimates, such as credit losses, payment rates, costs of funds, discount rates and the yields earned on credit card receivables, significantly affect the reported amount of credit card receivables that we report at fair value and our notes payable associated with structured financings, at fair value; these estimates likewise affect the changes in these amounts reflected within our fees and related income on earning assets line item on our consolidated statements of operations. Additionally, estimates of future credit losses have a significant effect on loans and fees receivable, net, as shown on our consolidated balance sheets, as well as on the provision for losses on loans and fees receivable within our consolidated statements of operations.

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

Loans and Fees Receivable

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

As of March 31, 2017 and December 31, 2016, the weighted average remaining accretion period for the $25.2 million and $23.6 million, respectively, of deferred revenue reflected in the consolidated balance sheets was 11 months and 11 months, respectively.

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



For the Three Months Ended March 31, 2017	Credit Cards			Auto Finance			Other Unsecured Lending Products			Total
Allowance for uncollectible loans and fees receivable:
Balance at beginning of period	$	(1.4	)	$	(2.1	)	$	(39.8	)	$	(43.3	)
Provision for loan losses	(0.4		)	(0.4		)	(9.9		)	(10.7		)
Charge offs	0.4			0.8			14.6			15.8
Recoveries	(0.4		)	(0.3		)	(0.6		)	(1.3		)
Balance at end of period	$	(1.8	)	$	(2.0	)	$	(35.7	)	$	(39.5	)



As of March 31, 2017	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	$	—		$	(0.3	)	$	(0.3	)	$	(0.6	)
Balance at end of period collectively evaluated for impairment	$	(1.8	)	$	(1.7	)	$	(35.4	)	$	(38.9	)
Loans and fees receivable:
Loans and fees receivable, gross	$	14.5		$	72.6		$	210.7		$	297.8
Loans and fees receivable individually evaluated for impairment	$	—		$	0.4		$	0.3		$	0.7
Loans and fees receivable collectively evaluated for impairment	$	14.5		$	72.2		$	210.4		$	297.1

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For the Three Months Ended March 31, 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	0.2			(0.6		)	(4.3		)	(4.7		)
Charge offs	0.4			0.8			6.6			7.8
Recoveries	(0.7		)	(0.3		)	(0.5		)	(1.5		)
Balance at end of period	$	(1.3	)	$	(1.8	)	$	(16.8	)	$	(19.9	)



As of December 31, 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	$	—		$	(0.3	)	$	(0.3	)	$	(0.6	)
Balance at end of period collectively evaluated for impairment	$	(1.4	)	$	(1.8	)	$	(39.5	)	$	(42.7	)
Loans and fees receivable:
Loans and fees receivable, gross	$	11.0		$	77.1		$	202.6		$	290.7
Loans and fees receivable individually evaluated for impairment	$	—		$	0.7		$	0.3		$	1.0
Loans and fees receivable collectively evaluated for impairment	$	11.0		$	76.4		$	202.3		$	289.7

An aging of our delinquent loans and fees receivable, gross (in millions) by class of receivable as of March 31, 2017 and December 31, 2016 is as follows:



Balance at March 31, 2017	Credit Cards		Auto Finance		Other Unsecured Lending Products		Total
30-59 days past due	$	0.3	$	4.4	$	7.0	$	11.7
60-89 days past due	0.3		1.6		6.0		7.9
90 or more days past due	0.5		1.6		11.9		14.0
Delinquent loans and fees receivable, gross	1.1		7.6		24.9		33.6
Current loans and fees receivable, gross	13.4		65.0		185.8		264.2
Total loans and fees receivable, gross	$	14.5	$	72.6	$	210.7	$	297.8
Balance of loans 90 or more days past due and still accruing interest and fees	$	—	$	1.1	$	—	$	1.1

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Balance at December 31, 2016	Credit Cards		Auto Finance		Other Unsecured Lending Products		Total
30-59 days past due	$	0.2	$	7.0	$	8.2	$	15.4
60-89 days past due	0.2		2.4		6.7		9.3
90 or more days past due	0.4		1.9		11.4		13.7
Delinquent loans and fees receivable, gross	0.8		11.3		26.3		38.4
Current loans and fees receivable, gross	10.2		65.8		176.3		252.3
Total loans and fees receivable, gross	$	11.0	$	77.1	$	202.6	$	290.7
Balance of loans 90 or more days past due and still accruing interest and fees	$	—	$	1.5	$	—	$	1.5

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses reflect both the billed and unbilled amounts owed at the end of a period for services rendered. Also included within accounts payable and accrued expenses are amounts ultimately owed to consumers associated with reimbursements in respect of one of our portfolios.

Income Taxes

We experienced an effective income tax expense rate of 45.9% for the three months ended March 31, 2017, compared to an effective income tax expense rate of 4.2% for the three months ended March 31, 2016. Our effective income tax expense rate for the three months ended March 31, 2017 is above the statutory rate principally due to interest that we accrued on unpaid federal tax liabilities. Our effective income tax expense rate for the three months ended March 31, 2016 is below the statutory rate principally due to income during that period of our U.K. subsidiary that was not subject to tax in the U.S. and the U.K. tax on which was fully offset by the release of U.K. valuation allowances in that period.

We report potential accrued interest and penalties related to both our accrued liabilities for uncertain tax positions and unpaid tax liabilities, as well as any net payments of income tax-related interest and penalties, 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 unpaid tax liabilities in a manner favorable to our accruals therefor. During both the three months ended March 31, 2017 and 2016, we included $0.2 million of net income tax-related interest and penalties within those periods’ respective income tax expense line items.

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 March 31, 2017; this amount excludes unpaid interest and penalties on the tax assessment, the accruals for which aggregated $3.6 million at March 31, 2017. An IRS examination team denied amended return claims we filed that would have eliminated the $7.3 million assessment (and corresponding interest and penalties), and we filed a protest with IRS Appeals. Pending the resolution of this matter, and as is customary in such cases, the IRS filed a lien in respect of the $7.3 million assessment described herein. To the extent we are unsuccessful in resolving this matter with IRS Appeals to our satisfaction, we plan to litigate this matter.

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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 March 31,
	2017		2016
Fees on credit products	$	1,096	$	799
Changes in fair value of loans and fees receivable recorded at fair value	563		1,898
Changes in fair value of notes payable associated with structured financings recorded at fair value	706		1,165
Rental revenue	148		4,214
Other	288		(189		)
Total fees and related income on earning assets	$	2,801	$	7,887

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 charge off of loans and fees receivable recorded at fair value on our consolidated statements of operations. See Note 6, “Fair Values of Assets and Liabilities,” for further discussion of these receivables and their effects on our consolidated statements of operations.

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. While we are continuing to evaluate the effect that ASU 2016-13 will have on our consolidated financial statements and related disclosures, this standard is expected to result in an increase to our allowance for loan losses given the change to expected losses for the estimated life of the financial asset. The extent of the increase will depend on the asset quality of the portfolio, and economic conditions and forecasts at adoption.

In 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 was effective January 1, 2017. The impact of adoption of this authoritative guidance did not result in a material impact on our consolidated financial statements.

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. The adoption of ASU 2016-02 will result in the Company recognizing a right-of-use asset and lease liability on the consolidated balance sheet based on the present value of remaining operating lease payments. We do not expect the adoption of ASU 2016-02 to have a material impact on our consolidated financial statements due to the limited lease activity we are involved in.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 establishes a principles-based model under which revenue from a contract is allocated to the distinct performance obligations within the contract and recognized in income as each performance obligation is satisfied. Additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract is also required. In

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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. The scope of ASU 2014-09 excludes interest and fee income on loans and as a result, the majority of our revenue will not be affected; however, our review is ongoing. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

Subsequent Events

We evaluate subsequent events that occur after our consolidated balance sheet date but before our consolidated financial statements are issued. There are two types of subsequent events: (1) recognized, or those that provide additional evidence with respect to conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements; and (2) nonrecognized, or those that provide evidence with respect to conditions that did not exist at the date of the balance sheet but arose subsequent to that date. We have evaluated subsequent events occurring after March 31, 2017, 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 March 31, 2017 and December 31, 2016, 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 three months ended March 31, 2017 and 2016 were generated outside of the U.S.

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

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



Three months ended March 31, 2017	Credit and Other Investments			Auto Finance			Total
Interest income:
Consumer loans, including past due fees	$	18,830		$	7,029		$	25,859
Other	101			—			101
Total interest income	18,931			7,029			25,960
Interest expense	(5,594		)	(223		)	(5,817		)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable	$	13,337		$	6,806		$	20,143
Fees and related income on earning assets	$	2,779		$	22		$	2,801
Servicing income	$	857		$	232		$	1,089
Depreciation of rental merchandise	$	(27	)	$	—		$	(27	)
Equity in income of equity-method investee	$	334		$	—		$	334
(Loss) income before income taxes	$	(387	)	$	1,732		$	1,345
Income tax expense	$	(33	)	$	(585	)	$	(618	)
Total assets	$	306,721		$	64,402		$	371,123

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Three months ended March 31, 2016	Credit and Other Investments			Auto Finance			Total
Interest income:
Consumer loans, including past due fees	$	11,185		$	6,963		$	18,148
Other	92			—			92
Total interest income	11,277			6,963			18,240
Interest expense	(4,337		)	(307		)	(4,644		)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable	$	6,940		$	6,656		$	13,596
Fees and related income on earning assets	$	7,829		$	58		$	7,887
Servicing income	$	1,192		$	255		$	1,447
Depreciation of rental merchandise	$	(3,379	)	$	—		$	(3,379	)
Equity in income of equity-method investee	$	1,002		$	—		$	1,002
Income before income taxes	$	3,326		$	1,424		$	4,750
Income tax benefit (expense)	$	317		$	(515	)	$	(198	)
Total assets	$	210,211		$	69,104		$	279,315


4.	Shareholders’ Equity

During the three months ended March 31, 2017 and 2016, we repurchased and contemporaneously retired 6,702 and 122,981 shares of our common stock at an aggregate cost of $18,000 and $371,000, respectively, pursuant to both open market and private purchases and the return of stock by holders of equity incentive awards to pay tax withholding obligations.

We had 1,459,233 loaned shares outstanding at March 31, 2017 and December 31, 2016, which were originally lent in connection with our November 2005 issuance of convertible senior notes. We retire lent shares as they are returned to us.


5.	Investment in Equity-Method Investee

Our equity-method investment outstanding at March 31, 2017 consists of our 66.7% interest in a joint venture formed to purchase a credit card receivable portfolio.

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



	As of
	March 31, 2017		December 31, 2016
Loans and fees receivable, at fair value	$	8,556	$	9,650
Total assets	$	9,024	$	10,291
Total liabilities	$	34	$	204
Members’ capital	$	8,990	$	10,087



	Three months ended March 31,
	2017		2016
Net interest income, fees and related income on earning assets	$	504	$	1,512
Net income	$	397	$	1,360
Net income attributable to our equity investment in investee	$	334	$	1,002

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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 March 31, 2017 and December 31, 2016 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 March 31, 2017 (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	$	—	$	—	$	252,346	$	232,994
Loans and fees receivable, at fair value	$	—	$	—	$	13,591	$	13,591



Assets – As of December 31, 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	$	—	$	—	$	248,171	$	223,783
Loans and fees receivable, at fair value	$	—	$	—	$	15,648	$	15,648


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

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

For Level 3 assets carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) a reconciliation of the beginning and ending balances for the three months ended March 31, 2017 and 2016:



	Loans and Fees Receivable, at Fair Value
	2017			2016
Balance at January 1,	$	15,648		$	26,706
Total gains—realized/unrealized:
Net revaluations of loans and fees receivable, at fair value	563			1,898
Settlements	(2,626		)	(4,803		)
Impact of foreign currency translation	6			(65		)
Balance at March 31,	$	13,591		$	23,736

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 March 31, 2017 and December 31, 2016:



Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurements	Fair Value at March 31, 2017		Valuation Technique	Unobservable Input	Range (Weighted Average)
Loans and fees receivable, at fair value	$	13,591	Discounted cash flows	Gross yield	16.3% to 25.8% (23.9%)
				Principal payment rate	1.2% to 3.1% (2.3%)
				Expected credit loss rate	9.2% to 13.9% (11.6%)
				Servicing rate	8.8% to 9.9% (9.0%)
				Discount rate	5.8% to 13.7% (12.6%)



Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurements	Fair Value at December 31, 2016		Valuation Technique	Unobservable Input	Range (Weighted Average)
Loans and fees receivable, at fair value	$	15,648	Discounted cash flows	Gross yield	24.2% to 35.8% (26.1%)
				Principal payment rate	2.2% to 3.5% (2.4%)
				Expected credit loss rate	11.8% to 18.0% (12.9%)
				Servicing rate	8.6% to 9.6% (8.8%)
				Discount rate	5.8% to 13.6% (12.5%)

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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 March 31, 2017 and December 31, 2016 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 March 31, 2017	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	$	—	$	—	$	90,716	$	90,716
Amortizing debt facilities	$	—	$	—	$	54,873	$	54,873
Senior secured term loan	$	—	$	—	$	40,000	$	40,000
5.875% convertible senior notes	$	—	$	42,816	$	—	$	60,937
Liabilities carried at fair value
Notes payable associated with structured financings, at fair value	$	—	$	—	$	11,131	$	11,131



Liabilities - As of December 31, 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	$	—	$	—	$	83,399	$	83,399
Amortizing debt facilities	$	—	$	—	$	58,190	$	58,190
Senior secured term loan	$	—	$	—	$	40,000	$	40,000
5.875% convertible senior notes	$	—	$	40,609	$	—	$	60,791
Liabilities carried at fair value
Notes payable associated with structured financings, at fair value	$	—	$	—	$	12,276	$	12,276

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 three months ended March 31, 2017 and 2016.



	Notes Payable Associated with Structured Financings, at Fair Value
	2017			2016
Beginning balance, January 1	$	12,276		$	20,970
Total (gains) losses—realized/unrealized:
Net revaluations of notes payable associated with structured financings, at fair value	(706		)	(1,165		)
Repayments on outstanding notes payable, net	(439		)	(1,736		)
Ending balance, March 31	$	11,131		$	18,069

The unrealized gains and losses for liabilities within the Level 3 category presented in the table above include changes in fair value that are attributable to both observable and unobservable inputs. We provide below a brief description of the valuation techniques used for Level 3 liabilities.

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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 March 31, 2017 and December 31, 2016:



Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurements	Fair Value at March 31, 2017 (in Thousands)		Valuation Technique	Unobservable Input	Weighted Average
Notes payable associated with structured financings, at fair value	$	11,131	Discounted cash flows	Gross yield	25.0	%
				Principal payment rate	2.3	%
				Expected credit loss rate	11.7	%
				Discount rate	13.7	%



Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurements	Fair Value at December 31, 2016 (in Thousands)		Valuation Technique	Unobservable Input	Weighted Average
Notes payable associated with structured financings, at fair value	$	12,276	Discounted cash flows	Gross yield	24.6	%
				Principal payment rate	2.2	%
				Expected credit loss rate	11.8	%
				Discount rate	13.6	%

Other Relevant Data

Other relevant data (in thousands) as of March 31, 2017 and December 31, 2016 concerning certain assets and liabilities we carry at fair value are as follows:



As of March 31, 2017	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	$	5,664	$	14,866
Aggregate fair value of loans and fees receivable that are reported at fair value	$	2,598	$	10,993
Aggregate fair value of receivables carried at fair value that are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies)	$	7	$	23
Aggregate excess of balance of unpaid principal receivables within loans and fees receivable that are reported at fair value and are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies) over the fair value of such loans and fees receivable	$	158	$	528

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As of December 31, 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	$	6,251	$	16,614
Aggregate fair value of loans and fees receivable that are reported at fair value	$	3,484	$	12,164
Aggregate fair value of receivables carried at fair value that are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies)	$	6	$	22
Aggregate excess of balance of unpaid principal receivables within loans and fees receivable that are reported at fair value and are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies) over the fair value of such loans and fees receivable	$	204	$	562



Notes Payable	Notes Payable Associated with Structured Financings, at Fair Value as of March 31, 2017		Notes Payable Associated with Structured Financings, at Fair Value as of December 31, 2016
Aggregate unpaid principal balance of notes payable	$	101,596	$	102,035
Aggregate fair value of notes payable	$	11,131	$	12,276


7.	Notes Payable

Notes Payable Associated with Structured Financings, at Fair Value

Scheduled (in millions) in the table below are (1) the carrying amount of our structured financing note secured by certain credit card receivables and reported at fair value as of March 31, 2017 and December 31, 2016, (2) the outstanding face amount of our structured financing note secured by certain credit card receivables and reported at fair value as of March 31, 2017, and (3) the carrying amount of the credit card receivables and restricted cash that provide the exclusive means of repayment for the note (i.e., lenders have recourse only to the specific credit card receivables and restricted cash underlying each respective facility and cannot look to our general credit for repayment) as of March 31, 2017 and December 31, 2016.



	Carrying Amounts at Fair Value as of
	March 31, 2017		December 31, 2016
Amortizing securitization facility issued out of our upper-tier portfolio master trust (stated maturity of December 2021), outstanding face amount of $101.6 million as of March 31, 2017 ($102.0 million as of December 31, 2016) bearing interest at a weighted average 6.2% interest rate at March 31, 2017 (6.1% at December 31, 2016), which is secured by credit card receivables and restricted cash aggregating $11.1 million as of March 31, 2017 ($12.3 million as of December 31, 2016) in carrying amount	$	11.1	$	12.3

Contractual payment allocations within this credit card receivables structured financing provide for a priority distribution of cash flows to us to service the credit card receivables, a distribution of cash flows to pay interest and principal due on the notes, and a distribution of all excess cash flows (if any) to us. The structured financing facility in the above table is amortizing down along with collections of the underlying receivables and there are no provisions within the debt agreement that allow for acceleration or bullet repayment of the facility prior to its scheduled expiration date. The aggregate carrying amount of the credit card receivables and restricted cash that provide security for the $11.1 million in fair value of the structured financing note in the above table is $11.1 million, which means that we have no aggregate exposure to pre-tax equity loss associated with the above structured financing arrangement at March 31, 2017.

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Beyond our role as servicer of the underlying assets within the credit cards receivables structured financing, we have provided no other financial or other support to the structures, and we have no explicit or implicit arrangements that could require us to provide financial support to the structures.

Notes Payable, at Face Value and Notes Payable to Related Parties

Other notes payable outstanding as of March 31, 2017 and December 31, 2016 that are secured by the financial and operating assets of either the borrower, another of our subsidiaries or both, include the following, scheduled (in millions); except as otherwise noted, the assets of our holding company (Atlanticus Holdings Corporation) are subject to creditor claims under these scheduled facilities:



	As of
	March 31, 2017		December 31, 2016
Revolving credit facilities at a weighted average interest rate equal to 5.6% at March 31, 2017 (4.8% at December 31, 2016) secured by the financial and operating assets of CAR and/or certain receivables and restricted cash with a combined aggregate carrying amount of $136.1 million as of December 31, 2017 ($127.9 million at December 31, 2016)
Revolving credit facility, not to exceed $20.0 million (expiring December 31, 2019) (1) (2)	19.7		19.5
Revolving credit facility, not to exceed $40.0 million (expiring November 1, 2018) (3)	27.6		29.2
Revolving credit facility, not to exceed $35.0 million (expiring October 29, 2017) (1) (2)	34.8		34.7
Revolving credit facility, not to exceed $90.0 million (expiring February 8, 2022) (1) (4)	10.0		—
Amortizing facilities at a weighted average interest rate equal to 5.6% at March 31, 2017 (5.4% at December 31, 2016) secured by certain receivables and restricted cash with a combined aggregate carrying amount of $67.9 million as of March 31, 2017 ($69.9 million as of December 31, 2016)
Amortizing debt facility (expiring March 31, 2018) (1) (2) (5)	14.6		14.6
Amortizing debt facility (expiring July 15, 2017) (1) (2) (5)	8.7		20.4
Amortizing debt facility (expiring June 30, 2018) (1) (2) (5)	16.7		—
Amortizing debt facility (expiring August 17, 2018) (1) (2)	4.0		6.0
Amortizing debt facility (expiring August 24, 2018) (1) (2)	5.9		9.7
Amortizing debt facility (expiring September 1, 2017) (1) (2)	5.0		7.5
Other facilities
Senior secured term loan from related parties (expiring November 22, 2017) that is secured by certain assets of the Company with an annual interest rate equal to 9.0% (4)	40.0		40.0
Total notes payable before unamortized debt issuance costs and discounts	187.0		181.6
Unamortized debt issuance costs and discounts	2.2		0.4
Total notes payable outstanding, net	$	184.8	$	181.2


(1)	Loans are subject to certain affirmative covenants tied to default rates and other performance metrics the failure of which could result in required early repayment of the remaining unamortized balances of the notes.


(2)	These notes reflect modifications to either extend the maturity date, increase the loaned amount or both.


(3)	Loan is subject to certain affirmative covenants, including a coverage ratio, a leverage ratio and a collateral performance test, the failure of which could result in required early repayment of all or a portion of the outstanding balance by our CAR Auto Finance operations.


(4)	See below for additional information.


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

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On November 26, 2014, we and certain of our subsidiaries entered into a Loan and Security Agreement with Dove Ventures, LLC, a Nevada limited liability company (“Dove”). The agreement provides for a senior secured term loan facility in an amount of up to $40.0 million at any time outstanding. The Loan and Security Agreement is fully drawn with $40.0 million outstanding as of March 31, 2017. In November 2016, the agreement was amended to extend the maturity date of the term loan to November 22, 2017. All other terms remain unchanged.

Our obligations under the agreement are guaranteed by certain subsidiary guarantors and secured by a pledge of certain assets of ours and the subsidiary guarantors. The loans bear interest at the rate of 9.0% per annum, payable monthly in arrears. The principal amount of these loans is payable in a single installment on November 22, 2017 (as amended). The agreement includes customary affirmative and negative covenants, as well as customary representations, warranties and events of default. Subject to certain conditions, we can prepay the principal amounts of these loans without premium or penalty.

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

On February 9, 2017, we (through a wholly owned subsidiary) established a program under which we sell certain receivables to a consolidated trust in exchange for notes issued by the trust. The notes are secured by the receivables and other assets of the trust. Simultaneously with the establishment of the program, the trust issued a series of variable funding notes and sold an aggregate amount of up to $90.0 million (of which $10.0 million was outstanding as of March 31, 2017) to an unaffiliated third party pursuant to a facility that can be drawn upon to the extent of outstanding eligible receivables.

The facility matures on February 8, 2022 and is subject to certain affirmative covenants and collateral performance tests, the failure of which could result in required early repayment of all or a portion of the outstanding balance of notes. The facility also may be prepaid subject to payment of a prepayment fee.


8.	Convertible Senior Notes

In November 2005, we issued $300.0 million aggregate principal amount of 5.875% convertible senior notes due November 30, 2035 (“5.875% convertible senior notes”). The 5.875% convertible senior notes are unsecured, subordinate to existing and future secured obligations and structurally subordinate to existing and future claims of our subsidiaries’ creditors. These notes (net of repurchases since the issuance dates) are reflected within convertible senior notes on our consolidated balance sheets. No put rights exist under our 5.875% convertible senior notes.

In 2016 we repurchased $5.0 million aggregate principal amount of outstanding 5.875% convertible senior notes for $2.3 million plus accrued interest from unrelated third parties. The purchase resulted in a gain of $1.2 million (net of the notes’ applicable share of deferred costs, which were written off in connection with the repurchases). Upon acquisition, the notes were retired.

The following summarizes (in thousands) components of our consolidated balance sheets associated with our convertible senior notes:



	As of
	March 31, 2017			December 31, 2016
Face amount of 5.875% convertible senior notes	$	88,280		$	88,280
Discount	(27,343		)	(27,489		)
Net carrying value	$	60,937		$	60,791
Carrying amount of equity component included in additional paid-in capital	$	108,714		$	108,714
Excess of instruments’ if-converted values over face principal amounts	$	—		$	—


9.	Commitments and Contingencies

General

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Under finance products available in the point-of-sale and direct-to-consumer channels, consumers have the ability to borrow up to the maximum credit limit assigned to each individual’s account. Unfunded commitments under these products aggregated $281.0 million at March 31, 2017. We have never experienced a situation in which all borrowers have exercised their entire available line of credit at any given point in time, nor do we anticipate this will ever occur in the future. Moreover, there would be a concurrent increase in assets should there be any exercise of these lines of credit. We also have the effective right to reduce or cancel these available lines of credit at any time.

Additionally our CAR operations 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. The financings allow dealers and finance companies to borrow up to the maximum pre-approved credit limit allowed in order to finance ongoing inventory needs. These loans are secured by the underlying auto inventory and, in certain cases where we have other lending products outstanding with the dealer, are secured by the collateral under those lending arrangements as well, including any outstanding dealer reserves. As of March 31, 2017, CAR had unfunded outstanding floor-plan financing commitments totaling $8.5 million. Each draw against unused commitments is reviewed for conformity to pre-established guidelines.

Under agreements with third-party originating and other financial institutions we have pledged security (collateral) related to their issuance of consumer credit and purchases thereunder, of which $9.0 million remains pledged as of March 31, 2017 to support various ongoing contractual obligations.

Under agreements with third-party originating and other financial institutions, we have agreed to indemnify the financial institutions for certain liabilities associated with the services we provide on behalf of the financial institutions—such indemnification obligations generally being limited to instances in which we either (a) have been afforded the opportunity to defend against any potentially indemnifiable claims or (b) have reached agreement with the financial institutions regarding settlement of potentially indemnifiable claims. As of March 31, 2017, we have assessed the likelihood of any potential payments related to the aforementioned contingencies as remote. We will accrue liabilities related to these contingencies in any future period if and in which we assess the likelihood of an estimable payment as probable.

Total System Services, Inc. provides certain services to Atlanticus Services Corporation in both the U.S. and the U.K. as a system of record provider under agreements that extend through October 2022 and September 2017, respectively. If Atlanticus Services Corporation were to terminate its U.S. or U.K. relationship with Total System Services, Inc. prior to the contractual termination period, it would incur significant penalties ($1.2 million and $0.7 million as of March 31, 2017, respectively).

We also are subject to certain minimum payments under cancelable and non-cancelable lease arrangements. For further information regarding these commitments, see Note 8, “Leases” to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.

Litigation

We are involved in various legal proceedings that are incidental to the conduct of our business, none of which are expected to be material to us.


10.	Net Income Attributable to Controlling Interests Per Common Share

The following table sets forth the computations of net income per common share (in thousands, except per share data):

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	For the Three Months Ended March 31,
	2017		2016
Numerator:
Net income attributable to controlling interests	$	728	$	4,553
Denominator:
Basic (including unvested share-based payment awards) (1)	13,944		13,898
Effect of dilutive stock compensation arrangements (2)	33		75
Diluted (including unvested share-based payment awards) (1)	13,977		13,973
Net income attributable to controlling interests per common share—basic	$	0.05	$	0.33
Net income attributable to controlling interests per common share—diluted	$	0.05	$	0.33


(1)	Shares related to unvested share-based payment awards included in our basic and diluted share counts were 345,385 for the three months ended March 31, 2017, compared to 222,550 for the three months ended March 31, 2016.


(2)	The effect of dilutive stock compensation arrangements is shown only for informational purposes where we are in a net loss position. In such situations, the effect of including outstanding options and restricted stock would be anti-dilutive, and they are thus excluded from all loss period calculations.

For the three months ended March 31, 2017 and 2016, there were no shares potentially issuable and thus includible in the diluted net income attributable to controlling interests per common share calculations pursuant to our 5.875% convertible senior notes. However, in future reporting periods during which our closing stock price is above the $24.61 conversion price for the 5.875% convertible senior notes, and depending on the closing stock price at conversion, the maximum potential dilution under the conversion provisions of such notes is 3.6 million shares, which could be included in diluted share counts in net income per common share calculations. See Note 8, “Convertible Senior Notes,” for a further discussion of these convertible securities.


11.	Stock-Based Compensation

We currently have two stock-based compensation plans, the Employee Stock Purchase Plan (the “ESPP”) and the Second Amended and Restated 2014 Equity Incentive Plan (the “2014 Plan”). As of March 31, 2017, 22,397 shares remained available for issuance under the ESPP and 1,270,635 shares remained available for issuance under the 2014 Plan.

Exercises and vestings under our stock-based compensation plans resulted in $0 in income tax-related charges to additional paid-in capital during the three months ended March 31, 2017 with $37,000 in such charges for the three months ended March 31, 2016.

Restricted Stock and Restricted Stock Unit Awards

During the three months ended March 31, 2017 and 2016, we granted 57,000 and 122,667 shares of restricted stock (net of any forfeitures), respectively, with aggregate grant date fair values of $0.2 million and $0.4 million, respectively. We incurred expenses of $0.5 million and $0.2 million during the three months ended March 31, 2017 and 2016, respectively, related to restricted stock, restricted stock unit and stock option awards. When we grant restricted stock, we defer the grant date value of the restricted stock and amortize that value (net of the value of anticipated forfeitures) as compensation expense with an offsetting entry to the additional paid-in capital component of our consolidated shareholders’ equity. Our restricted stock awards typically vest over a range of 12 to 60 months (or other term as specified in the grant) and are amortized to salaries and benefits expense ratably over applicable vesting periods. As of March 31, 2017, our unamortized deferred compensation costs associated with non-vested restricted stock awards were $0.4 million with a weighted-average remaining amortization period of 0.6 years.

Stock Options

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We had expense of $309 thousand and $117 thousand related to stock option-related compensation costs during the three months ended March 31, 2017 and 2016, respectively. When applicable, we recognize stock option-related compensation expense for any awards with graded vesting on a straight-line basis over the vesting period for the entire award. Information related to options outstanding is as follows:



	March 31, 2017
	Number of Shares		Weighted- Average Exercise Price		Weighted- Average of Remaining Contractual Life (in years)	Aggregate Intrinsic Value
Outstanding at December 31, 2016	1,411,667		$	3.09
Issued	1,000,000		$	2.78
Exercised	—		$	—
Cancelled/Forfeited	(2,000	)	$	3.04
Outstanding at March 31, 2017	2,409,667		$	2.96	4.0	$	53,603
Exercisable at March 31, 2017	692,039		$	2.77	2.7	$	53,603

We had $1.3 million and $1.3 million of unamortized deferred compensation costs associated with non-vested stock options as of March 31, 2017 and 2016, respectively.



ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and the related notes included therein and our Annual Report on Form 10-K for the year ended December 31, 2016, where certain terms (including trust, subsidiary and other entity names and financial, operating and statistical measures) have been defined.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements. We base these forward-looking statements on our current plans, expectations and beliefs about future events. There are risks, including the factors discussed in “Risk Factors” in Part II, Item 1A and elsewhere in this Report, that our actual experience will differ materially from these expectations. For more information, see “Forward Looking Information” below.

In this Report, except as the context suggests otherwise, the words “Company,” “Atlanticus Holdings Corporation,” “Atlanticus,” “we,” “our,” “ours,” and “us” refer to Atlanticus Holdings Corporation and its subsidiaries and predecessors.

OVERVIEW

We utilize proprietary analytics and a flexible technology platform to enable financial institutions to provide various credit and related financial services and products to or associated with the financially underserved consumer credit market. Currently, within our Credit and Other Investments segment, we are applying the experiences gained and infrastructure built from servicing over $25 billion in consumer loans over our 21-year operating history to support lenders who originate a range of consumer loan products. These products include retail credit, personal loans, and credit cards marketed through multiple channels, including retail point-of-sale, direct mail solicitation, Internet-based marketing and partnerships with third parties. In the point-of-sale channel, we partner with retailers and service providers in various industries across the U.S. to allow them to provide credit to their customers for the purchase of a variety of goods and services including consumer electronics, furniture, elective medical procedures, educational services and home-improvements. Our flexible technology platform allows our lending partners to integrate our paperless process and instant decision-making platform with the technology infrastructure of participating retailers and service providers. These services of our lending partners are often extended to consumers who may have been declined under traditional financing options. We specialize in supporting this “second-look” credit service. Additionally, we support lenders who market general purpose personal loans and credit cards directly to consumers through additional channels, which enables them to reach consumers through a diverse origination platform that includes direct mail, Internet-based marketing and our retail partnerships. Our technology platform and proprietary analytics enable lenders to make instant credit decisions utilizing hundreds of inputs from multiple sources and thereby offer credit to consumers overlooked by traditional providers of credit. By offering a range of products through a multitude of channels, we enable lenders to provide the right type of credit, whenever and wherever the consumer has a need. In most cases, we invest in the receivables originated by lenders who utilize our technology platform and other related services.

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Using our infrastructure and technology platform, we also provide loan servicing, including risk management and customer service outsourcing, for third parties. Also through our Credit and Other Investments segment, we engage in testing and limited investment in consumer finance technology platforms as we seek to capitalize on our expertise and infrastructure.

Beyond these activities within our Credit and Other Investments segment, we invest in and 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.

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. Some of these investees have raised capital at valuations in excess of our associated book value. However, none of these companies are publicly-traded, there are no material pending liquidity events, and ascribing value to these investments at this time would be speculative.

The recurring cash flows we receive within our Credit and Other Investments segment principally include those associated with (1) point-of-sale and direct-to-consumer receivables, (2) servicing compensation and (3) credit card receivables portfolios that are unencumbered or where we own a portion of the underlying structured financing facility.

We historically financed most of our investments in the credit card receivables originated through our platform through the asset-backed securitization markets. These markets deteriorated significantly in 2008, and the level of “advance rates,” or leverage against credit card receivable assets, in the current asset-backed securitization markets is below pre-2008 levels. We do believe, however, that point-of-sale and direct-to-consumer receivables are generating, and will continue to generate, attractive returns on assets, thereby facilitating debt financing under terms and conditions (including advance rates and pricing) that will support attractive returns on equity, and we continue to pursue growth in this area.

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

We closely monitor and manage our expenses based on current product offerings (and in recent years have significantly reduced our overhead infrastructure which was built to accommodate higher managed receivables levels and a much greater number of accounts serviced). As such, we are maintaining our infrastructure and incurring increased overhead and other costs in order to expand point-of-sale and direct-to-consumer finance and credit solutions and new product offerings that we believe have the potential to grow into our existing infrastructure and allow for long-term shareholder returns.

Subject to the availability of capital at attractive terms and pricing, we plan to continue to evaluate and pursue a variety of activities, including: (1) investments in additional financial assets associated with point-of-sale and direct-to-consumer finance and credit activities as well as the acquisition of interests in receivables portfolios; (2) investments in other assets or businesses that are not necessarily financial services assets or businesses; and (3) the repurchase of our convertible senior notes and other debt or our outstanding common stock.

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CONSOLIDATED RESULTS OF OPERATIONS



							Income
	For the Three Months Ended March 31,						Increases (Decreases)
(In Thousands)	2017			2016			from 2016 to 2017
Total interest income	$	25,960		$	18,240		$	7,720
Interest expense	(5,817		)	(4,644		)	(1,173		)
Fees and related income on earning assets:
Fees on credit products	1,096			799			297
Changes in fair value of loans and fees receivable recorded at fair value	563			1,898			(1,335		)
Changes in fair value of notes payable associated with structured financings recorded at fair value	706			1,165			(459		)
Rental revenue	148			4,214			(4,066		)
Other	288			(189		)	477
Other operating income:
Servicing income	1,089			1,447			(358		)
Other income	109			70			39
Equity in income equity-method investee	334			1,002			(668		)
Total	$	24,476		$	24,002		$	474
Net recovery of losses upon charge off of loans and fees receivable recorded at fair value	(7,851		)	(4,911		)	2,940
Provision for losses on loans and fees receivable recorded at net realizable value	10,653			4,731			(5,922		)
Other operating expenses:
Salaries and benefits	5,532			5,732			200
Card and loan servicing	7,385			8,988			1,603
Marketing and solicitation	1,532			855			(677		)
Depreciation, primarily related to rental merchandise	310			4,156			3,846
Other	5,570			(299		)	(5,869		)
Net income	727			4,552			(3,825		)
Net loss attributable to noncontrolling interests	1			1			—
Net income attributable to controlling interests	728			4,553			(3,825		)

Three Months Ended March 31, 2017, Compared to Three Months Ended March 31, 2016

Total interest income. Total interest income consists primarily of finance charges and late fees earned on point-of-sale and direct-to-consumer receivables, credit card and auto finance receivables. Period-over-period results reflect continued growth in our auto finance receivables, but primarily relate to growth in point-of-sale finance and direct-to-consumer products, the receivables of which increased from $115.0 million as of March 31, 2016 to $225.2 million as of March 31, 2017. These increases were offset, however, by continued net liquidations of our historical credit card receivable portfolios over the past year. We are currently experiencing continued growth in point-of-sale and direct-to-consumer receivables and our CAR receivables—growth which we expect to result in net period over period growth in our total interest income for these operations throughout 2017. Future periods’ growth is also dependent on the addition of new retail partners to expand the reach of point-of-sale operations as well as growth within existing partnerships and continued growth within the direct-to-consumer receivables. Despite anticipated increases in point-of-sale and direct-to-consumer receivables, continued net liquidations of our historical credit card receivables will continue to offset some of the expected increases and could result in overall net declines in interest income period over period if our investments in new receivable originations decline.

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Interest expense. Variations in interest expense are due to our debt facilities being repaid commensurate with net liquidations of the underlying credit card, auto finance and installment loan receivables that serve as collateral for the facilities offset by new borrowings associated with growth in point-of-sale and direct-to-consumer receivables and CAR operations as evidenced within Note 7, “Notes Payable,” to our consolidated financial statements. We anticipate additional debt financing over the next few quarters as we continue to grow, and as such, we expect our quarterly interest expense to be above that experienced in the prior periods for these operations.

Fees and related income on earning assets. The significant factors affecting our differing levels of fees and related income on earning assets include:


•	declines in rental revenue as we significantly reduced rent-to-own operations in the fourth quarter of 2015 and for which we discontinued new acquisitions in 2016. We do not expect future revenues associated with this product offering as existing rent-to-own contracts have effectively concluded with no new acquisitions expected;


•	reductions in fees on receivables, associated with general net declines in historical credit card receivables, offset slightly by new acquisitions of credit card receivables under our direct-to-consumer product offerings; and


•	the effects of changes in the fair values of credit card receivables recorded at fair value and notes payable associated with structured financings recorded at fair value as described below.

We expect a diminishing level of fee income for 2017 absent significant new credit card receivable acquisitions. Additionally, for credit card accounts for which we use fair value accounting, we expect our change in fair value of credit card receivables recorded at fair value and our change in fair value of notes payable associated with structured financings recorded at fair value amounts to gradually diminish (absent significant changes in the assumptions used to determine these fair values) in the future. These amounts, however, are subject to potentially high levels of volatility if we experience changes in the quality of our credit card receivables or if there are significant changes in market valuation factors (e.g., interest rates and spreads) in the future. Such volatility will be muted somewhat, however, by the offsetting nature of the receivables and underlying debt being recorded at fair value and with the expected reductions in the face amounts of such outstanding receivables and debt as we experience further credit card receivables liquidations and associated debt amortizing repayments. Further, as discussed above, we do not expect meaningful levels of rental revenue in 2017 as existing rent-to-own contracts have effectively concluded with no new acquisitions expected. Offsetting declines in fees on credit products is the aforementioned growth we are currently experiencing associated with point-of-sale and direct-to-consumer finance receivables and which we expect to continue throughout 2017. We do not expect that growth levels impacting our fees and related income on earning assets will be sufficient to offset overall declines in this category of revenue (primarily related to the decline in expected rental revenues) for 2017.

Servicing income. We earn servicing income by servicing loan portfolios for third parties (including our equity-method investee). Unless and/or until we grow the number of contractual servicing relationships we have with third parties or our current relationships grow their loan portfolios, we will not experience significant growth and income within this category, and we currently expect to experience limited growth in this category of revenue relative to revenue earned in prior periods.

Other income. Historically included within our other income category are ancillary and interchange revenues, which are now relatively insignificant for us due to credit card account closures and net credit card receivables portfolio liquidations. Absent portfolio acquisitions or continued growth with new credit card offerings and related receivables, we do not expect significant ancillary and interchange revenues in the future. Also included within our other income category are certain reimbursements we receive in respect of one of our portfolios.

Equity in income of equity-method investee. Because our equity-method investee uses the fair value option to account for its financial assets and liabilities, changes in fair value estimates can cause some volatility in the earnings of this investee. Because of continued liquidations in the credit card receivables portfolio of our equity-method investee, absent additional investments in our existing or in new equity-method investees in the future, we expect gradually declining effects from our equity-method investment on our operating results.

Net recovery of losses upon charge off of loans and fees receivable recorded at fair value. This account reflects charge offs (net of recoveries) of the face amount of credit card receivables we record at fair value on our consolidated balance sheet. We have experienced a general trending decline in, and we expect future trending declines in, these charge offs as we continue to liquidate our historical credit card receivables. Additionally, net recovery in both periods reflects the effects of reimbursements received in respect of one of our portfolios. In the three months ended March 31, 2017 and 2016, these reimbursements exceeded the charge-offs experienced within the portfolio during the periods presented as the reimbursements are not directly associated with the timing of actual charge offs. The timing of these reimbursements cannot be reliably determined and as such we may not continue to experience similar positive impacts in future quarters.

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Provision for losses on loans and fees receivable recorded at net realizable value. Our provision for losses on loans and fees receivable recorded at net realizable value covers, with respect to such receivables, changes in estimates regarding our aggregate loss exposures on (1) principal receivable balances, (2) finance charges and late fees receivable underlying income amounts included within our total interest income category, and (3) other fees receivable. We have experienced a period-over-period increase in this category between the three months ended March 31, 2017 and 2016 primarily reflecting the effects of volume associated with point-of-sale, direct-to-consumer and credit card finance receivables (i.e., growth of new product receivables and their subsequent maturation), rather than specific credit quality changes or deterioration which also impacted our provision for losses on loans and fees receivable recorded at net realizable value to a lesser degree. See Note 2, “Significant Accounting Policies and Consolidated Financial Statement Components,” to our consolidated financial statements and the discussions of our Credit and Other Investments and Auto Finance segments for further credit quality statistics and analysis.

Total other operating expense. Total other operating expense variances for the three months ended March 31, 2017, relative to the three months ended March 31, 2016, reflect the following:

•

slight reductions in card and loan servicing expenses in the three months ended March 31, 2017 when compared to the three months ended March 31, 2016 based on lower acquisitions of our rent-to-own products as well as continued net liquidations in our historical credit card portfolios, the receivables of which declined from $44.3 million outstanding to $28.7 million outstanding at March 31, 2016 and March 31, 2017, respectively. Further, as our relative level and mix of receivables have changed we have been better able to negotiate certain third party fixed costs as existing contracts expired. These declines have been offset by expenses related to growth in point-of-sale and direct-to-consumer products, the receivables of which grew from $115.0 million outstanding to $225.2 million outstanding at March 31, 2016 and March 31, 2017, respectively;


•	decreases in depreciation primarily associated with declines in acquisitions under our rent-to-own program which declined to $27 thousand from $3.4 million for the three months ended March 31, 2017 and 2016, respectively; and

•

increases in other expenses due to the reversal of a £3.4 million ($5.0 million) reserve in the three months ended March 31, 2016. This reserve related to a review in the U.K. by HM Revenue and Customs (“HMRC”) associated with filings by one of our U.K. subsidiaries to reclaim VAT that it paid on its inputs and that it believed were and are eligible to be reclaimed. In February of 2016, we received correspondence from HMRC stating that it (1) had chosen to discontinue its review of our U.K. subsidiary’s VAT filings with no changes to the returns as filed by our U.K. subsidiary, and (2) would pay VAT refund claims made by our U.K. subsidiary that had been suspended during the HMRC review. We subsequently received substantially all of such refunds, and as such we reversed the £3.4 million ($5.0 million) of VAT review-related liabilities in the first quarter of 2016.

Offsetting these declines are:

•

increases in marketing and solicitation costs for the three months ended March 31, 2017 as brand marketing expanded throughout 2016 and in the first quarter of 2017, as well as volume related increases in costs attributable to the growth in our retail point-of-sale and direct-to-consumer portfolios. We expect that increased origination and brand marketing support will result in overall increases in year over year costs during 2017 although the frequency and timing of marketing efforts could result in reductions in quarter over quarter marketing costs; and


•	general increases in other expenses related to receivables acquisition, risk management costs and third party costs associated with ongoing information technology upgrades.

Certain operating costs are variable based on the levels of accounts and receivables we service (both for our own account and for others) and the pace and breadth of our growth in receivables. However, a number of our operating costs are fixed and until recently have comprised a larger percentage of our total costs based on the ongoing contraction of our historical credit card receivables. This trend is gradually reversing, however, as we continue to grow our earning assets (including loans and fees receivable) based principally on growth of point-of-sale and direct-to-consumer receivables and to a lesser extent, growth within our CAR operations. This is evidenced by the growth we experienced in our managed receivables levels with no effective growth in our card and loan servicing expenses (and overall expenses) as we were able to better utilize our fixed costs to grow our asset base. We continue to perform extensive reviews of all areas of our businesses for cost savings opportunities to better align our costs with our portfolio of managed receivables.

Notwithstanding our cost-control efforts and focus, we expect increased levels of expenditures associated with anticipated growth in point-of-sale and direct-to-consumer personal loan and credit card related operations. These expenses will primarily relate to the variable costs of marketing efforts associated with new receivable acquisitions. While we have greater control over our variable expenses, it is difficult (as explained above) for us to appreciably reduce our fixed and other costs associated with an infrastructure (particularly within our Credit and Other Investments segment) that was built to support

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levels of managed receivables that are significantly higher than both our current levels and the levels that we expect to see in the near future. At this point, our Credit and Other Investments segment cash inflows are sufficient to cover its direct variable costs and a portion, but not all, of its share of overhead costs (including, for example, corporate-level executive and administrative costs and our convertible senior notes interest costs). As such, if we are unable to contain overhead costs or expand revenue-earning activities to levels commensurate with such costs, then, depending upon the earnings generated from our Auto Finance segment and our liquidating credit card portfolios, we may experience continuing pressure on our ability to achieve consistent profitability.

Noncontrolling interests. We reflect the ownership interests of noncontrolling holders of equity in our majority-owned subsidiaries as noncontrolling interests in our consolidated statements of operations. Unless we enter into significant new majority-owned subsidiary ventures with noncontrolling interest holders in the future, we expect to have negligible noncontrolling interests in our majority-owned subsidiaries and negligible allocations of income or loss to noncontrolling interest holders in future quarters.

Income Taxes. We experienced an effective income tax expense rate of 45.9% for the three months ended March 31, 2017, compared to an effective income tax expense rate of 4.2% for the three months ended March 31, 2016. Our effective income tax expense rate for the three months ended March 31, 2017 is above the statutory rate principally due to interest that we accrued on unpaid federal tax liabilities. Our effective income tax expense rate for the three months ended March 31, 2016 is below the statutory rate principally due to income during that period of our U.K. subsidiary that was not subject to tax in the U.S. and the U.K. tax on which was fully offset by the release of the U.K. valuation allowances in that period.

Credit and Other Investments Segment

Our Credit and Other Investments segment includes our activities relating to our servicing of and our investments in the point-of-sale, direct-to-consumer personal finance and credit card operations, our various credit card receivables portfolios, as well as other product testing and investments that generally utilize much of the same infrastructure. The types of revenues we earn from our investments in receivables portfolios and services primarily include finance charges, fees and the accretion of discounts associated with the point-of-sale receivables.

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We record (i) the finance charges, discount accretion and late fees assessed on our Credit and Other Investments segment receivables in the interest income - consumer loans, including past due fees category on our consolidated statements of operations, (ii) the rental revenue, over-limit, annual, activation, monthly maintenance, returned-check, cash advance and other fees in the fees and related income on earning assets category on our consolidated statements of operations, and (iii) the charge offs (and recoveries thereof) within our provision for losses on loans and fees receivable on our consolidated statements of operations (for all credit product receivables other than those for which we have elected the fair value option) and within losses upon charge off of loans and fees receivable recorded at fair value on our consolidated statements of operations (for all of our other receivables for which we have elected the fair value option). Additionally, we show the effects of fair value changes for those credit card receivables for which we have elected the fair value option as a component of fees and related income on earning assets in our consolidated statements of operations.

We historically have invested in receivables portfolios through subsidiary entities. If we control through direct ownership or exert a controlling interest in the entity, we consolidate it and reflect its operations as noted above. If we exert significant influence but do not control the entity, we record our share of its net operating results in the equity in income of equity-method investee category on our consolidated statements of operations.

Managed Receivables

We make various references within our discussion of the Credit and Other Investments segment to our managed receivables. In calculating managed receivables data, we include within managed receivables those receivables we manage for our consolidated subsidiaries, but we exclude from managed receivables any noncontrolling interest holders’ shares of the receivables. Additionally, we include within managed receivables only our economic share of the receivables that we manage for our equity-method investee.

Financial, operating and statistical data based on aggregate managed receivables are important to any evaluation of the performance of our credit portfolios, including our risk management, servicing and collection activities and our valuing of purchased receivables. In allocating our resources and managing our business, management relies heavily upon financial data and results prepared on this “managed basis.” Analysts, investors and others also consider it important that we provide selected financial, operating and statistical data on a managed basis because this allows a comparison of us to others within the specialty finance industry. Moreover, our management, analysts, investors and others believe it is critical that they understand the credit performance of the entire portfolio of our managed receivables because it reveals information concerning the quality of loan originations and the related credit risks inherent within the portfolios.

Reconciliation of the managed receivables data to our GAAP financial statements requires: (1) an understanding that our managed receivables data are based on billings and actual charge offs as they occur, without regard to any changes in our allowance for uncollectible loans and fees receivable or any changes in the fair value of loans and fees receivable and their associated structured financing notes; (2) inclusion of our economic share of (or equity interest in) the receivables we manage for our equity-method investee; (3) removal of any noncontrolling interest holders’ shares of the managed receivables underlying our GAAP consolidated results; (4) treatment of the transaction in which our 50%-owned equity-method investee acquired our structured financing trust notes (a) as a deemed sale of the trust receivables at their face amount, (b) followed by the 50%-owned equity-method investee’s deemed repurchase of such receivables for consideration equal to the discounted purchase price that it paid for the notes, and (c) as though the difference between the deemed face amount and the deemed discounted repurchase price of the receivables is to be treated as credit quality discount to be accreted into managed earnings as a reduction of net charge offs over the remaining life of the receivables; and (5) the exclusion from our managed receivables data of certain reimbursements received in respect of one of our portfolios which resulted in pre-tax income benefits within our total interest income, fees and related income on earning assets, losses upon charge off of loans and fees receivable recorded at fair value, net of recoveries, other income, servicing income, and equity in income of equity-method investee line items on our consolidated statements of operations totaling approximately $8.6 million for the three months ended March 31, 2017, $10.3 million for the three months ended December 31, 2016, $2.4 million for the three months ended September 30, 2016, $7.1 million for the three months ended June 30, 2016, $5.9 million for the three months ended March 31, 2016, $10.7 million for the three months ended December 31, 2015, $11.4 million for the three months ended September 30, 2015, and $10.7 million for the three months ended June 30, 2015. This last category of reconciling items above is excluded because it does not bear on our performance in managing our credit card portfolios, including our risk management, servicing and collection activities and our valuing of purchased receivables; moreover, it is difficult to determine the future effects of any such reimbursements that may be received.

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Asset quality. Our delinquency and charge-off data at any point in time reflect the credit performance of our managed receivables. The average age of the accounts underlying our receivables, the timing of portfolio purchases, the success of our collection and recovery efforts and general economic conditions all affect our delinquency and charge-off rates. The average age of the accounts underlying our receivables portfolio also affects the stability of our delinquency and loss rates. We consider this delinquency and charge-off data in our determination of the fair value of our credit card receivables underlying formerly off-balance-sheet securitization structures, as well as our allowance for uncollectible loans and fees receivable in the case of our other credit product receivables that we report at net realizable value. Our strategy for managing delinquency and receivables losses consists of account management throughout the life of the receivable. This strategy includes credit line management and pricing based on the risks. See also our discussion of collection strategies under the “How Do We Collect?” in Item 1, “Business” of our Annual Report on Form 10-K for the year ended December 31, 2016.

The following table presents the delinquency trends of the receivables we manage within our Credit and Other Investments segment, as well as charge-off data and other managed receivables statistics (in thousands; percentages of total):



	At or for the Three Months Ended
	2017		2016								2015
	Mar. 31		Dec. 31		Sept. 30		Jun. 30		Mar. 31		Dec. 31		Sept. 30		Jun. 30
Period-end managed receivables	$253,308		$245,007		$221,683		$201,406		$155,425		$152,528		$151,055		$142,338
Percent 30 or more days past due	10.9	%	11.8	%	10.9	%	8.2	%	9.7	%	11.5	%	10.5	%	11.8	%
Percent 60 or more days past due	7.8	%	8.1	%	7.3	%	5.3	%	7.1	%	7.9	%	7.2	%	8.8	%
Percent 90 or more days past due	5.2	%	5.2	%	4.7	%	3.4	%	5.1	%	5.4	%	5.0	%	4.9	%
Average managed receivables	$250,862		$236,103		$216,951		$188,128		$152,831		$152,983		$143,946		$139,401
Total yield ratio	34.4	%	32.6	%	33.5	%	36.8	%	35.4	%	35.2	%	41.3	%	38.1	%
Combined gross charge-off ratio	23.6	%	21.1	%	13.3	%	14.9	%	18.2	%	16.8	%	21.5	%	17.4	%
Adjusted charge-off ratio	20.1	%	17.8	%	10.7	%	11.7	%	14.1	%	12.9	%	16.5	%	13.2	%

Managed receivables levels. We have experienced overall quarterly growth throughout the periods presented related to our current product offerings with over $110.2 million in net receivables growth associated with our point-of-sale and direct-to-consumer products from March 31, 2016 to March 31, 2017. Our historical credit card receivables continue to decline given the closure of substantially all credit card accounts underlying the portfolios. While we expect continued quarterly growth in our managed receivables balances for all of our products throughout 2017, this growth in future periods largely is dependent on the addition of new retail partners to the point-of-sale operations as well as the timing of solicitations within the direct-to-consumer operations. Further, the loss of existing retail partner relationships could adversely affect new loan acquisition levels.

Delinquencies. Delinquencies have the potential to impact net income in the form of net credit losses. Delinquencies also are costly in terms of the personnel and resources dedicated to resolving them. We intend for the receivables management strategies we use on our portfolios to manage and, to the extent possible, reduce the higher delinquency rates that can be expected in the more mature portion of our managed portfolio. These account management strategies include conservative credit line management, purging of inactive accounts and collection strategies intended to optimize the effective account-to-collector ratio across delinquency categories. We measure the success of these efforts by measuring delinquency rates. These rates exclude receivables that have been charged off.

Given that the vast majority of credit card accounts related to our historical credit card receivables have been closed and there has been no significant new activity for these accounts, we generally have noted declines in delinquency statistics of our managed credit card receivables (when compared to the same quarters in the prior year).

As our investments in point-of-sale and direct-to-consumer receivables have become a larger component of our managed receivables base, our delinquency rates have increased (when compared to periods during which seasoned credit cards made up a larger portion of our managed receivables). This is largely a result of the risk profiles (and corresponding expected returns) for these receivables being higher than that experienced under our mature credit card receivables underlying closed

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credit card accounts as discussed above. Our delinquency rates have continued to be somewhat lower than what we ultimately expect for our new point-of-sale and direct-to-consumer receivables given the continued growth and age of the related accounts. If and when growth for these product lines moderates, as occurred with our personal loan product offering in the last two quarters of 2016, we expect increased overall delinquency rates as the existing receivables mature through their peak charge-off periods. Additionally, seasonal payment patterns on these receivables are similar to those experienced with our historical credit card receivables and we expect those patterns to continue. For example, delinquency rates historically are lower in the first quarter of each year as seen above due to the benefits of seasonally strong payment patterns associated with year-end tax refunds for most consumers.

Total yield ratio. Currently, we are experiencing growth in our newer, higher yielding receivables, including point-of-sale receivables and direct-to-consumer loans. While this growth has contributed to increases in our total yield ratio, we expect this growth will continue to reverse the trend of our declining charge-off rates as noted in the fourth quarter of 2016, because we expect these receivables to season, mature, and charge off at higher rates than we currently experience on our liquidating pool of credit card receivables associated with closed credit card accounts. We anticipate continued growth in our higher yielding point-of-sale and direct-to-consumer receivables over the next few quarters which should continue to stabilize our yield consistent with what we experienced in the past several quarters. However, the timing of receivable acquisitions as well as the relative mix of receivables acquired within a given quarter may contribute to some continued minor variability in our total yield ratio.

Although we have seen generally improving total yield ratio trend-lines, our third quarter 2015 total yield ratio was positively impacted by the recovery of approximately $2.0 million associated with a receivable that was fully reserved in a prior period. Absent this item, our total yield ratio would have been 35.8% in the third quarter of 2015.

Combined gross charge-off ratio and Adjusted charge-off ratio. We charge off our Credit and Other Investments segment receivables when they become contractually more than 180 days past due or 120 days past due for the direct-to-consumer personal loan receivables. We charge off rent-to-own receivables and impair associated rental merchandise if a payment has not been made within the previous 90 days. However, if a payment is made greater than or equal to two minimum payments within a month of the charge-off date, we may reconsider whether charge-off status remains appropriate. Typically, we charge off receivables within 30 days of notification and confirmation of a consumer’s bankruptcy or death. However, in some cases of death, we do not charge off receivables if there is a surviving, contractually liable individual or an estate large enough to pay the debt in full.

Given that our historical credit card portfolios now account for less than 15% of our total managed receivables, the impacts of these historical portfolios are no longer key drivers in the performance of our managed receivables. Instead, growth within point-of-sale finance and direct-to-consumer receivables that have higher charge-off rates than the liquidating credit card portfolios that have historically comprised a larger portion of our managed receivables has resulted in increases in our charge-off rates over time. The declines we experienced in the second quarter of 2015 and 2016 in both our combined and adjusted gross charge-off ratios were largely due to the seasonal beneficial impacts associated with payments experienced in the first quarter of each of those years. Our recent combined gross charge-off and adjusted charge-off ratios benefited in the first few quarters of 2016 from growth we experienced in our point-of-sale operations and more directly from growth in our direct-to-consumer receivables, many of which reached peak charge off periods in the fourth quarter of 2016 but continued to negatively impact the first quarter of 2017. We made substantial investments in our personal loan offerings in the second quarter of 2016 which did not reach their peak-charge off period until the fourth quarter of 2016, thus positively impacting our second and third quarter combined and adjusted gross charge-off ratios and negatively impacting the same ratios in the fourth quarter of 2016 and the first quarter of 2017.

The continued growth in the point-of-sale and direct-to-consumer receivables continues to result in higher charge-offs than those experienced historically. In the next few quarters, we expect increasing charge off rates on a period-over-period comparison basis. This expectation is based on (1) higher expected charge off rates on the point-of-sale and direct-to-consumer receivables, offset by lower charge offs associated with historical credit card receivables due to the continued liquidation of these receivables, (2) the low charge-off ratios experienced in the second quarter of 2015 and second and third quarters of 2016 as discussed above and (3) recent vintages reaching peak charge-off periods. Offsetting these increases will be growth in the underlying receivables base which will serve to mute to a varying degree, some of the aforementioned impacts as has been seen in recent quarters.

Auto Finance Segment

Our Auto Finance segment historically included a variety of auto sales and lending activities.

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Our original platform, CAR, acquired in April 2005, principally purchases and/or services loans secured by automobiles from or for, and also provides 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 have expanded these operations to also include certain installment lending products in addition to our traditional loans secured by automobiles both in the U.S. and U.S. territories.

Collectively, as of March 31, 2017, we served more than 560 dealers through our Auto Finance segment in 32