Atlanticus Holdings Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; filed May 10, 2022. Atlanticus is a financial technology company supporting consumer lending, primarily through its Credit as a Service (CaaS) and Auto Finance segments. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 or prior date |
|---|---|---|
| Total revenue | $229.8 million | $144.7 million |
| Net margin, as reported | $107.6 million | $100.8 million |
| Operating expenses | $70.0 million | $41.2 million |
| Income before income taxes | $37.6 million | $51.8 million |
| Net income | $44.8 million | $44.0 million |
| Net income attributable to common shareholders | $38.8 million | $39.4 million |
| Basic / diluted EPS | $2.62 / $1.96 | $2.62 / $1.91 |
| Cash from operating activities | $80.7 million | $52.8 million |
- Revenue growth was led by CaaS consumer loans and fees. The filing attributes growth partly to a larger managed credit-card receivables portfolio and a greater mix of general-purpose card receivables.
- The reported net margin includes a $104.7 million adverse fair-value change in receivables and related structured-financing liabilities, versus a $27.5 million adverse change a year earlier. This measure and its year-over-year comparison were affected by accounting changes described below.
- Operating cash flow was more than offset by $102.6 million used in investing and $79.3 million used in financing. Cash and restricted cash together declined $101.2 million during the quarter to $405.5 million.
- At March 31, total assets were $1.922 billion and total liabilities were $1.509 billion. Unrestricted cash was $373.5 million and restricted cash was $32.0 million. Notes payable, net, were $1.269 billion; senior notes, net, were $143.3 million.
- CaaS reported $43.6 million of pretax income; Auto Finance reported a $6.0 million pretax loss. The Auto Finance result included an $8.5 million litigation-settlement accrual.
Material changes and credit trends
- Revenue rose 59% year over year, while net income increased modestly and income before tax declined. Higher interest expense and operating costs, and the larger adverse fair-value change, partly offset revenue growth. The prior-year quarter included a $7.8 million loss on repurchase of convertible notes; no such loss was reported in Q1 2022.
- Effective January 1, 2022, Atlanticus adopted CECL and elected fair-value accounting for remaining CaaS card receivables previously measured at amortized cost. Adoption increased opening retained earnings by $8.6 million and shifted substantial receivables into fair-value accounting. This changes the timing and presentation of fees, credit losses and earnings, limiting direct period comparisons.
- Managed CaaS receivables, a non-GAAP face-value measure, were $1.678 billion at March 31, up from $1.093 billion a year earlier. The annualized combined principal net charge-off ratio was 16.7%, compared with 9.7% a year earlier; managed receivables 90 or more days past due were 8.5%, versus 4.9%. Management expected charge-offs and delinquencies to rise as newer portfolios mature and stimulus-related payment benefits fade.
- Auto Finance receivables were $99.9 million, versus $94.1 million a year earlier. Its 90-plus-day delinquency rate was 1.4%, compared with 1.8% a year earlier.
Outlook, liquidity, risks and unusual items
- Management expected continued growth in private-label and general-purpose card receivables and revenue during 2022, with additional funding needs and higher quarterly interest expense as rates rise. It also anticipated rising CaaS charge-off rates. These are expectations, not guidance with quantified targets.
- Management said operating cash, available debt facilities and capital-market access should fund operating and financing needs, and viewed near-term refinancing risk as low. It identified $66.5 million of facilities expiring by October 2023, including $4.8 million due July 2022. Atlanticus reported compliance with debt covenants at quarter-end.
- Key risks include inflation, rising rates, supply-chain and labor disruptions, weaker consumer payment behavior, access to financing, reliance on bank and retail partners, regulatory and litigation exposure, and sensitivity of Level 3 fair values to credit losses, payment rates and discount rates. Five retail partners accounted for more than 65% of private-label receivables.
- The company repurchased and retired 1,005,212 common shares at an aggregate cost of $65.2 million. A board-authorized program permits repurchases of up to 5 million shares through June 30, 2024.
- Unfunded card credit commitments were $2.1 billion; unfunded Auto Finance floor-plan commitments were $12.8 million. A new Atlanta headquarters lease commencing in June 2022 carries an approximately $27.8 million commitment, not included in the quarter-end lease-liability balance.
- Management disclosed a Maryland regulatory dispute involving the bank partner and a subsidiary; it believed an adverse outcome would not be material, while noting potential broader implications. The filing also describes ongoing uncertainty from COVID-19 and geopolitical events.
Investor verification priorities
- Assess how much earnings and reported margin depend on Level 3 fair-value estimates and the new accounting election; compare cash collections and portfolio performance alongside GAAP earnings.
- Track CaaS delinquencies, charge-offs and vintage performance as stimulus effects recede and receivables mature.
- Verify funding capacity, facility renewals, covenant headroom and exposure to floating rates; distinguish unrestricted cash from restricted or VIE-held funds.
- Review the $8.5 million Auto Finance settlement, the Maryland proceeding, and any subsequent legal or regulatory developments.
- Monitor partner concentration, repurchase activity, preferred-stock obligations and the headquarters lease commitment.