Atlanticus Holdings Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts below are in millions of dollars unless stated otherwise. Atlanticus is a fintech and consumer-credit company operating through Credit as a Service (CaaS) and Auto Finance segments; it typically invests in receivables originated by partner lenders.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $294.9 | $278.0 | $846.8 | $777.8 |
| Net margin | $88.2 | $92.4 | $263.0 | $304.4 |
| Net income | $25.0 | $32.4 | $75.7 | $110.9 |
| Net income attributable to common shareholders | $18.9 | $26.3 | $57.7 | $92.8 |
| Diluted earnings per common share | $1.03 | $1.41 | $3.14 | $4.85 |
- Revenue and earnings: Q3 revenue increased about 6% year over year, while net income attributable to common shareholders declined about 28%. For the nine-month period, revenue rose about 9%, but common-shareholder income fell about 38%.
- Drivers and costs: Q3 interest expense was $28.3 million, up from $21.5 million; the fair-value change in loans was a $177.9 million expense, versus $163.6 million. Nine-month interest expense was $76.7 million and the fair-value change was a $505.5 million expense. Operating expenses fell to $165.2 million for nine months from $184.9 million, mainly reflecting lower marketing and other expenses; 2022 included an $8.5 million Auto Finance litigation settlement accrual.
- Cash flow: Nine-month operating cash flow was $326.7 million, compared with $245.6 million in 2022. Investing activities used $461.0 million and financing activities provided $101.2 million. Cash and restricted cash totaled $400.0 million at period end; unrestricted cash was $355.7 million.
- Assets and debt: Total assets were $2.597 billion, up from $2.388 billion at December 31, 2022. Net loans and receivables were $2.148 billion. Notes payable, net, were $1.788 billion and senior notes, net, were $144.4 million, versus $1.653 billion and $144.4 million, respectively, at year-end 2022. The senior notes bear 6.125% interest and mature in November 2026.
- Liquidity: Management said cash, operating cash flow, debt-facility availability and capital-market access should provide adequate resources. It identified $112.7 million of facilities with maturities within 24 months and characterized near-term refinancing risk as moderate.
Material changes versus comparable periods
- Consumer-loan and fee growth lifted nine-month revenue, supported by managed credit-card receivables growth: private-label and general-purpose balances together reached $2.315 billion, up from $2.050 billion a year earlier.
- Higher interest costs and larger fair-value loan expenses more than offset revenue growth, reducing net margin and earnings. The CaaS annualized principal net charge-off ratio was 22.5% in Q3 2023, compared with 18.0% in Q3 2022.
- CaaS receivables 90 or more days past due were 9.4% of managed receivables at September 30, 2023, compared with 10.0% a year earlier; the rate had been 7.8% at June 30, 2023. The Auto Finance portfolio was $118.0 million, compared with $107.4 million a year earlier.
- Atlanticus issued $300 million of asset-backed securities in September 2023 at a fixed weighted-average rate of 9.51%; it also paid off a $200 million facility in September. The weighted-average rate on revolving facilities was 6.1% at quarter end, versus 5.1% at December 31, 2022.
Outlook, risks and unusual items
- Outlook: No specific numerical earnings or revenue guidance was provided. Management expected continued receivables and income growth, but at a slower pace than in 2022; it anticipated higher quarterly interest costs and expected CaaS charge-off rates to remain elevated through Q2 2024 before returning toward historical levels. These expectations depend in part on inflation easing and underwriting changes proving effective.
- Credit and valuation: Most CaaS receivables are measured at fair value using Level 3 cash-flow estimates. Results are sensitive to expected credit losses, payment rates, yields, servicing costs and discount rates; management cautioned that changes in portfolio quality or market factors could make fair values volatile.
- Funding and concentration: The business relies substantially on borrowing to fund receivables. Rising rates, facility renewals, collateral performance and access to capital could constrain growth or raise funding costs. The five largest retail partners represented over 70% of private-label managed receivables.
- Contingencies: Unfunded consumer credit lines were $2.4 billion; these are commitments, not current borrowings. Auto dealer floor-plan commitments were $9.8 million. Potential exposure under the credit-protection program was $68.6 million if all eligible participants claimed benefits; management includes estimated claims in receivable fair values. The filing says pending legal proceedings are not expected to be material, while identifying a Maryland regulatory dispute that could affect lending practices if resolved adversely.
- Controls and unusual disclosure: Management reported that a material weakness in controls over review and documentation of fair-value cash-flow forecasts had been remediated by the date of this report. It said the weakness did not cause a financial-statement misstatement; the prior 2022 annual and Q1 2023 control disclosures were amended. Disclosure controls were deemed effective at September 30, 2023. The filing also describes uncertain patent litigation involving Fintiv, an investee; Atlanticus said the investment carrying value was not material and would remain at cost subject to impairment and observable price changes.
- Preferred stock: Holders of a majority of Series A preferred shares may require a redemption offer beginning January 1, 2024. Series A carries a $40.0 million liquidation preference; Series B carries an 7.625% cumulative dividend. Preferred dividends and accretion reduced income attributable to common shareholders by $18.9 million over nine months.
Key facts for investors to verify
- How CaaS delinquencies, charge-offs and payment patterns evolve, especially against management’s forecast of elevated losses through Q2 2024.
- Whether Level 3 fair-value assumptions and the related control remediation remain supportable; the valuation process materially affects reported earnings.
- Capacity and cost to renew or refinance upcoming facilities, and the effect of additional higher-rate funding on margins and liquidity.
- Exposure to major retail partners and the sustainability of receivables growth under tightened underwriting standards.
- Potential cash requirements from the Series A holder redemption right beginning in 2024, and developments in the Maryland regulatory matter and other material regulatory risks.