Atlanticus Holdings Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet figures are as of March 31, 2021. Atlanticus facilitates consumer credit through technology and servicing services, and invests in consumer receivables. Its two reportable segments are Credit and Other Investments and Auto Finance. Financial figures below are in millions, except per-share data and percentages.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Total revenue | $144.7 | $140.5 |
| Net margin | $93.0 | $44.4 |
| Net income | $44.0 | $5.4 |
| Net income attributable to common shareholders | $39.4 | $2.7 |
| Basic / diluted EPS | $2.62 / $1.91 | $0.18 / $0.17 |
| Operating cash flow | $52.8 | $34.9 |
| Investing cash flow | $(2.2) | $(44.7) |
| Financing cash flow | $(66.1) | $36.3 |
- Operating expenses were $41.2 million versus $37.8 million. Interest expense declined to $12.3 million from $13.6 million, while the fair-value adjustment was a $27.5 million loss versus a $15.2 million loss.
- At quarter-end, total assets were $1.199 billion, total liabilities $942.3 million, and total equity $117.8 million. Net loans, interest and fees receivable were $934.5 million.
- Unrestricted cash was $203.1 million and restricted cash $40.5 million. Notes payable, net, were $839.3 million; additional reported debt included $2.8 million of structured-financing notes at fair value and $13.8 million of convertible senior notes.
- Cash and restricted cash declined by $15.4 million during the quarter, to $243.5 million. Management said operating cash, available debt facilities and capital-market access should provide adequate funding.
Material changes versus the comparable period
- Revenue increased 3% year over year. Management attributed growth mainly to point-of-sale and direct-to-consumer receivables and fee recognition; managed receivables in these channels rose to $1.089 billion from $911.7 million.
- Net income rose substantially, primarily as the provision for losses on receivables at net realizable value fell to $4.1 million from $67.3 million. The comparison also reflects fair-value accounting for eligible receivables, adopted beginning in 2020, and differing credit conditions.
- Q1 2021 included a $7.8 million loss on repurchasing $14.7 million face amount of convertible notes for $18.6 million cash, including accrued interest. The notes were retired.
- Credit and Other Investments managed receivables totaled $1.093 billion, versus $917.5 million a year earlier. Its annualized managed yield ratio was 46.0% versus 50.1%, and its combined net charge-off ratio was 13.6% versus 29.0%. These are company-defined non-GAAP measures.
- At March 31, 8.4% of Credit and Other Investments managed receivables were 30 or more days past due, compared with 16.0% a year earlier; 4.9% were 90 or more days past due, versus 9.0%. Management cautioned that stimulus-supported payments and portfolio growth affected delinquency trends.
- Auto Finance revenue was $8.5 million versus $8.2 million. Its managed receivables were $94.1 million; its annualized net charge-off ratio was 1.3%, versus 2.7% a year earlier.
Outlook, risks and unusual items
- Management expected continued 2021 growth in point-of-sale and direct-to-consumer receivables and related interest income, subject to consumer demand, new and existing retail partnerships, funding availability, and COVID-19 effects. It anticipated additional debt financing and quarterly interest expense above prior-period levels as the business grows.
- Management expected operating costs, particularly servicing and marketing, to increase with receivables and origination growth. It also expected credit losses and delinquencies to rise as newer vintages mature, despite near-term improvement from stronger payment behavior and government stimulus.
- COVID-19’s effects on consumers, merchants, bank partners, credit quality, receivable purchases, liquidity and capital access remained uncertain. The company reported that hardship deferrals were a diminishing portion of its portfolio; deferred accounts generally continued accruing interest and were not treated as delinquent during the deferral period.
- Fair-value receivables rely on Level 3 discounted-cash-flow estimates, including expected yields, payment rates, credit losses, servicing costs and discount rates. Changes in assumptions or actual performance can materially affect reported earnings.
- Management identified $28.9 million of facilities with potential refinancing or refunding needs within 24 months and considered near-term risk low; the listed facilities included maturities in July and September 2021. The company reported compliance with debt covenants at quarter-end.
- Other material exposures include $1.8 billion of unfunded consumer credit commitments, $11.6 million of unfunded auto floor-plan commitments, and a $23.4 million potential exposure under a credit-protection program, against which $0.7 million was accrued. The filing said no pending legal proceedings were expected to be material.
- Capital structure considerations include $40.0 million of Series A preferred stock with a cumulative 6% dividend and $99.4 million of Class B preferred units carrying a 16% preferred return. The filing also identifies regulatory, bank-partner concentration, consumer-credit, funding, technology, cybersecurity and system-conversion risks.
Important facts for investors to verify
- How much of the earnings increase reflects sustainable portfolio performance versus the prior-year high loss provision, fair-value accounting, and the one-time convertible-note repurchase loss.
- Whether fair-value assumptions and actual payment, delinquency and loss trends support the carrying value of the Level 3 receivables.
- How consumer credit performance develops as government stimulus and payment deferrals recede and newer receivable vintages mature.
- Whether receivable growth can be funded on acceptable terms, and whether near-term facility maturities are renewed or refinanced without disrupting liquidity.
- The impact of retail-partner concentration, reliance on a bank partner, regulatory developments and the ongoing system-provider conversion on originations and operations.
- How preferred returns, potential redemption rights, convertible securities and share repurchases affect cash available to common shareholders and potential dilution.