Atlanticus Holdings Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Atlanticus provides technology and servicing to lenders serving financially underserved consumers, and invests in receivables. Its reportable segments are Credit and Other Investments and Auto Finance. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Consumer loan interest income | $37.7 | $26.6 | $73.4 | $52.5 |
| Total interest income | $37.8 | $26.7 | $73.5 | $52.6 |
| Interest expense | $8.8 | $6.4 | $17.0 | $12.2 |
| Net interest income before fees and loan-loss provision | $29.0 | $20.2 | $56.6 | $40.4 |
| Fees and related income on earning assets | $7.1 | $4.0 | $13.3 | $6.8 |
| Provision for loan losses, net of fair-value recoveries/(losses) | $15.1 net expense | $15.2 net expense | $32.9 net expense | $18.0 net expense |
| Income (loss) before income taxes | $0.6 | $(13.2) | $(4.0) | $(11.9) |
| Income tax benefit | $5.0 | $4.4 | $4.9 | $3.8 |
| Net income (loss) | $5.6 | $(8.8) | $0.9 | $(8.1) |
| Net income (loss) attributable to controlling interests per diluted share | $0.41 | $(0.63) | $0.07 | $(0.58) |
The Q2 provision row combines the $16.5 million provision on loans at net realizable value with a $1.4 million net recovery on fair-value receivables. The comparable 2017 amounts were a $15.7 million provision and a $0.5 million net recovery.
- At June 30, 2018, total assets were $458.7 million, including net loans and fees receivable of $358.0 million; gross loans were $441.4 million and the allowance was $54.8 million. At December 31, 2017, net loans were $305.1 million and gross loans were $393.9 million.
- Unrestricted cash was $49.6 million and restricted cash was $28.9 million, for combined cash of $78.5 million. Total liabilities were $491.1 million; total equity was negative $32.3 million.
- Debt included $268.3 million of notes payable, net, $40.0 million of related-party term debt, $6.8 million of structured-financing debt at fair value, and $61.8 million of convertible notes. These balances increased from year-end overall.
- For the first half, operating cash flow was $10.7 million, investing cash outflow was $44.5 million, and financing cash inflow was $41.3 million. Cash and cash equivalents increased $7.8 million.
- No conventional profit-margin measure is provided. The filing reports a 41.6% total yield ratio and 22.4% combined gross charge-off ratio for Credit and Other Investments in Q2; Auto Finance reported a 38.2% yield ratio and 0.5% gross charge-off ratio. These are annualized managed-receivables measures, not GAAP margins.
Changes versus the prior comparable period
- Q2 controlling-interest income improved to $5.6 million from an $8.8 million loss; first-half income improved to $1.0 million from an $8.1 million loss. Higher interest income and credit-product fees reflected expansion in point-of-sale and direct-to-consumer receivables.
- Point-of-sale and direct-to-consumer managed receivables grew to $357.5 million from $247.5 million a year earlier. Total Credit and Other Investments managed receivables were $371.3 million, up from $267.6 million.
- Growth increased interest and servicing costs and the loan-loss provision. The company said the provision increase primarily reflected portfolio growth and maturation, rather than a specific deterioration in credit quality.
- Credit and Other Investments 30-, 60-, and 90-day delinquency ratios were 11.8%, 8.5%, and 5.7%, respectively, compared with 11.5%, 7.8%, and 4.9% a year earlier. The combined gross charge-off ratio was 22.4% versus 21.1%.
- Expenses were mixed: Q2 card and loan servicing expense rose to $8.9 million from $7.5 million, while marketing expense fell to $2.1 million from $4.4 million. First-half total operating expenses were $44.0 million in both years.
Outlook, risks, contingencies, and unusual items
- Management expected continued growth in point-of-sale and direct-to-consumer receivables during 2018, subject to funding availability, new retail partners, existing partner performance, and direct-marketing activity. It anticipated higher interest expense as borrowing supported receivables growth, and elevated charge-offs as newer portfolios matured. No quantitative earnings guidance was provided.
- Management said growth in earning assets should improve utilization of existing infrastructure, but acknowledged that Credit and Other Investments cash inflows covered direct variable costs and only part of overhead. Failure to contain overhead or expand revenue could continue to pressure consistent profitability.
- The Q2 tax benefit included a favorable IRS settlement concerning prior-year net operating-loss carrybacks, including reversal of $1.5 million of accrued tax interest and penalties. The settlement reduced a previously reported $7.4 million tax assessment to $3.7 million. In July 2018, after quarter-end, the company paid $5.4 million for the assessment and accrued interest.
- In June, Atlanticus added a receivables-backed facility of up to $100 million, with $58.1 million outstanding at quarter-end. Management identified $221.6 million of debt facilities as potentially requiring refinancing or repayment over the near term, including a $40 million related-party term loan maturing November 21, 2018. It viewed refinancing risk as low, while noting covenants and collateral-performance tests can trigger early repayment.
- Unfunded consumer credit commitments were $492.7 million and auto floor-plan commitments were $8.7 million. The company said it could reduce or cancel consumer credit lines and did not expect these commitments to result in material payments. It reported no off-balance-sheet arrangements and no other pending legal proceedings expected to be material.
- Key risks include subprime borrower losses and adverse economic conditions, dependence on financing and bank partners, concentration among large retail partners, regulation and litigation, fair-value estimation uncertainty, and the ability to manage costs. The company also disclosed a NASDAQ notice regarding the $15 million public-float requirement, with an August 20, 2018 deadline to regain compliance.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether receivables growth produces sustainable earnings and cash generation after funding costs, credit losses, and infrastructure expenses.
- Vintage-level delinquency and charge-off performance as newer, higher-yielding portfolios mature, and the adequacy of the $54.8 million allowance.
- Availability, pricing, and covenant terms of financing, including refinancing or repayment arrangements for the $40 million related-party loan and other facilities.
- The final accounting and cash impact of the IRS settlement and July 2018 payment, as well as the status of the IRS lien.
- Whether Atlanticus regained NASDAQ public-float compliance by the disclosed deadline and maintained its listing.