What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-08 compared with 2024-05-10 · 123 added, 116 removed, 551 unchanged (30% of the section changed)

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Using our technology and proprietary predictive analytics, lenders can make instant credit decisions utilizing hundreds of inputs from multiple sources and thereby offer credit to consumers overlooked by many providers of financing who focus exclusively on consumers with higher FICO scores.

Atlanticus’ underwriting process is enhanced by large language models and machine learning, enabling lenders to make fast, sound decisions when it matters most.

Atlanticus’ underwriting process is enhanced by artificial intelligence and machine learning, enabling lenders to make fast, sound decisions when it matters most.

We are principally engaged in providing products and services to lenders in the U.S.

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See "Consumer and Debtor Protection Laws and Regulations—CaaS Segment" in Part I, Item 1 of our Annual Report on Form 10-K and Part II, Item 1A, "Risk Factors" contained in this Report.

Subject to possible disruptions caused by inflation, rising interest rates, COVID-19 and supply chain interruptions, we believe that our private label credit and general purpose credit card 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.

Subject to possible disruptions caused by inflation and rising interest rates, we believe that our private label credit and general purpose credit card 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.

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We offer a number of other products to our network of buy-here, pay-here dealers (including our floor-plan financing offering), but the majority of our activities are represented by our purchases of auto loans at discounts and our servicing of auto loans for a fee.

As of March 31, 2024, our CAR operations served over 660 dealers in 33 states and two U.S.

As of June 30, 2024, our CAR operations served over 670 dealers in 34 states and two U.S.

The core operations continue to perform well (achieving consistent profitability and generating positive cash flows and growth).

Impact of the COVID-19 Pandemic on Atlanticus and our Markets

In March 2020, a national emergency was declared under the National Emergencies Act due to a new strain of coronavirus.

The response to the COVID-19 pandemic negatively impacted global supply chains and business operations.

In addition, rising inflation in 2021, 2022 and 2023 resulted in increased costs for many goods and services.

As a result of persistently high inflation, interest rates have been on the rise.

Russia’s invasion of Ukraine and the ongoing regional conflict in the Middle East have intensified supply chain disruptions and heightened uncertainty surrounding the near-term outlook for the broader economy.

The impacts of responses to the COVID-19 pandemic by both consumers and governments, rising energy costs, inflation, rising interest rates, and unresolved geopolitical tensions could significantly affect the economic outlook.

The duration and severity of the effects of these impacts on our financial condition, results of operations and liquidity remain uncertain.

Borrowers impacted by COVID-19 requesting hardship assistance may have received temporary relief from payments or fee waivers.

While these measures mitigated credit losses, related economic disruptions subsequently resulted in increased portfolio credit losses.

The Biden administration ended the COVID-19 national and public health emergencies on May 11, 2023.

The long term impact that the cessation of certain benefits provided under emergency relief programs will have on our consumers is uncertain although the remaining financial statement impact for those customers previously provided the aforementioned short-term payment deferrals and fee waivers is not material.

For more information, refer to Part II, Item 1A "Risk Factors" and, in particular, "Other Risks of our Business – The reaction to COVID-19 caused severe disruptions in the U.S.

economy and may have further adverse impacts on our performance, results of operations and access to capital.

" and "Other Risks of our Business – Our business and operations may be negatively affected by rising prices and interest rates ."

CONSOLIDATED RESULTS OF OPERATIONS

For the Three Months Ended March 31,

For the Three Months Ended June 30,

Increases (Decreases)

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Net income attributable to controlling interests to common shareholders

Three Months Ended March 31, 2024, Compared to Three Months Ended March 31, 2023

For the Six Months Ended June 30,

Increases (Decreases)

(In Thousands)

from 2023 to 2024

Total operating revenue

Other non-operating revenue

Interest expense

Provision for credit losses

Changes in fair value of loans at fair value

Operating expenses:

Salaries and benefits

Card and loan servicing

Marketing and solicitation

Total operating expenses:

Net loss attributable to noncontrolling interests

Net income attributable to controlling interests

Net income attributable to controlling interests to common shareholders

Six Months Ended June 30, 2024, Compared to Six Months Ended June 30, 2023

Total operating revenue.

Total operating revenue consists of:

1) interest income, finance charges and late fees on consumer loans, 2) other fees on credit products including annual and merchant fees and 3) ancillary, interchange and servicing income on loan portfolios.

Period-over-period results primarily relate to growth in private label credit and general purpose credit card products, the receivables of which increased to $2,317.6 million as of March 31, 2024 from $2,055.0 million as of March 31, 2023.

We experienced higher period over period growth in our general purpose credit card acquisitions for first quarter ended March 31, 2024 than in our acquisition of private label credit receivables for the same period.

This increase is primarily due to consistent quarterly growth in new credit card customers serviced compared to seasonally driven growth with private label credit receivables.

Growth within our private label credit receivables for the first quarter ended March 31, 2024 was largely due to continued growth associated with our largest existing retail partners.

Period-over-period results primarily relate to growth in private label credit and general purpose credit card products, the receivables of which increased to $2,414.7 million as of June 30, 2024 from $2,173.4 million as of June 30, 2023.

We experienced modest year to date growth in both our general purpose credit card acquisitions and acquisitions of private label credit receivables for the six months ended June 30, 2024.

This increase is primarily due to consistent quarterly growth in new credit card customers serviced and seasonally driven growth with private label credit receivables.

Growth within our private label credit receivables for the first and second quarters of 2024 was largely due to continued growth associated with our largest existing retail partners, growth which typically increases late in the second quarter and into the third quarter of each year based on our retail partners' seasonal sale cycles.

The relative mix of receivable acquisitions can lead to some variation in our corresponding revenue as general purpose credit card receivables typically generate higher gross yields than private label credit receivables do.

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Future periods’ growth is also dependent on the addition of new retail partners to expand the reach of private label credit operations as well as growth within existing partnerships and the level of marketing investment for the general purpose credit card operations.

Other revenue on our consolidated statements of income consists of ancillary, interchange and servicing income.

Other revenue on our condensed consolidated statements of income consists of ancillary, interchange and servicing income.

Ancillary and interchange revenues are largely impacted by growth in our receivables as discussed above.

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The above discussions on expectations for finance, fee and other income are based on our current expectations.

Recent rules enacted by the Consumer Financial Protection Bureau ("CFPB"), which, unless blocked by court order, will limit the late fees charged to consumers in most instances, is expected to significantly impact the revenue recognized on our receivables.

Recent rules enacted by the Consumer Financial Protection Bureau ("CFPB"), which, if implemented, would limit the late fees charged to consumers in most instances, are expected to adversely impact the revenue recognized on our receivables.

In order to mitigate these impacts, our bank partners have taken a number of steps, from modifying products and policies (such as further tightening the criteria used to evaluate new loans) to changing prices (including increasing interest rates and fees charged to consumers).

While we believe these product, policy and pricing changes will offset the negative impact of a reduced late fee, the changes will take time to be fully incorporated into our existing portfolios of receivables.

As such, we expect that revenue will be most acutely impacted in the second and third quarters of 2024 as these new changes are applied to existing and new receivables.

We believe these product, policy and pricing changes will offset the negative impact of a reduced late fee.

The changes will take several quarters to fully implement.

For more information, refer to Part II, Item 1A "Risk Factors" and, in particular, " The CFPB recently issued a final rule regarding credit card late fees, which represents a significant departure from the rules that are currently in effect.

Absent a successful legal challenge, we expect the rule will have a significant adverse impact on our business, results of operations and financial condition for at least the short term and, depending on the effectiveness of our actions taken in response to the rule, potentially over the long term ."

The rules are currently enjoined from implementation.

If implemented in the future, we expect the rule would have an adverse impact on our business, results of operations and financial condition for at least the short term and, depending on the effectiveness of our actions taken in response to the rule, potentially over the long term ."

Other non-operating revenue.

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Interest expense.

Variations in interest expense are due to new borrowings associated with growth in private label credit and general purpose credit card receivables and CAR operations as evidenced within Note 9, "Notes Payable," to our consolidated financial statements, offset by 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.

Outstanding notes payable, net of unamortized debt issuance costs and discounts, associated with our private label credit and general purpose credit card platform increased to $1,795.4 million as of March 31, 2024 from $1,543.8 million as of March 31, 2023.

Variations in interest expense are due to new borrowings associated with growth in private label credit and general purpose credit card receivables and CAR operations as evidenced within Note 9, "Notes Payable," to our condensed consolidated financial statements, offset by 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.

Outstanding notes payable, net of unamortized debt issuance costs and discounts, associated with our private label credit and general purpose credit card platform increased to $1,816.8 million as of June 30, 2024 from $1,595.8 million as of June 30, 2023.

The majority of this increase in outstanding debt relates to the addition of multiple credit facilities in 2023.

Recent increases in the effective interest rates on debt have started to increase our interest expense as we have raised additional capital (or replaced existing facilities) over the last two years.

Recent increases in the effective interest rates on debt have increased our interest expense as we have raised additional capital (or replaced existing facilities) over the last two years.

We anticipate additional debt financing over the next few quarters as we continue to grow coupled with increased effective interest rates.

As such, we expect our quarterly interest expense for these operations to increase compared to prior periods.

However, we do not expect our interest expense to increase significantly in the short term (absent raising additional capital) because over 90% of interest rates on our outstanding debt are fixed.

Adding to interest expense in 2024, we sold approximately $57.2 million aggregate principal amount of 9.25% Senior Notes due 2029 in January and February of 2024.

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Most risk of loss in our Auto Finance segment is widely diversified.

Floorplan loans offered to dealers, which fund auto inventory at dealer locations, increase our exposure to loss.

Floorplan loans offered to dealers to finance auto inventory increase our exposure to loss.

We take a number of steps to mitigate this risk including holding title to the underlying collateral, ongoing reassessments of collateral value and regular audits at participating dealer locations.

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Recent stress noted at some dealer locations is incorporated into our loss estimates.

See Note 2, "Significant Accounting Policies and Consolidated Financial Statement Components," to our consolidated financial statements for further credit quality statistics and analysis.

See Note 2, "Significant Accounting Policies and Consolidated Financial Statement Components," to our condensed consolidated financial statements for further credit quality statistics and analysis.

We expect that our provision for credit losses will continue to increase modestly in 2024 in relation to expected growth in the underlying Auto Finance receivables.

Changes in fair value of loans.

The increase in Changes in fair value of loans was largely driven by growth in the underlying receivables (as noted above) as well as changes in assumptions due to recent rules enacted by the CFPB, which, unless blocked by court order, will limit the late fees charged to consumers in most instances.

The increase in Changes in fair value of loans was largely driven by growth in the underlying receivables (as noted above) as well as changes in assumptions due to recent rules enacted by the CFPB, which, if implemented, would limit the late fees charged to consumers in most instances.

For both periods presented, we included asset performance degradation in our forecasts to reflect both changes in assumed asset level economics and the possibility of delinquency rates increasing in the near term (and the corresponding increase in charge-offs and decrease in payments) above the level that current trends would suggest.

In recent periods we have removed some of this expected degradation based on observed asset performance and improvements in U.S.

In recent periods we have removed some of this expected degradation based on observed asset performance, implementation of mitigants to a potential change in late fee billings and general improvements in U.S.

economic expectations.

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Total operating expenses.

Total operating expenses variances for the three months ended March 31, 2024, relative to the three months ended March 31, 2023, reflect the following:

increases in salaries and benefit costs related to both the growth in the number of employees throughout 2023 and inflationary compensation pressure.

We expect some continued increase in this cost in 2024 compared to corresponding periods in 2023 as we expect our receivables to continue to grow and as a result we expect to modestly increase our number of employees;

increases in card and loan servicing expenses due to growth in receivables associated with our investments in private label credit and general purpose credit card receivables, which grew to $2,317.6 million outstanding from $2,055.0 million outstanding at March 31, 2024 and March 31, 2023, respectively.

Total operating expenses variances for the three and six months ended June 30, 2024, relative to the three and six months ended June 30, 2023, reflect the following:

increases in salaries and benefit costs related to both the growth in the number of employees throughout 2023 and into 2024 and inflationary compensation pressure.

We expect some continued increase in this cost in 2024 compared to corresponding periods in 2023 as we expect our receivables to continue to grow and as a result we expect to continue to modestly increase our number of employees;

increases in card and loan servicing expenses due to growth in receivables associated with our investments in private label credit and general purpose credit card receivables, which grew to $2,414.7 million outstanding from $2,173.4 million outstanding at June 30, 2024 and June 30, 2023, respectively, and costs associated with the implementation of product, policy, and pricing changes discussed above.

As many of the expenses associated with our card and loan servicing efforts are now variable based on the amount of underlying receivables, we would expect this number to continue to grow in 2024 commensurate with growth in our receivables;

Offsetting a portion of this increase are significant reductions in our servicing costs per account, resulting from the realization of greater economies of scale and increased use of automation as our receivables have grown.

modest increases in marketing and solicitation costs as growth in new accounts serviced was in line with growth observed in the first quarter of 2023.

This modest increase in marketing and solicitation costs is a direct result of tightened underwriting standards adopted during the second quarter 2022 (and continued in subsequent quarters) and additional tightened underwriting resulting from the CFPB restrictions on late fee assessments.

modest decreases in marketing and solicitation costs as total growth in new accounts serviced was in line with combined growth observed in the first and second quarters of 2023.

This modest decrease in marketing and solicitation costs is a direct result of tightened underwriting standards resulting from the planned CFPB restrictions on late fee assessments.

As we continue to adjust our underwriting standards to reflect changes in fee and finance assumptions on new receivables, we expect period over period marketing costs for 2024 to increase relative to those experienced in 2023, particularly towards the third and fourth quarters of 2024, although the frequency and timing of increased marketing efforts could vary and are dependent on macroeconomic factors such as national unemployment rates and federal funds rates; and

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Some costs including legal expenses and travel expenses are variable based on growth and have grown as we expand our marketing and growth efforts.

Increases in this category for the quarter ended March 31, 2024 when compared to the quarter ended March 31, 2023 primarily relate to certain nonrecurring costs associated with accounting and legal expenditures.

Increases in this category for the quarter ended June 30, 2024 when compared to the quarter ended June 30, 2023 primarily relate to certain nonrecurring costs associated with accounting and legal expenditures.

While we expect some increase in these costs as we continue to grow our receivable portfolios, we do not anticipate the increases to be meaningful.

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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 income.

We reflect the ownership interests of noncontrolling holders of equity in our majority-owned subsidiaries as noncontrolling interests in our condensed consolidated statements of income.

In November 2019, a wholly-owned subsidiary issued 50.5 million Class B preferred units at a purchase price of $1.00 per unit to an unrelated third party.

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A holder of the Class B preferred units may, at its election and with notice, require the Company to redeem part or all of such holder’s Class B preferred units for cash at $1.00 per unit, on or after October 14, 2024.

We have included the issuance of these Class B preferred units as temporary noncontrolling interests on the consolidated balance sheets and the associated dividends are included as a reduction of our net income attributable to common shareholders on the consolidated statements of income.

We have included the issuance of these Class B preferred units as temporary noncontrolling interests on the condensed consolidated balance sheets and the associated dividends are included as a reduction of our net income attributable to common shareholders on the condensed consolidated statements of income.

Income Taxes.

We experienced effective tax rates of 21.1% and 23.8% for the three months ended March 31, 2024 and 2023, respectively.

Our effective tax rates for the three months ended March 31, 2024 and 2023, were above the statutory rate to varying degrees between the two periods principally due to (1) state and foreign income tax expense, (2) interest accrued on uncertain tax positions, (3) taxes on global intangible low-taxed income, and (4) deduction disallowance under Section 162(m) of the Internal Revenue Code of 1986, as amended, with respect to compensation paid to our covered employees.

Offsetting the foregoing items were (1) our deduction for income tax purposes of amounts characterized in our consolidated financial statements as dividends on a preferred stock issuance, such amounts constituting deductible interest expense on a debt issuance for tax purposes and (2) deductions associated with the vesting of restricted stock at times when the fair value of our stock exceeded such share-based awards’ grant date values.

We report interest expense associated with our income tax liabilities (including accrued liabilities for uncertain tax positions) within our income tax line item on our consolidated statements of income.

We experienced effective tax rates of 15.6% and 18.5% for the three and six months ended June 30, 2024, respectively, compared to 22.3% and 23.1% for the three and six months ended June 30, 2023, respectively.

Our effective tax rates for the three and six months ended June 30, 2024 are below the statutory rate principally due to our deduction for income tax purposes of (1) amounts characterized in our condensed consolidated financial statements as dividends on a preferred stock issuance, such amounts constituting deductible interest expense on a debt issuance for tax purposes, and (2) a loss related to our unrecovered investment in a foreign subsidiary—such subsidiary which ceased operations in the three months ended June 30, 2024, and with respect to which we had used “permanently reinvested earnings” accounting in our condensed consolidated financial statements.

Offsetting the foregoing items were (1) state and foreign income tax expense including the effects of law changes enacted in the three months ended June 30, 2024 in certain states in which we operate, (2) taxes on global intangible low-taxed income, and (3) deduction disallowance under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), with respect to compensation paid to our covered employees.

Our effective tax rates for the three and six months ended June 30, 2023 are above the statutory rate principally due to (1) state and foreign income tax expense, (2) interest accrued on uncertain tax positions, (3) taxes on global intangible low-taxed income, and (4) deduction disallowance under the Code with respect to compensation paid to our covered employees.

Partially offsetting the foregoing items was our deduction for income tax purposes of amounts characterized in our condensed consolidated financial statements as dividends on a preferred stock issuance, such amounts constituting deductible interest expense on a debt issuance for tax purposes.

We report interest expense associated with our income tax liabilities (including accrued liabilities for uncertain tax positions) within our income tax line item on our condensed consolidated statements of income.

We likewise report within such line item the reversal of interest expense associated with our accrued liabilities for uncertain tax positions to the extent we resolve such liabilities in a manner favorable to our accruals therefor.

Our interest expense was de minimis in the three months ended March 31, 2024, and $0.9 million in the three months ended March 31, 2023.

Our interest expense was $93 thousand for the six months ended June 30, 2024, and $1.14 million for the six months ended June 30, 2023.

Our CaaS segment includes our activities related to our servicing of and our investments in the private label credit and general purpose 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 fees and finance charges, merchant fees or annual fees associated with the private label credit and general purpose credit card receivables.

We record (i) the finance charges, merchant fees and late fees assessed on our CaaS segment receivables in the Revenue - Consumer loans, including past due fees category on our consolidated statements of income, (ii) the annual, monthly maintenance, returned-check, cash advance and other fees in the Revenue - Fees and related income on earning assets category on our consolidated statements of income, and (iii) the charge-offs (and recoveries thereof) as a component within our Changes in fair value of loans on our consolidated statements of income.

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 Changes in fair value of loans in our consolidated statements of income.

We record (i) the finance charges, merchant fees and late fees assessed on our CaaS segment receivables in the Revenue - Consumer loans, including past due fees category on our condensed consolidated statements of income, (ii) the annual, monthly maintenance, returned-check, cash advance and other fees in the Revenue - Fees and related income on earning assets category on our condensed consolidated statements of income, and (iii) the charge-offs (and recoveries thereof) as a component within our Changes in fair value of loans on our condensed consolidated statements of income.

We historically have invested in receivables portfolios through subsidiary entities.

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The fair value mark against receivables reflects the difference between the face value of a receivable and the net present value of the expected cash flows associated with that receivable.

See Note 6, "Fair Value of Assets and Liabilities" to our consolidated financial statements included herein for further discussion of this calculation.

See Note 6, "Fair Value of Assets and Liabilities" to our condensed consolidated financial statements included herein for further discussion of this calculation.

Total managed receivables is equal to the Aggregate unpaid gross balance of loans at fair value.

See Note 6, "Fair Value of Assets and Liabilities" to our consolidated financial statements included herein for further discussion of the Aggregate unpaid gross balance of loans at fair value.

See Note 6, "Fair Value of Assets and Liabilities" to our condensed consolidated financial statements included herein for further discussion of the Aggregate unpaid gross balance of loans at fair value.

The Fair value to Total managed receivables ratio is calculated using Loans at fair value as the numerator, and Total managed receivables as the denominator.

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Combined principal net charge-offs

Finance charge-offs are included as a component of our Changes in fair value of loans in the accompanying consolidated statements of income.

Finance charge-offs are included as a component of our Changes in fair value of loans in the accompanying condensed consolidated statements of income.

Our delinquency and charge-off data at any point in time reflect the credit performance of our managed receivables.

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The Combined principal net charge-off ratio, annualized is calculated using the annualized combined principal net charge-offs as the numerator and period-end average managed receivables as the denominator.

Interest expense ratio, annualized is calculated using the annualized interest expense associated with the CaaS segment (See Note 3, "Segment Reporting" to our consolidated financial statements) as the numerator and period-end average managed receivables as the denominator.

Interest expense ratio, annualized is calculated using the annualized interest expense associated with the CaaS segment (See Note 3, "Segment Reporting" to our condensed consolidated financial statements) as the numerator and period-end average managed receivables as the denominator.

Net interest margin ratio, annualized is calculated using the Total managed yield ratio, annualized less the Combined principal net charge-off ratio, annualized less the Interest expense ratio, annualized.

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Managed receivables levels.

We have continued to experience overall period-over-period quarterly receivables growth with over $262.7 million in net receivables growth associated with the private label credit and general purpose credit card products offered by our bank partners from March 31, 2023 to March 31, 2024.

The addition of large private label credit retail partners and ongoing purchases of receivables arising in accounts issued by our bank partners to customers of our existing retail partners helped grow our private label credit receivables by $71.8 million in the twelve months ended March 31, 2024.

Our general purpose credit card receivables grew by $190.9 million during the twelve months ended March 31, 2024.

While some of our merchant partners continue to face year-over-year growth challenges, others are still benefiting from continued consumer spending and a growing economy.

We have continued to experience overall period-over-period quarterly receivables growth with over $241.3 million in net receivables growth associated with the private label credit and general purpose credit card products offered by our bank partners from June 30, 2023 to June 30, 2024.

The addition of large private label credit retail partners and ongoing purchases of receivables arising in accounts issued by our bank partners to customers of our existing retail partners helped grow our private label credit receivables by $121.1 million in the twelve months ended June 30, 2024.

Our general purpose credit card receivables grew by $120.2 million during the twelve months ended June 30, 2024.

While some of our merchant partners continue to face year-over-year growth challenges, others are benefiting from continued consumer spending and a growing economy.

Our general purpose credit card portfolio continues to grow in terms of total customers served and therefore we continue to experience growth in total managed receivables.

We expect continued growth in our managed receivables when compared to prior periods in 2023 which were restricted due to tightened underwriting standards adopted during the second quarter 2022 (and continued in subsequent quarters).

Growth in the first quarter of 2024 was somewhat restricted due to the aforementioned rules recently enacted by the CFPB.

Growth in the first and second quarters of 2024 was somewhat restricted due to our initial response to rule changes enacted by the CFPB.

While we believe these product, policy and pricing changes will offset the negative impact of a reduced late fee, the product, policy and pricing changes will take time to be fully implemented and could impact new receivable acquisitions in the short term.

We believe these product, policy and pricing changes will offset the negative impact of a reduced late fee.

The changes will take several quarters to fully implement and could impact new receivable acquisitions in the short term.

Growth in future periods for our private label credit receivables largely is dependent on the addition of new retail partners to the private label credit origination platform, the timing and size of solicitations within the general purpose credit card platform by our bank partners, as well as purchase activity of consumers.

Similarly, the loss of existing retail partner relationships could adversely affect new loan acquisition levels.

Our top five retail partnerships accounted for 70% of the above-referenced Retail period-end managed receivables outstanding as of March 31, 2024.

Our top five retail partnerships accounted for over 70% of the above-referenced Retail period-end managed receivables outstanding as of June 30, 2024.

Delinquencies.

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These rates exclude receivables that have been charged off.

During the first and second quarters of 2023 we experienced increased delinquency rates in conjunction with slower receivables growth, higher energy costs and rising inflation and the resulting negative impact on consumers.

This increase abated in the third and fourth quarters of 2023 as certain of these costs decreased and consumers adjusted to new price points for these consumer staples while simultaneously enjoying a strong employment environment.

As we continue to acquire newer private label credit and general purpose credit card receivables, we expect our delinquency rates to marginally increase in 2024 when compared to the same periods in prior years.

This increase was evident in the first quarter of 2024 and will, to a lesser degree, be evident in the second quarter of 2024 as the remaining accounts that were enrolled in short-term payment deferrals, due to hardship claims resulting from COVID-19, are expected to charge off.

During 2023, we experienced increased delinquency rates, when compared to the same periods in 2022, in conjunction with slower receivables growth, higher energy costs and rising inflation and the resulting negative impact on consumers.

These increases abated in the third and fourth quarters of 2023 as certain of these costs decreased and consumers adjusted to new price points for these consumer staples while simultaneously enjoying a strong employment environment.

Increases in the first and second quarters of 2024 in our Private label credit receivables were due to a mix shift in receivables acquired to certain receivables that have higher observed delinquencies, but for which we have limited loss exposure due to agreements with retail partners.

Our delinquency rates for our general purpose credit cards receivables were higher in the first quarter of 2024 due to both a reduction in the growth of our managed receivables and accounts that were enrolled in short-term payment deferrals, due to hardship claims resulting from COVID-19.

Receivables enrolled in these short-term payment deferrals continued to accrue interest and their delinquency status did not change through their respective deferment periods.

We continue to actively work with consumers that indicate hardship as a result of COVID-19; however, the number of impacted consumers is a small part of our overall receivable base.

The remainder of these accounts were removed from hardship status with the end of the COVID-19 national and public health emergencies on May 11, 2023.

While these accounts have resulted in higher than normal reported delinquency rates, the expected charge offs will not result in a further economic impact to us as the majority of these accounts were already considered in our changes in fair value.

Further impacting expected 2024 delinquency rates, is an ongoing planned shift in our general purpose receivables mix to higher yielding assets.

The remainder of these accounts were removed from hardship status with the end of the COVID-19 national and public health emergencies in May 2023.

While these accounts resulted in higher than normal reported delinquency rates for the first quarter of 2024 (and correspondingly higher chargeoffs in the first and second quarters of 2024), the charge offs did not result in a further economic impact to us as the majority of these accounts were already considered in our changes in fair value in prior periods.

As these accounts were largely charged off by the end of the first quarter we saw some modest improvement in our second quarter 2024 delinquencies offset by slower net receivables growth during this period.

As we continue to acquire newer private label credit and general purpose credit card receivables, we expect our delinquency rates to marginally increase throughout 2024 when compared to the same periods in prior years due to a planned shift in our general purpose and private label credit receivables mix to higher yielding assets.

These assets tend to have higher corresponding delinquencies and chargeoffs and will contribute to marginally higher delinquency rates (and a corresponding higher net interest margin ratio).

We also expect continued seasonal payment patterns on these receivables that impact our delinquencies in line with prior periods.

For example, delinquency rates historically are lower in the first quarter of each year due to the benefits of seasonally strong payment patterns associated with tax refunds for many consumers.

Offsetting some of this expected increase in delinquencies is continued growth in the portfolio which will continue to mute some of the aforementioned delinquency increase.

Our beliefs for future delinquency rates are predicated on the assumption that the slowing rate of inflation will continue and our recent tightened underwriting standards implemented in the second quarter 2022 (and continued in subsequent quarters), will prove effective at reducing account delinquencies.

For example, delinquency rates historically are lower in the second quarter of each year due to the benefits of seasonally strong payment patterns associated with tax refunds for many consumers.

Offsetting some of this expected increase in delinquencies is continued growth in the portfolio which we expect will continue to mute some of the aforementioned delinquency increase.

Our beliefs for future delinquency rates are predicated on the assumption that the slowing rate of inflation will continue and our recent tightened underwriting standards will prove effective at reducing account delinquencies.

Total managed yield ratio, annualized.

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General purpose credit card receivables tend to have higher total yields than private label credit receivables (and corresponding higher charge off rates).

As a result, in periods where we have declines in rates of growth of these receivables we expect to have slightly lower total managed yield ratios.

With tightened underwriting standards implemented in the second quarter 2022 and additional product, policy and pricing changes recently implemented as a result of the CFPB late fee rules, we expect slightly lower managed yield ratios (and correspondingly lower delinquency rates) associated with slower growth rates in our credit card receivables for early 2024 when compared to those ratios in 2023.

As these more recent changes fully take effect in later 2024, we expect our total managed yield ratio to increase as the aforementioned receivables mix shift to higher yielding assets which become a larger component of our acquired receivables.

As a result, in periods where we have declines in rates of growth of these receivables, as was noted in the first quarter of 2024, we expect to have slightly lower total managed yield ratios.

We currently expect increases in the acquisition of receivables and correspondingly higher period-over-period operating revenue for the remainder of 2024.

This growth includes an expected shift in our mix of acquired private label receivables to higher FICO receivables that have lower gross yields (and correspondingly lower charge-off expectations) which may result in marginally lower managed yield ratios when compared to the corresponding periods in 2023.

Combined principal net charge-off ratio, annualized.

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Growth within our general purpose credit card receivables (as a percent of outstanding receivables) has resulted in increases in our charge-offs over time.

The increase in the combined principal net charge-off ratio, annualized throughout 2023 is a reflection of increased delinquencies noted as consumer behavior reverted to historical norms (similar to those experienced in periods prior to COVID-19).

The increase in the combined principal net charge-off ratio, annualized throughout 2023 and the first two quarters of 2024 is a reflection of increased delinquencies noted as consumer behavior reverted to historical norms (similar to those experienced in periods prior to COVID-19) and decreases in the acquisition of new general purpose credit card receivables.

Additionally, inflation, particularly as it relates to higher gas prices, negatively impacted some consumers' ability to make payments on outstanding loans and fees receivable.

As delinquency rates continue to be elevated due to our ongoing receivables mix shift into products with higher yields and corresponding charge offs, we expect combined principal net charge-off rates to continue to increase, when compared to comparable prior periods.

These increased charge-off rates are expected to continue through the second quarter of 2024 before returning to historically normalized levels.

Despite the expected marginal increases in delinquency rates as discussed above, we expect our overall combined principal net charge-off ratios to decrease for the remainder of 2024, when compared to comparable prior periods.

These charge-off rates are expected to return to historically normalized levels for the remainder of 2024, adjusted for the mix shift discussed above, and will benefit from planned growth in the underlying receivables which we expect will further reduce our combined principal net charge-off ratio.

Our charge-off ratio has also been impacted due to (and will continue to be impacted by):

1) charge-offs associated with previously mentioned accounts enrolled in short-term payment deferrals (2) higher expected charge-off rates on the private label credit and general purpose credit card receivables corresponding with higher yields on these receivables, (3) continued testing of receivables with higher risk profiles, which leads to periodic increases in combined principal net charge offs, (4) the aforementioned tightened underwriting standards that will slow the pace of growth in our receivables base, and (5) negative impacts on some consumers' ability to make payments on outstanding loans and fees receivable as a result of COVID-19 and the related economic impacts.

While charge-offs associated with previously mentioned accounts enrolled in short-term payment deferrals will have a negative impact on our Combined principal net charge-off ratio, annualized through the second quarter of 2024, they are not expected to have a material impact on our consolidated statements of income as the majority of these accounts were already considered in our changes in fair value.

1) higher expected charge-off rates on the private label credit and general purpose credit card receivables corresponding with higher yields on these receivables, (2) continued testing of receivables with higher risk profiles, which leads to periodic increases in combined principal net charge offs, (3) the aforementioned tightened underwriting standards that will slow the pace of growth in our receivables base, and (4) negative impacts on some consumers' ability to make payments on outstanding loans and fees receivable as a result of COVID-19 and the related economic impacts.

While charge-offs associated with previously mentioned accounts enrolled in short-term payment deferrals had a negative impact on our Combined principal net charge-off ratio, annualized through the second quarter of 2024, they did not have a material impact on our condensed consolidated statements of income as the majority of these accounts were already considered in our changes in fair value.

Further impacting our charge-off rates are the timing and size of solicitations that serve to minimize charge-off rates in periods of high receivable acquisitions but also exacerbate charge-off rates in periods of lower receivable acquisitions.

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Recent impacts to this ratio primarily relate to the timing and size of outstanding debt as well as the addition of new funding facilities.

In general, we have obtained lower cost financing with fixed interest rates, resulting in lower interest expense ratios.

In general, we have historically obtained lower cost financing with fixed interest rates, resulting in lower interest expense ratios.

Increases in the federal funds borrowing rate have led to an increase in spreads for newly-originated debt and for that portion of debt which does not have fixed rates.

As such, we have seen our Interest expense ratio, annualized increase throughout 2023 and we expect the interest expense ratio to increase when compared to prior quarters throughout 2024 as we replace existing financing arrangements with new ones.

As such, we have seen our Interest expense ratio, annualized increase throughout 2023 and 2024 and we expect the interest expense ratio to increase when compared to prior quarters for the remainder of 2024 as we replace existing financing arrangements with new ones.

Net interest margin ratio, annualized.

Our Net interest margin ratio, annualized represents the difference between our Total managed yield ratio, annualized, our Combined principal net charge-off ratio, annualized and our Interest expense ratio, annualized.

Recent declines in this ratio, when compared to corresponding prior periods, relate primarily to recent (and projected) increases in our principal net charge-offs as noted above.

Given recent increases in delinquency rates, we expect this ratio to continue to fall through the second quarter of 2024 relative to corresponding periods in 2023, before returning to more historical norms.

Recent declines in this ratio, when compared to corresponding prior periods, relate primarily to recent increases in our principal net charge-offs as noted above.

Given the above noted expectations for marginal improvements in our Combined principal net charge-off ratio, annualized, we expect this ratio to start to improve relative to corresponding periods in 2023.

Changes in the mix shift of acquired receivables, noted above, will also lead to increases in the Net interest margin, annualized as the higher yielding receivables become a larger component of our total portfolio.

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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.

Collectively, as of March 31, 2024, we served over 660 dealers through our Auto Finance segment in 33 states and two U.S.

Collectively, as of June 30, 2024, we served over 670 dealers through our Auto Finance segment in 34 states and two U.S.

Non-GAAP Financial Measures

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Combined principal net charge-offs

Finance charge-offs are included as a component of our Provision for credit losses in the accompanying consolidated statements of income.

Finance charge-offs are included as a component of our Provision for credit losses in the accompanying condensed consolidated statements of income.

Financial, operating and statistical metrics for our Auto Finance segment are detailed (in thousands;

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While we have experienced recent increases in our delinquency rates (and related charge-offs), we do not believe they will have a significantly adverse impact on our results of operations; even at slightly elevated rates, we earn significant yields on CAR’s receivables and have significant dealer reserves (i.e., retainages or holdbacks on the amount of funding CAR provides to its dealer customers) and other collateral to protect against meaningful credit losses.

Delinquency rates also tend to fluctuate based on seasonal trends and historically are lower in the first quarter of each year as seen above due to the benefits of strong payment patterns associated with tax refunds for many consumers.

Delinquency rates also tend to fluctuate based on seasonal trends and historically are lower in the second quarter of each year as seen above due to the benefits of strong payment patterns associated with tax refunds for many consumers.

Total managed yield ratio, annualized.

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Increases in our Combined principal net charge-off ratios for the fourth quarter of 2022 and throughout 2023 are indicative of our charge off levels returning to historically normalized levels (i.e., those periods prior to COVID-19 and the related government stimulus programs).

While we anticipate our charge offs to be incurred ratably across our portfolio of dealers, specific dealer-related losses are difficult to predict and can negatively influence our combined principal net charge-off ratio.

We continually re-assess our dealers and will take appropriate action if we believe a particular dealer’s risk characteristics adversely change.

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Represents an annualized fraction, the numerator of which includes (as appropriate for each applicable disclosed segment) the:

1) finance charge and late fee income billed on all consolidated outstanding receivables and the amortization of merchant fees, collectively included in the consumer loans, including past due fees category on our consolidated statements of income; plus 2) credit card fees (including over-limit fees, cash advance fees, returned check fees and interchange income), earned, amortized amounts of annual membership fees with respect to certain credit card receivables, collectively included in our fees and related income on earning assets category on our consolidated statements of income; plus 3) servicing, other income and other activities collectively included in our other operating income category on our consolidated statements of income; minus 4) finance charge and fee losses from consumers unwilling or unable to pay their receivables balances, as well as from bankrupt and deceased consumers.

1) finance charge and late fee income billed on all consolidated outstanding receivables and the amortization of merchant fees, collectively included in the consumer loans, including past due fees category on our condensed consolidated statements of income; plus 2) credit card fees (including over-limit fees, cash advance fees, returned check fees and interchange income), earned, amortized amounts of annual membership fees with respect to certain credit card receivables, collectively included in our fees and related income on earning assets category on our condensed consolidated statements of income; plus 3) servicing, other income and other activities collectively included in our other operating income category on our condensed consolidated statements of income; minus 4) finance charge and fee losses from consumers unwilling or unable to pay their receivables balances, as well as from bankrupt and deceased consumers.

The denominator is our average managed receivables.

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Interest expense ratio, annualized.

Represents an annualized fraction, the numerator of which is the annualized interest expense associated with the CaaS segment (See Note 3, "Segment Reporting" to our consolidated financial statements) and the denominator of which is average managed receivables.

Represents an annualized fraction, the numerator of which is the annualized interest expense associated with the CaaS segment (See Note 3, "Segment Reporting" to our condensed consolidated financial statements) and the denominator of which is average managed receivables.

Net interest margin ratio, annualized.

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We believe our unrestricted cash, future cash provided by operating activities, availability under our debt facilities, and access to the capital markets will provide adequate resources to fund our operating and financing needs.

All of our CaaS segment’s structured financing facilities are expected to amortize down with collections on the receivables within their underlying trusts and should not represent significant refunding or refinancing risks to our consolidated balance sheets.

Facilities that could represent near-term refunding or refinancing needs (within the next 24 months) as of March 31, 2024 are those associated with the following notes payable in the amounts indicated (in millions):

Facilities that could represent near-term refunding or refinancing needs (within the next 24 months) as of June 30, 2024 are those associated with the following notes payable in the amounts indicated (in millions):

Unsecured term debt (expiring August 26, 2024)

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We believe that the quality of our new receivables should allow us to raise more capital through increasing the size of our facilities with our existing lenders and attracting new lending relationships, albeit at increased costs due to the aforementioned recent interest rate increases.

Further details concerning the above debt facilities and other debt facilities we use to fund the acquisition of receivables are provided in Note 9, "Notes Payable," to our consolidated financial statements included herein.

Further details concerning the above debt facilities and other debt facilities we use to fund the acquisition of receivables are provided in Note 9, "Notes Payable," to our condensed consolidated financial statements included herein.

In November 2021, we issued $150.0 million aggregate principal amount of 6.125% Senior Notes due 2026 (the "2026 Senior Notes").

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We are amortizing fees associated with the issuance of the 2026 Senior Notes into interest expense over the expected life of such notes.

Amortization of these fees for the three months ended March 31, 2024 and 2023 totaled $0.4 million and $0.4 million, respectively.

We repurchased $0.4 million and $0 of the outstanding principal amount of these 2026 Senior Notes in the three months ended March 31, 2024 and 2023, respectively.

Amortization of these fees for the three and six months ended June 30, 2024 and 2023 totaled $0.3 million, $0.7 million, $0.3 million and $0.7 million, respectively.

We repurchased $0, $0.4 million, $0.8 million and $0.8 million of the outstanding principal amount of these 2026 Senior Notes in the three and six months ended June 30, 2024 and 2023, respectively.

In January and February 2024, we issued an aggregate of $57.2 million aggregate principal amount of 9.25% Senior Notes due 2029 (the "2029 Senior Notes").

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We are amortizing fees associated with the issuance of the 2029 Senior Notes into interest expense over the expected life of such notes.

Amortization of these fees for the three months ended March 31, 2024 totaled $0.1 million.

Amortization of these fees for the three and six months ended June 30, 2024 totaled $0.1 million an $0.2 million, respectively.

In June and July 2021, we issued an aggregate of 3,188,533 shares of 7.625% Series B Cumulative Perpetual Preferred Stock, liquidation preference of $25.00 per share (the "Series B preferred stock"), for net proceeds of approximately $76.5 million after deducting underwriting discounts and commissions, but before deducting expenses and the structuring fee.

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The sales agents will make all sales using commercially reasonable efforts consistent with their normal trading and sales practices up to the amount specified in, and otherwise in accordance with the terms of, the placement notices.

During the three months ended March 31, 2024 and 2023, we sold 44,143 shares and 51,327 shares, respectively, of our Series B preferred stock under our Preferred Stock ATM Program for net proceeds of $1.1 million and $1.1 million, respectively.

During the three months ended March 31, 2024, no common stock was sold under the Company’s Common Stock ATM Program.

During the three months ended March 31, 2023, we repurchased and contemporaneously retired 1,806 shares of Series B preferred stock at an aggregate cost of $29,000.

No shares of Series B preferred stock were repurchased in the three months ended March 31, 2024.

During the three and six months ended June 30, 2024 and 2023, we sold 0 shares, 44,143 shares, 2,100 shares and 53,427 shares, respectively, of our Series B preferred stock under our Preferred Stock ATM Program for net proceeds of $0, $1.1 million, $0 and $1.1 million, respectively.

During the three and six months ended June 30, 2024 and 2023, no 2026 Senior Notes were sold under the Company's Preferred Stock ATM Program.

During the three and six months ended June 30, 2024, no common shares were sold under the Company’s Common Stock ATM Program.

During the three and six months ended June 30, 2023, we repurchased and contemporaneously retired 0 shares and 1,806 shares of Series B preferred stock at an aggregate cost of $0 and $29,000.

No shares of Series B preferred stock were repurchased in the three and six months ended June 30, 2024.

On November 14, 2019, a wholly-owned subsidiary issued 50.5 million Class B preferred units at a purchase price of $1.00 per unit to an unrelated third party.

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The proceeds from the transaction were used for general corporate purposes.

We have included the issuance of these Class B preferred units as temporary noncontrolling interest on the consolidated balance sheets.

We have included the issuance of these Class B preferred units as temporary noncontrolling interest on the condensed consolidated balance sheets.

Dividends paid on the Class B preferred units are deducted from Net income attributable to controlling interests to derive Net income attributable to common shareholders.

See Note 5, "Redeemable Preferred Stock" and Note 11, "Net Income Attributable to Controlling Interests Per Common Share" to our consolidated financial statements for more information.

See Note 5, "Redeemable Preferred Stock" and Note 11, "Net Income Attributable to Controlling Interests Per Common Share" to our condensed consolidated financial statements for more information.

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").

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Upon the election by the holders of a majority of the shares of Series A preferred stock, each share of the Series A preferred stock is convertible into the number of shares of the Company’s common stock as is determined by dividing (i) the sum of (a) $100 and (b) any accumulated and unpaid dividends on such share by (ii) an initial conversion price equal to $10 per share, subject to adjustment in certain circumstances to prevent dilution.

At March 31, 2024, we had $444.8 million in unrestricted cash held by our various business subsidiaries.

At June 30, 2024, we had $350.9 million in unrestricted cash held by our various business subsidiaries.

Because the characteristics of our assets and liabilities change, liquidity management is a dynamic process for us, driven by the pricing and maturity of our assets and liabilities.

We historically have financed our business through cash flows from operations, asset-backed structured financings and the issuance of debt and equity.

Details concerning our cash flows for the three months ended March 31, 2024 and 2023 are as follows:

During the three months ended March 31, 2024, we generated $118.8 million of cash flows from operations compared to our generating $101.7 million of cash flows from operations during the three months ended March 31, 2023.

Details concerning our cash flows for the six months ended June 30, 2024 and 2023 are as follows:

During the six months ended June 30, 2024, we generated $234.4 million of cash flows from operations compared to our generating $209.8 million of cash flows from operations during the six months ended June 30, 2023.

The increase in cash provided by operating activities was principally related to an increase in finance and fee collections associated with growing private label credit and general purpose credit card receivables and increased recoveries on charged-off receivables.

During the three months ended March 31, 2024, we used $67.5 million of cash in our investing activities, compared to use of $53.4 million of cash in investing activities during the three months ended March 31, 2023.

During the six months ended June 30, 2024, we used $264.8 million of cash in our investing activities, compared to use of $241.4 million of cash in investing activities during the six months ended June 30, 2023.

This increase in cash used is primarily due to marginal increases in the level of net investments primarily in general purpose credit card receivables relative to the same period in 2023.

During the three months ended March 31, 2024, we generated $47.4 million of cash in financing activities, compared to use of $47.0 million of cash in financing activities during the three months ended March 31, 2023.

During the six months ended June 30, 2024, we generated $53.8 million of cash in financing activities, compared to use of $7.2 million of cash in financing activities during the six months ended June 30, 2023.

The increase in cash generated is primarily due to the issuance of $57.2 million of 2029 Senior Notes during the six months ended June 30, 2024.

Additionally, for the six months ended June 30, 2023, we used $4.9 million for the repurchase and retirement of common stock compared to $1.8 million for the six months ended June 30, 2024.

In both periods, the data reflect borrowings associated with private label credit and general purpose credit card receivables offset by net repayments of amortizing debt facilities as payments are made on the underlying receivables that serve as collateral.

Additionally, we issued $57.2 million of 2029 Senior Notes during the quarter ended March 31, 2024.

Beyond our immediate financing efforts discussed throughout this Report, we will continue to evaluate debt and equity issuances as a means to fund our investment opportunities.

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We do not currently expect that these contingent commitments will result in any material amounts being paid by us.

See Note 10, "Commitments and Contingencies," to our consolidated financial statements included herein for further discussion of these matters.

See Note 10, "Commitments and Contingencies," to our condensed consolidated financial statements included herein for further discussion of these matters.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 2, "Significant Accounting Policies and Consolidated Financial Statement Components," to our consolidated financial statements included herein for a discussion of recent accounting pronouncements.

See Note 2, "Significant Accounting Policies and Consolidated Financial Statement Components," to our condensed consolidated financial statements included herein for a discussion of recent accounting pronouncements.

CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements are prepared in accordance with GAAP.

Our condensed consolidated financial statements are prepared in accordance with GAAP.

In connection with the preparation of our financial statements, we are required to make estimates and assumptions about future events and apply judgments that affect the reported amounts of certain assets and liabilities, and in some instances, the reported amounts of revenues and expenses during the period.

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HBR reimburses us for the full cost of the employees, based on the amount of time devoted to HBR.

In the three months ended March 31, 2024 and 2023, we received $180,000 and $141,000, respectively, of reimbursed costs from HBR associated with these leased employees.

In the six months ended June 30, 2024 and 2023, we received $390,500 and $278,500, respectively, of reimbursed costs from HBR associated with these leased employees.

On November 26, 2014, we and certain of our subsidiaries entered into a Loan and Security Agreement with Dove.

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Hanna, III and members of his immediate family are the beneficiaries of these other two trusts.

See Note 5, "Redeemable Preferred Stock," to our consolidated financial statements for more information.

See Note 5, "Redeemable Preferred Stock," to our condensed consolidated financial statements for more information.

During 2022, we utilized Axiom Bank, NA to provide legal and other services related to various commercial opportunities.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis