Atlanticus Holdings Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. The company provides technology and services to lenders serving financially underserved consumers, generally investing in originated receivables. Its segments are Credit and Other Investments and Auto Finance. Unless otherwise noted, amounts below are in millions of dollars.
Financial results and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Interest income | $29.0 | $24.1 | $81.6 | $63.9 |
| Interest expense | $7.3 | $5.3 | $19.5 | $14.7 |
| Provision for loan losses | $24.1 | $17.5 | $50.5 | $33.0 |
| Loss before income taxes | $(14.5) | $(13.7) | $(26.4) | $(8.1) |
| Net loss attributable to controlling interests | $(14.5) | $(9.1) | $(22.5) | $(4.2) |
| Basic and diluted loss per share | $(1.04) | $(0.65) | $(1.61) | $(0.31) |
- Q3 net interest income before fees and loan-loss provision was $21.8 million, versus $18.8 million a year earlier. After fees, fair-value items, recoveries and provision, net interest income and related income was $4.2 million, versus $3.0 million.
- At September 30, total assets were $429.1 million; unrestricted cash was $68.6 million and restricted cash was $28.7 million. Net loans and fees receivable reported at net realizable value were $283.8 million; an additional $12.0 million was reported at fair value. Allowances for uncollectible loans and fees were $52.1 million, and deferred revenue was $35.9 million.
- Total liabilities were $445.9 million and total equity was negative $16.9 million, compared with positive equity of $5.8 million at December 31, 2016.
- Reported debt included $209.0 million of notes payable, net, $40.0 million of related-party notes, $9.8 million of structured-financing notes at fair value, and $61.2 million of convertible senior notes.
- For the first nine months, operating cash flow was $(12.0) million, investing cash flow was $(63.0) million and financing cash flow was $67.2 million. Unrestricted cash declined by $7.5 million from year-end.
- Q3 pretax results included a $16.5 million loss in Credit and Other Investments and $2.1 million of income in Auto Finance. Nine-month results were a $32.1 million loss and $5.7 million of income, respectively.
Changes versus the prior comparable period
- Interest income rose, reflecting growth in point-of-sale and direct-to-consumer receivables; the company said those receivables increased from $192.5 million at September 30, 2016 to $284.3 million at September 30, 2017. Historical credit-card portfolios continued to liquidate.
- Loan-loss provision increased by $6.6 million in Q3 and $17.5 million year to date. Management attributed the increase mainly to receivables growth and seasoning, with credit quality changes also contributing to a lesser degree.
- Q3 net loss widened by $5.4 million year over year; the nine-month net loss widened by $18.3 million. The prior-year nine-month period included a $1.0 million gain on repurchase of convertible notes and a $5.0 million reversal of a UK tax-related reserve reflected in other expenses.
- Debt and receivables expanded as the company funded growth: notes payable at face value, net, increased from $141.2 million at year-end 2016 to $209.0 million at September 30, 2017. Total assets increased from $362.5 million to $429.1 million.
- Managed receivables in Credit and Other Investments were $307.9 million, up from $221.7 million a year earlier. The 30-days-past-due rate was 11.6%, versus 10.9%; the adjusted charge-off ratio was 15.3%, versus 10.7%. Auto Finance managed receivables were $78.5 million, with a 13.0% 30-days-past-due rate and 1.1% combined gross charge-off ratio.
Outlook, risks and unusual items
- No formal earnings or revenue guidance was provided. Management expected continued growth in point-of-sale and direct-to-consumer receivables through the remainder of 2017 and into 2018, subject to new retail partners, growth within existing partnerships, funding availability and origination levels.
- Management anticipated higher quarterly interest expense and increased marketing and servicing costs as receivables grow. It also expected higher charge-off rates as newer, higher-yielding receivables mature, and noted that losses could pressure profitability if growth and cost control are insufficient.
- A $40.0 million related-party secured term loan at 9% was due November 22, 2017. Management said it was discussing an extension and anticipated similar terms; the filing does not establish that an extension had been completed. Management described near-term refinancing risk overall as low.
- The company reported a $7.4 million unpaid IRS assessment plus $3.9 million of accrued interest and penalties. After the IRS examination team denied amended-return claims, the company protested to IRS Appeals and was preparing a supplemental submission following an October 2017 conference.
- Unfunded consumer credit-line commitments were $369.9 million; management said it could reduce or cancel the lines and did not expect all to be drawn at once. Auto Finance had $7.9 million of unfunded floor-plan commitments. Indemnification payments were assessed as remote; routine litigation was not expected to be material.
- Key risks include reliance on subprime consumer receivables and external funding, credit losses and fair-value estimation, retail-partner and bank relationships, regulation and litigation, and cybersecurity and third-party processing. The filing also cautioned that the company had not achieved consistent profitability in recent years.
Important facts for investors to verify
- Whether the related-party term loan was extended or repaid, and the status of other facilities, covenants and funding capacity.
- Developments in the IRS Appeals process and any changes to the assessment, interest or penalty exposure.
- Whether receivables growth produces sustainable earnings and cash generation as newer vintages season and charge-offs rise.
- Trends in delinquency, allowance adequacy and Level 3 fair-value assumptions, which depend on estimated yields, payment rates, credit losses and discount rates.
- Liquidity and capital implications of negative shareholders’ equity, restricted cash requirements and the company’s reliance on borrowing to fund receivables.
- Retail-partner concentration, bank-originator relationships and any changes that could constrain new originations.