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 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, interest and fees receivable, net, as shown on our consolidated balance sheets, as well as on the provision for losses on loans, interest and fees receivable within our consolidated statements of operations.

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

Loans, Interest and Fees Receivable

Our loans, interest and fees receivable include loans, interest and fees receivable, at fair value and loans, interest and fees receivable, gross. Some of these receivables are held by entities which qualify as variable interest entities ("VIE"), that are consolidated onto our consolidated balance sheet.

As of

March

31,

2019

and

December

31,

2018,

the weighted average remaining accretion period for the

$47.3

million and

$43.9

million of deferred revenue reflected in the consolidated balance sheets was

months. Included within deferred revenue, are discounts on purchased loans of

$29.5

million and

$30.0

million as of

March

31,

2019

and

December 31, 2018,

respectively.

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

For the three months ended March 31, 2019	Credit Cards			Auto Finance			Other Unsecured Lending Products			Total
Allowance for uncollectible loans, interest and fees receivable:
Balance at beginning of period	$	(35.4	)	$	(1.3	)	$	(42.5	)	$	(79.2	)
Provision for loan losses		(19.7	)		(0.9	)		(14.0	)		(34.6	)
Charge offs		12.3			0.9			17.1			30.3
Recoveries		(0.3	)		(0.3	)		(1.2	)		(1.8	)
Balance at end of period	$	(43.1	)	$	(1.6	)	$	(40.6	)	$	(85.3	)

As of March 31, 2019	Credit Cards			Auto Finance			Other Unsecured Lending Products			Total
Allowance for uncollectible loans, interest and fees receivable:
Balance at end of period individually evaluated for impairment	$	—		$	(0.3	)	$	—		$	(0.3	)
Balance at end of period collectively evaluated for impairment	$	(43.1	)	$	(1.3	)	$	(40.6	)	$	(85.0	)
Loans, interest and fees receivable:
Loans, interest and fees receivable, gross	$	211.4		$	90.2		$	260.9		$	562.5
Loans, interest and fees receivable individually evaluated for impairment	$	—		$	0.6		$	0.1		$	0.7
Loans, interest and fees receivable collectively evaluated for impairment	$	211.4		$	89.6		$	260.8		$	561.8

For the three months ended March 31, 2018	Credit Cards			Auto Finance			Other Unsecured Lending Products			Total
Allowance for uncollectible loans, interest and fees receivable:
Balance at beginning of period	$	(18.2	)	$	(2.3	)	$	(42.5	)	$	(63.0	)
Provision for loan losses		(9.0	)		—			(7.0	)		(16.0	)
Charge offs		6.5			0.7			15.1			22.3
Recoveries		(0.1	)		(0.3	)		(1.2	)		(1.6	)
Balance at end of period	$	(20.8	)	$	(1.9	)	$	(35.6	)	$	(58.3	)

As of December 31, 2018	Credit Cards			Auto Finance			Other Unsecured Lending Products			Total
Allowance for uncollectible loans, interest and fees receivable:
Balance at end of period individually evaluated for impairment	$	—		$	(0.2	)	$	(0.1	)	$	(0.3	)
Balance at end of period collectively evaluated for impairment	$	(35.4	)	$	(1.1	)	$	(42.4	)	$	(78.9	)
Loans, interest and fees receivable:
Loans, interest and fees receivable, gross	$	188.6		$	88.1		$	264.6		$	541.3
Loans, interest and fees receivable individually evaluated for impairment	$	—		$	0.4		$	0.1		$	0.5
Loans, interest and fees receivable collectively evaluated for impairment	$	188.6		$	87.7		$	264.5		$	540.8

An aging of our delinquent loans, interest and fees receivable, gross (in millions) by class of receivable as of

March

31,

2019

and

December

31,

2018

is as follows:

As of March 31, 2019	Credit Cards		Auto Finance		Other Unsecured Lending Products		Total
30-59 days past due	$	8.3	$	5.5	$	7.8	$	21.6
60-89 days past due		6.7		2.1		6.9		15.7
90 or more days past due		17.0		2.7		18.5		38.2
Delinquent loans, interest and fees receivable, gross		32.0		10.3		33.2		75.5
Current loans, interest and fees receivable, gross		179.4		79.9		227.7		487.0
Total loans, interest and fees receivable, gross	$	211.4	$	90.2	$	260.9	$	562.5
Balance of loans greater than 90-days delinquent still accruing interest and fees	$	—	$	2.0	$	—	$	2.0

As of December 31, 2018	Credit Cards		Auto Finance		Other Unsecured Lending Products		Total
30-59 days past due	$	7.1	$	7.9	$	9.7	$	24.7
60-89 days past due		5.3		2.8		7.6		15.7
90 or more days past due		12.3		2.2		18.5		33.0
Delinquent loans, interest and fees receivable, gross		24.7		12.9		35.8		73.4
Current loans, interest and fees receivable, gross		163.9		75.2		228.8		467.9
Total loans, interest and fees receivable, gross	$	188.6	$	88.1	$	264.6	$	541.3
Balance of loans greater than 90-days delinquent still accruing interest and fees	$	—	$	1.5	$	—	$	1.5

Troubled Debt Restructurings.

As part of ongoing collection efforts, once an account in our Credit and Other Investments segment is

days or more past due, the account is placed on a non-accrual status. Placement on a non-accrual status results in the use of programs under which the contractual interest associated with a receivable

may

be reduced or eliminated, or a certain amount of accrued fees is waived, provided a minimum number or amount of payments have been made. Following this adjustment, if a customer demonstrates a willingness and ability to resume making monthly payments and meets certain additional criteria, we will re-age the customer’s account. When we re-age an account, we adjust the status of the account to bring a delinquent account current, but generally do

not

make any further modifications to the payment terms or amount owed. Once an account is placed on a non-accrual status, it is closed for further purchases. Accounts that are placed on a non-accrual status and thereafter make at least

one

payment qualify as troubled debt restructurings (“TDRs”).

The following table details by class of receivable, the number and amount of loans that qualify as TDRs, as of

March

31,

2019

and

December

31,

2018:

	As of
	March 31, 2019				December 31, 2018
	Point-of-sale		Direct-to-consumer		Point-of-sale		Direct-to-consumer
Number of TDRs		8,604		6,515		8,722		3,003
Number of TDRs that have been re-aged		2,737		1,503		2,414		236
Amount of TDRs on non-accrual status (in thousands)	$	11,712	$	6,160	$	12,178	$	3,193
Amount of TDRs on non-accrual status above that have been re-aged (in thousands)	$	4,779	$	1,608	$	3,876	$	262
Carrying value of TDRs (in thousands)	$	8,015	$	4,033	$	7,535	$	1,524
TDRs - Performing (carrying value, in thousands)*	$	6,426	$	3,449	$	5,788	$	1,208
TDRs - Nonperforming (carrying value, in thousands)*	$	1,589	$	584	$	1,747	$	316

*“TDRs - Performing” include accounts that are current on all amounts owed, while “TDRs - Nonperforming” include all accounts with past due amounts owed.

Given that the above TDRs have a high reserve rate prior to modification as TDRs, we do

not

separately reserve or impair these receivables outside of our general reserve process.

The Company modified

19,383

and

15,723

accounts in the amount of

$29.2

million and

$26.4

million during the

twelve

month periods ended

March

31,

2019

and

March 31, 2018,

respectively, that qualified as TDRs. The following table details by class of receivable, the number of accounts and balance of TDRs that completed a modification within the prior

twelve

months and subsequently defaulted.

	Twelve Months Ended
	March 31, 2019				March 31, 2018
	Point-of-sale		Direct-to-consumer		Point-of-sale		Direct-to-consumer
Number of accounts		2,279		1,985		2,753		1,245
Loan balance at time of charge off (in thousands)	$	3,607	$	2,168	$	4,322	$	2,415

Prepaid Expenses and Other Assets

Prepaid expenses and other assets include amounts paid to

third

parties for marketing and other services as well as amounts owed to us by

third

parties. Prepaid amounts are expensed as the underlying related services are performed. Also included are (

) commissions paid associated with our various office leases which we amortize into expense over the lease terms, (

) ongoing deferred costs associated with service contracts and (

) investments in consumer finance technology platforms carried at the lower of cost or market valuation.

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 which

may

be payable in respect of

one

of our portfolios.

Income Taxes

We experienced an effective income tax expense rate of

4.0%

for the

three

months ended

March 31, 2019,

compared to a negative effective income tax expense rate of

3.1%

for the

three

months ended

March 31, 2018.

Our effective income tax expense rate for the

three

months ended

March 31, 2019,

is below the statutory rate principally due to reductions in our valuation allowances against net federal deferred tax assets during such period—the effect of such reductions being partially offset by accruals of interest on unpaid federal tax liabilities and uncertain tax positions and state and foreign income taxes during such period. Conversely, our negative effective income tax expense rate for the

three

months ended

March 31, 2018,

was greater than the statutory rate principally due to accruals of interest on unpaid federal tax liabilities and uncertain tax positions and state and foreign income taxes during such period—the effect of such accruals being partially offset by additions to valuation allowances against our net federal deferred tax assets during such period.

We report income tax-related interest and penalties (including those associated with both our accrued liabilities for uncertain tax positions and unpaid tax liabilities) within our income tax line item on our consolidated statements of operations. We likewise report the reversal of income tax-related interest and penalties within such 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 the

three

months ended

March 31, 2019,

and

2018,

we included

$0.1

million and

$0.2

million, respectively, of net income tax-related interest and penalties within those periods’ respective income tax expense line items.

December 2014,

we reached a settlement with the IRS concerning the tax treatment of net operating losses we incurred in

2007

and

2008

and carried back to obtain refunds of federal income taxes paid in earlier years dating back to

2003.

2015,

we filed an amended return claim that, if accepted, would have eliminated the

$7.4

million assessment (and corresponding interest and penalties) under a negotiated provision of the

December 2014

IRS settlement. The IRS filed a lien (as is customarily the case) associated with the assessment. Subsequently, an IRS examination team denied our amended return claims, and we filed a protest with IRS Appeals. Following correspondence and conferences held with IRS Appeals, we received and accepted a settlement offer from IRS Appeals in

June 2018

that reduced our

$7.4

million net unpaid income tax assessment referenced above to

$3.7

million. In

July 2018,

we paid

$5.4

million to the IRS to cover the

$3.7

million unpaid income tax assessment and most of the interest that had accrued thereon; during the

three

months ended

September 30, 2018,

the IRS refunded

$0.5

million of the

$5.4

million payment. Although we have paid all assessed income taxes related to this matter, we still have an outstanding accrued liability for some of the interest and for failure-to-pay penalties related to this matter. We paid another

$0.2

million against accrued interest liabilities in

March 2019,

and we are continuing to pursue complete abatement of failure-to-pay penalties of

$0.9

million. Once this matter is resolved and we pay any residual interest liability, we expect the IRS to remove the aforementioned lien in due course.

Revenue Recognition and Revenue from Contracts with Customers

Consumer Loans, Including Past Due Fees

Consumer loans, including past due fees, reflect interest income, including finance charges, and late fees on loans, which are recognized in accordance with the terms of the related customer agreements. Premiums and discounts paid or received associated with an installment or auto loan are generally deferred and amortized over the average life of the related loans using the effective interest method. Finance charges and fees, net of amounts that we consider uncollectible, are included in loans, interest and fees receivable and revenue when the fees are earned based upon the contractual terms of the loans.

Fees and Related Income on Earning Assets

Fees and related income on earning assets primarily include: (

) fees associated with our credit products, including the receivables underlying our U.S. point-of-sale finance and direct-to-consumer activities, and our legacy credit card receivables; (

) changes in the fair value of loans, interest and fees receivable recorded at fair value; (

) changes in fair value of notes payable associated with structured financings recorded at fair value; and (

) gains or losses associated with our investments in securities.

We assess fees on credit card accounts underlying our credit card receivables according to the terms of the related cardholder agreements and, except for annual membership fees, we recognize these fees as income when they are charged to the customers’ accounts. We accrete annual membership fees associated with our credit card receivables into income on a straight-line basis over the cardholder privilege period which is generally

months. Similarly, fees on our other credit products are recognized when earned, which coincides with the time they are charged to the customer’s account. Fees and related income on earning assets, net of amounts that we consider uncollectible, are included in loans, interest and fees receivable and revenue when the fees are earned based upon the contractual terms of the loans.

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

	For the three months ended March 31,
	2019			2018
Fees on credit products	$	10,296		$	4,905
Changes in fair value of loans, interest and fees receivable recorded at fair value		(1	)		(18	)
Changes in fair value of notes payable associated with structured financings recorded at fair value		875			1,331
Other		94			(4	)
Total fees and related income on earning assets	$	11,264		$	6,214

The above changes in the fair value of loans, interest and fees receivable recorded at fair value category exclude the impact of current period charge offs associated with these receivables which are separately stated in Net (losses upon) recovery of charge off of loans, interest and fees receivable recorded at fair value on our consolidated statements of operations. See Note

“Fair Values of Assets and Liabilities,” for further discussion of these receivables and their effects on our consolidated statements of operations.

Other Income

Included in Other income for the

three

months ended

March 31, 2019,

$15.5

million associated with reductions in accruals related to

one

of our portfolios. The original accrual was based upon our estimate of the amount that could be claimed by customers and is based upon several factors including customer claims volume, average claim amount and a determination of the amount, if any, which

may

be offered to resolve such claims. The assumptions used in the accrual estimate are subjective, mainly due to uncertainty associated with future claims volumes and the resolution costs, if any, per claim. As of

March 31, 2019,

we had approximately

$92

million accrued related to this liability within accounts payable and accrued expenses on the consolidated balance sheets, including the reclassification of approximately

$26

million from unrestricted cash and cash equivalents on our consolidated balance sheets. Also included in other income, are revenues associated with ancillary product offerings and interchange revenues. We recognize these fees as income in the period earned.

Revenue from Contracts with Customers

The majority of our revenue is earned from financial instruments and is

not

included within the scope of this standard. We have determined that revenue from contracts with customers would primarily consist of interchange revenues in our Credit and Other Investments segment and servicing revenue and other customer-related fees in both our Credit and Other Investments segment and our Auto Finance segment. Servicing revenue is generated by meeting contractual performance obligations related to the collection of amounts due on receivables, and is settled with the customer net of our fee. Revenue from these contracts with customers is included as a component of Other income on our consolidated statements of operations. Service charges and other customer related fees are earned from customers based on the occurrence of specific services that do

not

result in an ongoing obligation beyond what has already been rendered. Components (in thousands) of our revenue from contracts with customers is as follows:

	Credit and
Three months ended March 31, 2019	Other Investments		Auto Finance		Total
Interchange revenues, net (1)	$	928	$	—	$	928
Servicing income		419		267		686
Service charges and other customer related fees		429		17		446
Total revenue from contracts with customers	$	1,776	$	284	$	2,060

(

) Interchange revenue is presented net of customer reward expense.

	Credit and
Three months ended March 31, 2018	Other Investments		Auto Finance		Total
Interchange revenues, net (1)	$	444	$	—	$	444
Servicing income		402		230		632
Service charges and other customer related fees		25		47		72
Total revenue from contracts with customers	$	871	$	277	$	1,148

(

) Interchange revenue is presented net of customer reward expense.

Recent Accounting Pronouncements

June 2016,

the FASB issued 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 (known as the current expected credit loss model). 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

is effective for annual and interim periods beginning after

December 15, 2019,

with early adoption permitted. We are currently in the process of reviewing accounting interpretations, expected data requirements and necessary changes to our loss estimation methods, processes and systems. 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.

February 2016,

the FASB issued ASU

No.

2016

02,

Leases, along with subsequent guidance, which requires lessees to recognize assets and liabilities for most leases and changes certain aspects of current lessor accounting, among other things. We adopted these standards using a modified retrospective transition approach for leases existing at, or entered into after,

January 1, 2019

and did

not

restate the comparative periods presented in the Consolidated Financial Statements upon adoption.

ASU

2016

provides a number of optional practical expedients and policy elections in transition. We elected the ‘package of practical expedients’ under which we did

not

reassess prior conclusions about lease identification, lease classification and initial direct costs. We did

not

elect the use-of-hindsight or the practical expedient pertaining to land easements, the latter

not

being applicable to us. We also elected the short-term lease recognition exemption for all leases that qualify, meaning we did

not

recognize right-of-use assets or lease liabilities for these short term leases.

Upon adoption, we recognized additional lease liabilities of

$30.2

million and a corresponding right-of-use asset of

$18.6

million with a

$0.6

million cumulative effect on our opening retained deficit. The impact of our status as a lessor in the sublease arrangements we maintain did

not

result in a material change upon adoption. See Note

"Leases" for additional disclosure.

May 2014,

the FASB issued ASU

No.

2014

09,

“Revenue from Contracts with Customers.” ASU

2014

establishes a principles-based model under which revenue from a contract is allocated to the distinct performance obligations within the contract and recognized in income as each performance obligation is satisfied. Additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract is also required. In

August 2015,

the FASB delayed the effective date by

one

year and the guidance was effective for annual and interim periods beginning

January 1, 2018.

Most revenue associated with financial instruments, including interest income, loan origination fees and credit card fees, is outside the scope of the guidance. This includes most of the revenue of the Company. We adopted this standard as of

January 1, 2018

using the modified retrospective method of adoption. Our adoption of this standard did

not

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: (

) 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 (

) 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,

2019,

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.