Atlanticus Holdings Corporation — Q2 2019 Form 10-Q
Business context and period. This unaudited filing covers the quarter and six months ended June 30, 2019, compared with the same 2018 periods. Atlanticus provides technology and related services to consumer lenders and invests in receivables, primarily through its Credit and Other Investments segment; it also operates an auto-finance business.
Financial performance and position
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Interest income | $55.2 | $37.8 | $105.7 | $73.5 |
| Fees and related income on earning assets | $15.1 | $7.1 | $26.4 | $13.3 |
| Other operating income | $29.2 | $1.9 | $46.9 | $3.1 |
| Provision for loan losses | $48.4 | $16.5 | $83.0 | $32.5 |
| Net income attributable to controlling interests | $5.2 | $5.6 | $11.0 | $1.0 |
| Diluted earnings per share | $0.35 | $0.41 | $0.74 | $0.07 |
| Operating cash flow | — | — | $39.7 | $10.7 |
- Q2 comparison: Interest income and fees increased with growth in point-of-sale and direct-to-consumer receivables. Other operating income included a $26.0 million reduction in a customer-claims accrual. The larger provision for credit losses and operating expenses offset much of the income growth; controlling-interest net income was $5.2 million versus $5.6 million.
- First-half comparison: Controlling-interest net income rose to $11.0 million from $1.0 million. Other income included $41.4 million of accrual reductions. The prior-year period also included a favorable tax effect from an IRS settlement, so period comparisons are affected by unusual items.
- Credit and receivables: Gross loans, interest and fees receivable were $691.8 million; the allowance was $100.2 million and deferred revenue was $65.7 million, leaving net receivables of $530.9 million. Managed Credit and Other Investments receivables reached $610.1 million, up from $371.3 million a year earlier. Its 30-plus-day delinquency rate was 11.5% versus 11.8%; the 90-plus-day rate was 5.8% versus 5.7%. The combined gross charge-off ratio increased to 23.8% from 22.4%.
- Auto finance: Managed receivables were $89.5 million versus $83.9 million a year earlier. The 30-plus-day delinquency rate rose to 13.3% from 10.8%, and the gross charge-off ratio rose to 4.9% from 0.5%.
- Balance sheet and liquidity: Total assets were $710.4 million and total liabilities were $718.9 million, leaving a total deficit of $8.6 million. Unrestricted cash was $63.2 million; restricted cash was $81.9 million. Six-month investing cash outflow was $141.6 million, principally reflecting receivables purchases; financing cash inflow was $105.5 million.
- Debt: The balance sheet reported $497.1 million of notes payable at face value, $40.0 million payable to related parties, $4.3 million of structured-financing notes at fair value, and $62.5 million of convertible senior notes. In June, Atlanticus issued $200 million of asset-backed securities at a 5.37% weighted-average fixed rate. The filing identifies $118.0 million of facilities with near-term maturities or refinancing needs; management characterized immediate refinancing risk as low. An additional $62.0 million of committed bank capacity was undrawn.
Changes, outlook and risks
- Management attributed higher loan-loss provisions primarily to the expansion and maturation of point-of-sale and direct-to-consumer portfolios, rather than to specific deterioration in credit quality. It nevertheless expected elevated charge-offs as newer vintages mature.
- Management expected continued receivables growth during 2019, additional debt financing to fund purchases, and quarterly interest expense above prior-period levels. Growth depends on new and existing retail partners, direct-to-consumer marketing, and available capital. No specific numerical earnings guidance was provided.
- The $26.0 million Q2 and $41.4 million first-half reductions in customer-claims accruals were based on estimates. Approximately $64 million remained accrued at June 30, 2019; management expected a significant majority of the remainder to be reduced or paid by early 2020. Further accrual reductions could increase future earnings.
- Key risks include subprime borrower credit performance and economic sensitivity; dependence on funding facilities, a bank issuing partner, and major retail partners; regulatory, litigation and consumer-claims exposure; and the ability to control overhead while growing receivables. Management stated it was in compliance with debt covenants. It also warned that rapid portfolio growth may precede higher delinquencies and losses.
- The company adopted the lease standard in 2019, recognizing $30.2 million of lease liabilities at adoption. It was evaluating the expected-credit-loss standard; management anticipated an increase in loan-loss allowances absent use of the fair-value option, but the ultimate impact was not yet clear.
Important facts for investors to verify
- How much of reported earnings and future results depends on additional releases of the customer-claims accrual, and what claims or payments drive the remaining approximately $64 million liability?
- Whether delinquency and charge-off trends worsen as recently acquired receivables mature, particularly in direct-to-consumer lending and auto finance.
- Whether the $118 million of identified near-term refinancing needs are refinanced or repaid on acceptable terms, and whether additional funding remains available to support portfolio growth.
- Whether growth in receivables generates sufficient risk-adjusted returns to cover higher provisions, funding costs, marketing and servicing expenses, and fixed overhead.
- The effects of the expected-credit-loss accounting standard and management’s fair-value assumptions on allowances, earnings volatility and reported asset values.