Atlanticus Holdings Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Atlanticus provides consumer-credit technology and services through Credit as a Service (CaaS) and Auto Finance; it also invests in receivables originated by partner lenders. Unless noted, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $290.8 | $270.0 | $551.9 | $499.9 |
| Net margin (company-reported subtotal) | $88.5 | $104.4 | $174.8 | $212.0 |
| Income before income taxes | $32.0 | $42.5 | $66.1 | $80.2 |
| Net income | $24.8 | $33.8 | $50.7 | $78.6 |
| Net income attributable to common shareholders | $18.8 | $27.8 | $38.8 | $66.6 |
| Diluted EPS | $1.02 | $1.46 | $2.11 | $3.43 |
| Interest expense | $24.2 | $18.9 | $48.4 | $36.3 |
| Fair-value changes in receivables | $(177.8) | $(146.6) | $(327.7) | $(251.2) |
- Balance sheet at June 30: Assets were $2,454.7 million; liabilities were $1,953.2 million; total equity was $361.4 million. Unrestricted cash was $342.6 million and restricted cash was $51.8 million.
- Debt: Notes payable, net, were $1,665.2 million and senior notes, net, were $144.3 million, totaling approximately $1.81 billion. The senior notes bear 6.125% interest and mature in November 2026. More than 85% of debt interest rates were fixed, per management.
- Cash flows for the first half: Operating activities provided $209.8 million, investing activities used $241.4 million, and financing activities used $7.2 million. Cash and restricted cash declined $38.8 million to $394.4 million.
- Receivables: Fair-value receivables were $1,916.1 million, up from $1,818.0 million at year-end 2022. Managed CaaS receivables were $2,174.0 million at quarter-end, versus $1,908.9 million a year earlier.
Material changes versus the prior comparable period
- Q2 revenue rose 7.7%, led by consumer-loan revenue and growth in credit-card receivables. Yet Q2 net income fell 26.6% and diluted EPS fell from $1.46 to $1.02.
- The decline in earnings reflected a larger fair-value receivable charge, higher interest expense and lower reported net margin. Interest expense increased as receivables and related borrowings grew.
- For the first half, operating cash flow increased from $152.6 million to $209.8 million. The company attributed this mainly to higher finance and fee collections and recoveries, as well as lower tax payments. Net investing outflows narrowed year over year.
- CaaS managed receivables’ annualized combined principal net charge-off ratio was 23.8% in Q2, up from 19.0% a year earlier; the 90-days-or-more delinquency share was 7.8%, versus 7.8% a year earlier and 9.6% in Q1 2023. These are company-defined non-GAAP managed-portfolio measures.
- Operating expenses fell to $56.5 million in Q2 from $61.8 million, principally reflecting lower marketing and solicitation costs. First-half expenses also declined, partly because Q1 2022 included an $8.5 million litigation-settlement accrual.
Outlook, risks, contingencies and unusual items
- Management outlook: Atlanticus expected receivables and related income to keep growing through most of 2023, but at a slower pace than in 2022. It anticipated higher interest expense as growth requires additional financing and new or floating-rate borrowing costs rise. Management expected CaaS charge-off rates to remain elevated through Q3 2023 before moving toward historically normalized levels, and said net interest margin could continue to decline versus 2022 comparisons. No specific earnings or revenue guidance was provided.
- Credit and macroeconomic risks: Inflation, higher interest rates, energy costs, weaker consumer payment capacity, reduced spending, and the end of COVID-era relief could affect delinquencies, losses, receivables growth and funding. Management’s fair-value estimates depend on significant unobservable assumptions, including expected credit losses, payment rates, yields and discount rates.
- Funding and liquidity: Management believed cash, operating cash flows, facility availability and market access would support operating and financing needs. It identified approximately $99.7 million of facilities with potential refinancing needs within 24 months and characterized near-term refinancing risk as moderate. The company reported compliance with debt covenants at June 30, 2023. A May 2023 revolving facility added $20 million of capacity, with $10 million drawn at quarter-end.
- Concentration and regulatory exposure: The five largest retail partners represented over 70% of private-label managed receivables. The company disclosed a pending dispute involving a partner bank and a subsidiary with the Maryland Commissioner of Financial Regulation concerning state licensing and federal preemption; an unfavorable outcome could affect lending in Maryland and potentially other states. The filing also highlights consumer-finance regulation, partner-bank dependence, and proposed late-fee guidance as risks.
- Preferred securities: Series A preferred stock carries a 6% cumulative dividend and may be put to the company by holders on or after January 1, 2024. Series B preferred stock carries a 7.625% cumulative dividend. A subsidiary’s Class B preferred units carry a 16% preferred return and potential holder redemption rights beginning in October 2024.
- Internal controls: Management identified a material weakness in review controls and documentation supporting cash-flow forecasts used to value fair-value receivables. The weakness existed at June 30, 2023, March 31, 2023 and December 31, 2022; disclosure controls were deemed ineffective. Management said the weakness did not cause a financial-statement misstatement and described remediation procedures implemented as of June 30, subject to monitoring. The company said its prior-year internal-control assessment and auditor opinion should no longer be relied upon and expected to amend its 2022 Form 10-K.
- Other items: The company reported no pending legal proceedings expected to be material and no subsequent events requiring financial-statement adjustment. Unfunded consumer credit-line commitments were $2.5 billion; these are not equivalent to funded debt. The filing also describes an investment in Fintiv, a private company involved in patent litigation, whose outcome and value remain uncertain.
Most important facts for investors to verify
- Progress and independent validation of remediation for the fair-value forecasting control weakness, including any amended 2022 Form 10-K or revised control conclusions.
- Whether credit losses, delinquencies and payment rates follow management’s forecast, particularly after the expected Q3 2023 elevated charge-off period.
- Receivables fair-value assumptions and the sensitivity of earnings to changes in credit-loss, payment-rate and discount-rate estimates.
- Renewal or refinancing of near-term facilities, borrowing costs, covenant headroom and the company’s ability to fund receivables growth.
- Developments in the Maryland regulatory dispute, partner-bank and major-retailer relationships, and the timing and potential effect of Series A preferred redemption rights.