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
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,"
"
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 everyday Americans. According to data published by Experian, 41% of Americans had FICO® scores of less than 700 as of the second quarter of 2019. A recent survey conducted by Highland Solutions found that 63% of Americans lived "paycheck to paycheck" and 82% of people do not have access to an emergency fund. We believe this equates to a population of over 100 million everyday Americans in need of additional access to credit. These consumers often have financial needs that are not effectively met by larger financial institutions. By facilitating fairly priced consumer credit and financial service alternatives with value added features and benefits specifically curated for the unique needs of these consumers, we endeavor to empower everyday Americans on a path to improved financial well-being.
Currently, within our Credit and Other Investments segment, we are applying the
experiences gained and infrastructure built from servicing over
We are principally engaged in providing products and services to lenders in the
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.
Additionally, we report within our Credit and Other Investments segment: (1) the income earned from an investment in an equity-method investee that holds credit card receivables for which we are the servicer; and (2) gains or losses 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. None of these companies are publicly-traded and there are no material pending liquidity events. We will continue to carry the investments on our books at cost minus impairment, if any, plus or minus changes resulting from observable price changes.
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 (such as those associated with our legacy credit card operations).
Subject to potential disruptions caused by COVID-19, we believe that our 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.
Beyond these activities within our Credit and Other Investments segment, we invest in and service portfolios of credit card receivables.
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.
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 and our outstanding common stock.
We elected the fair value option to account for certain loans receivable
associated with our point-of-sale and direct-to-consumer platform that are
acquired on or after
COVID-19 Pandemic
On
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The following are anticipated key impacts on our business and response initiatives taken by the Company, in coordination with our partners, to mitigate such impacts:
Consumer spending behavior has been significantly impacted by the COVID-19
pandemic, principally due to restrictions on "non-essential" businesses,
issuances of stay-at-home orders, and uncertainties about the extent and
duration of the pandemic. Additionally, government stimulus programs have
decreased consumer need for credit products and generally led to an increase in
customer payments. While we have seen some improvements in this area, to the
extent this change in consumer spending behavior continues, receivables
purchases could decline relative to the prior year. The extent to which our
merchants have remained open for business has varied across merchant category
and geographic location within the
Borrowers impacted by COVID-19 requesting hardship assistance have been receiving temporary relief from payments. While we expect these measures to mitigate credit losses, we anticipate that the elevated unemployment rate, while partially mitigated by the effects of government stimulus and relief measures (such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the American Rescue Plan), may result in increased portfolio credit losses in the future.
As the impact of COVID-19 continues to evolve, the Company remains committed to
serving our bank partner, merchants and consumers, while caring for the safety
of our employees and their families. The potential impact that COVID-19 and
related government stimulus and relief measures could have on our financial
condition and results of operations remains highly uncertain. For more
information, refer to Part II, Item 1A "Risk Factors" and, in particular, "- The
global outbreak of COVID-19 has caused severe disruptions in the
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