Atlanticus Holdings Corporation — 2020 Form 10-K
Reporting period: Year ended December 31, 2020; filed March 31, 2021. The filing is an annual report, not a standalone fourth-quarter report. Unless noted, financial figures are for the full year and in U.S. dollars.
Business context
Atlanticus provides technology, analytics and servicing to lenders offering consumer credit, and generally invests in receivables originated through its platform. Its two reportable segments are Credit and Other Investments—principally point-of-sale (POS) and direct-to-consumer (DTC) credit—and Auto Finance, which purchases and services used-car loans and provides dealer floor-plan financing. The business primarily serves less-than-prime consumers and relies substantially on borrowing and asset-backed financing to fund receivables.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Operating revenue | $560.0 million | $343.6 million |
| Total revenue, including non-operating revenue | $563.4 million | $455.2 million |
| Net margin | $260.6 million | $158.2 million |
| Net income | $93.9 million | $26.2 million |
| Net income attributable to common shareholders | $77.1 million | $25.3 million |
| Basic / diluted earnings per common share | $5.32 / $3.95 | $1.74 / $1.66 |
| Net cash from operating activities | $212.7 million | $100.0 million |
| Net cash used in investing activities | $292.6 million | $433.7 million |
| Net cash from financing activities | $162.4 million | $368.7 million |
- Operating revenue increased 63%, reflecting growth in POS and DTC receivables and higher fee recognition. Net margin was about 46.5% of operating revenue versus 46.0% in 2019.
- Net income rose substantially, but comparisons are affected by unusual prior-year items: 2019 included $105.9 million of non-operating revenue from reductions in portfolio-related accruals. 2020 non-operating revenue was $3.4 million, including $2.0 million of investment distributions.
- Interest expense was $51.5 million, up slightly from $50.7 million. The provision for losses on amortized-cost receivables fell to $142.7 million from $248.4 million. Fair-value changes on receivables and associated structured debt were a $108.5 million loss in 2020, compared with a $2.1 million gain in 2019.
- At year-end, unrestricted cash was $178.1 million and restricted cash was $80.9 million. Net notes payable were $882.6 million, with $24.4 million carrying value of convertible senior notes. Total assets were $1.207 billion and total equity was $76.5 million.
- Operating cash flow increased to $212.7 million; investing used $292.6 million, principally reflecting net investment in earning assets. Financing provided $162.4 million, including borrowings and $50.0 million of subsidiary preferred-unit contributions.
- POS and DTC managed receivables reached $1.086 billion at year-end, up from $908.4 million; total managed receivables across the Credit and Other Investments segment were $1.090 billion. These are non-GAAP face-value measures and are not equivalent to GAAP carrying value.
Material changes and credit trends
- Effective January 1, 2020, Atlanticus elected fair-value accounting for specified POS and DTC receivables acquired on or after that date. Fair-value estimates use discounted cash flows and significant unobservable inputs; changes flow through earnings. Fees and certain acquisition costs are recognized earlier than under amortized-cost accounting. Older accounts continue at amortized cost.
- Credit and Other Investments’ annualized combined net charge-off ratio was 13.4% in fourth-quarter 2020, down from 22.5% in fourth-quarter 2019. At year-end, 9.4% of managed receivables were 30 or more days past due and 4.5% were 90 or more days past due, compared with 15.3% and 8.1%, respectively, a year earlier. The company cautions that government support, strong payments, portfolio growth and payment deferrals affected these trends.
- About 1.7% of accounts, representing $28.3 million of gross receivables, were actively in COVID-related payment deferrals at year-end; these accounts were generally treated as current for delinquency reporting. Approximately 5.6% of accounts had received some form of deferral during the year.
- Auto Finance managed receivables were $93.2 million at year-end. Its annualized fourth-quarter net charge-off ratio was 1.7%, versus 4.0% a year earlier; the company reported continued profitability and positive cash generation in the segment.
Outlook, risks and unusual items
- Outlook: Management expects continued POS and DTC receivables growth in 2021, subject to COVID-19 effects, funding availability, consumer spending and partner activity. It expects interest expense to exceed prior-period levels as receivables grow, and anticipates higher future credit losses than historically as newer vintages mature. It expects Auto Finance managed receivables to grow modestly. No quantified earnings or revenue guidance is provided.
- COVID-19: Stimulus and relief measures supported customer payments and reduced credit demand in 2020, while business closures and hardship requests affected origination and operations. Management warns that elevated unemployment and the eventual expiration of relief could increase losses; the overall impact remains uncertain.
- Funding and concentration: The company depends on finite-term financing facilities and continued access to capital. It identified $285.8 million of facilities that could present near-term refinancing needs as of year-end, while describing imminent refinancing risk as low. Its five largest retail partners represented over 60% of POS receivables.
- Other material risks: Regulatory scrutiny of bank-partner lending and “true lender” theories; consumer-protection litigation or changes in law; credit-loss and fair-value estimation risk; cybersecurity, outsourced processing and a system-provider conversion; and competition. Management reported no pending legal proceedings expected to be material and no off-balance-sheet arrangements.
- Capital structure: A subsidiary’s Class B preferred units carry a 16% preferred return and put rights subject to covenants. Series A preferred stock carries a cumulative 6% dividend and holder redemption rights beginning in 2024. In first-quarter 2021, the company repurchased $14.7 million face amount of convertible notes; $19.1 million remained outstanding, according to the filing.
- Other items: The company repurchased 33,404 shares under its public plan during fourth-quarter 2020; additional shares were withheld for taxes. It had no current plan to pay common-stock dividends. Unfunded consumer credit lines totaled $1.6 billion, and unfunded floor-plan commitments were $9.9 million; management does not expect all consumer lines to be drawn.
Investor verification priorities
- Review the fair-value model assumptions and the $108.5 million fair-value loss, including the sensitivity of Level 3 valuations to payment, loss and discount-rate assumptions.
- Reconcile reported earnings growth with the 2019 $105.9 million accrual reversal, the 2020 fair-value accounting change and the reduction in amortized-cost loan-loss provision.
- Assess whether improved delinquency and charge-off metrics persist after stimulus effects and payment deferrals, and as newer receivable vintages mature.
- Check facility maturities, covenant headroom, collateral performance and funding costs; distinguish unrestricted cash from restricted cash and subsidiary-held funds.
- Monitor the concentration in the five largest POS partners and the company’s dependence on its bank partner for credit originations.
- Consider dilution and liquidity implications of preferred-stock rights, Class B unit terms and remaining convertible notes. The filing reports an unqualified audit opinion on the financial statements; management concluded internal control over financial reporting was effective, but the auditor did not attest to that conclusion.