Atlanticus Holdings Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited. Atlanticus provides financial products and services primarily to sub-prime consumers. Its reportable segments are Credit Cards and Other Investments and Auto Finance.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Total interest income | $19.9 million | $25.3 million |
| Net interest income before fees and loan-loss charges | $14.2 million | $14.5 million |
| Fees and related income on earning assets | $6.8 million | $49.9 million |
| Net loss attributable to controlling interests | $3.0 million; $0.22 per share | $4.4 million; $0.20 per share |
| Cash from operating activities | Used $6.7 million | Provided $10.8 million |
| Unrestricted cash, at period end | $71.3 million | $67.9 million at Dec. 31, 2012 |
Q1 2013 total interest income, fees and other operating income was $30.0 million, versus $72.4 million in Q1 2012. The comparison was heavily affected by fair-value items: fair-value changes in receivables were $16.7 million versus $55.9 million, while fair-value changes in structured-financing notes were a $14.6 million loss versus a $9.3 million loss. Q1 2012 also included $3.8 million of income from discontinued operations following the 2012 sale of the previously charged-off receivables and balance-transfer businesses.
At March 31, total assets were $369.1 million, total liabilities $354.5 million and total equity $14.6 million. Cash and cash equivalents included $14.0 million restricted. Debt carrying values included $37.2 million of notes payable, $129.6 million of structured-financing notes and $95.5 million of convertible senior notes. The income-tax liability was $60.6 million, substantially all related to uncertain tax positions.
Investing activities provided $23.9 million and financing activities used $13.1 million; unrestricted cash increased by $3.4 million during the quarter. Managed Credit Cards and Other Investments receivables were $263.3 million, down from $401.4 million a year earlier; managed Auto Finance receivables were $60.4 million, down from $75.3 million. These are management-defined managed-receivables measures, not balance-sheet loan totals. Q1 managed net interest margin was 16.1% for Credit Cards and Other Investments and 35.5% for Auto Finance.
Changes and management outlook
- Controlling-interest net loss improved from $4.4 million to $3.0 million, but continuing operations remained loss-making. The Q1 2013 continuing-operations loss attributable to controlling interests was $3.0 million, compared with $8.3 million in Q1 2012.
- Interest expense declined to $5.8 million from $10.9 million, reflecting debt repayments as receivables contracted and the 2012 repayment of substantially all 3.625% convertible notes.
- Management expects interest income to continue declining in coming quarters as legacy credit-card and auto portfolios liquidate; growth in U.K. cards and private-label merchant credit is expected to offset this only partly. Management expects lower interest expense than comparable 2012 quarters.
- Management expects growing new-product receivables to increase provisions on loans carried at net realizable value, principally due to portfolio growth, and anticipates improving credit quality in newer products during 2013. It expects Credit Cards and Other Investments’ managed net interest margin to remain broadly within 10%–20% in the foreseeable future.
- Management described CAR Auto Finance operations as consistently profitable and expected further expansion, while start-up costs may initially weigh on operating ratios. It also noted that fixed overhead is not declining as quickly as legacy receivables, which could pressure liquidity and profitability absent further cost reductions or revenue growth.
- Management said near-term refinancing risk was low, but identified $34.3 million of facilities as presenting near-term refinancing or renewal exposure at March 31. A $1.9 million revolving facility was refinanced in April 2013 into a $2.0 million amortizing facility maturing in 2016.
- Q1 share repurchases totaled 120,100 shares for $0.4 million. The board-authorized plan had 9,879,900 shares remaining for repurchase through June 30, 2014.
Risks, contingencies and unusual items
- Fair-value accounting relies on significant unobservable assumptions, including expected yields, payment rates, credit losses and discount rates; changes in actual performance or assumptions could materially affect reported earnings and asset values.
- Management cited constrained and costly financing for sub-prime receivables, continuing portfolio contraction, regulatory and bank-partner dependence, consumer-credit losses, foreign-exchange exposure and difficulty reducing fixed overhead.
- Uncertain tax positions are a material liquidity risk. The company said resolution could require significant payment; the timing and ultimate amount are uncertain.
- A purported class action relating to former payday-lending operations remains pending. Plaintiffs seek damages of up to $75,000 per class member and attorneys’ fees; the company is defending the case.
- Commitments included $28.9 million of unfunded merchant-credit lines, $4.8 million of floor-plan financing commitments and £1.5 million ($2.2 million) of U.K. card commitments. The company said it did not expect contingent commitments to result in material payments.
- Disclosure controls and procedures were reported effective, with no material change in internal control over financial reporting during the quarter. No defaults on senior securities were reported.
Investor verification points
- Review the drivers and sensitivity of Level 3 receivables and structured-financing valuations, including the impact of fair-value changes on earnings.
- Track unrestricted versus restricted cash, operating cash flow, subsidiary cash availability and scheduled debt maturities/refinancings.
- Assess whether growth in U.K. cards, private-label credit and servicing can offset liquidation of legacy receivables and fixed-cost pressure.
- Monitor delinquency, charge-off, recovery and provision trends by segment, distinguishing managed-basis statistics from GAAP results.
- Follow IRS and other uncertain-tax-position developments, the class action and other legal or regulatory matters.