Atlanticus Holdings Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; comparative periods ended September 30, 2020. Amounts are U.S. dollars; financial-statement amounts are in millions unless otherwise noted. The filing was signed November 12, 2021.
Business context
Atlanticus is a financial technology and consumer-credit company. It supports lenders offering point-of-sale, direct-to-consumer and other credit products, and generally invests in receivables originated through its platform. Its two reportable segments are Credit and Other Investments and Auto Finance.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $203.9 | $144.5 | $530.8 | $420.7 |
| Net income | $47.1 | $38.8 | $128.0 | $67.3 |
| Net income attributable to common shareholders | $40.3 | $34.1 | $111.9 | $55.2 |
| Diluted EPS | $1.96 | $1.72 | $5.43 | $2.85 |
| Net margin, as reported | $123.6 | $82.5 | $322.9 | $192.2 |
| Interest expense | $12.4 | $12.7 | $38.5 | $38.5 |
| Provision for loan losses on amortized-cost receivables | $9.2 | $17.0 | $24.5 | $116.9 |
| Fair-value changes in receivables and related structured-financing notes | $(58.7) | $(32.3) | $(145.0) | $(73.2) |
| Operating expenses | $49.6 | $34.2 | $136.8 | $109.2 |
Q3 revenue increased about 41% year over year and nine-month revenue about 26%. Net income rose about 21% for Q3 and 90% for the nine-month period. The filing attributes revenue growth principally to point-of-sale and direct-to-consumer receivables growth. These results also reflect a lower provision on amortized-cost loans, while the loss from fair-value changes increased. The company recorded a $16.2 million Q3 and $29.4 million nine-month loss on repurchase and redemption of convertible senior notes.
Cash from operations was $140.0 million for the nine months, compared with $147.8 million in 2020. Investing activities used $294.5 million, versus $180.9 million; financing activities provided $110.3 million, versus $33.6 million. Cash and restricted cash totaled $214.8 million at September 30, 2021, including $167.0 million unrestricted and $47.8 million restricted.
At September 30, 2021, total assets were $1.483 billion, total liabilities $1.081 billion, and total equity $262.0 million. Net notes payable were $995.3 million; convertible senior notes had been fully retired. Reported loan receivables, net, were $1.247 billion, including $846.2 million carried at fair value.
Material changes and credit performance
- Managed receivables rose to $1.446 billion from $987.4 million a year earlier. Point-of-sale and direct-to-consumer receivables together reached $1.442 billion, up from $982.5 million.
- The annualized managed net charge-off ratio improved to 14.8% from 22.1% a year earlier. However, managed receivables 30 or more days past due increased to 12.1% from 7.7%, and 90 or more days past due to 6.3% from 4.0%. The filing notes that younger, rapidly growing portfolios and pandemic-era payment support affect these comparisons.
- Marketing and solicitation expense rose to $16.5 million from $7.0 million in Q3, reflecting investment in portfolio growth. Management also cited higher servicing costs as receivables expanded.
- Atlanticus issued 3.19 million Series B preferred shares in June and July, raising approximately $76.5 million net. The shares carry a 7.625% cumulative dividend and a $25 per-share liquidation preference.
- During 2021, the company repurchased or redeemed its remaining convertible senior notes; the balance was zero at quarter-end. Related cash payments totaled $54.3 million, including accrued interest, and the recognized loss was $29.4 million.
Outlook, risks and unusual items
Management expected continued growth in point-of-sale and direct-to-consumer receivables, revenue and receivable purchases into the remainder of 2021 and 2022, subject to consumer demand, new and existing retail partnerships, available funding and economic conditions. It anticipated additional borrowing to support growth and quarterly interest expense above prior-period levels. Management also expected delinquency and charge-off rates to rise from unusually favorable pandemic-era levels as newer receivables mature, while noting near-term charge-offs were expected to remain below comparable pre-pandemic periods.
The company said it had $63.9 million of facilities maturing within 24 months and viewed refinancing risk as low, citing collateral performance, lender relationships and debt-market conditions. It reported compliance with debt covenants. It stated that operating cash, facility availability and capital-market access should provide adequate resources, but funding access remains important to its growth strategy.
- Credit and macroeconomic exposure: COVID-19 effects, reduced stimulus, consumer payment patterns, labor shortages and supply-chain disruptions could affect receivable growth and losses. The duration and severity remained uncertain.
- Fair-value estimates: Significant receivables are valued using Level 3 discounted-cash-flow assumptions, including yields, payment rates, expected credit losses and discount rates; changes can materially affect reported earnings. Atlanticus planned to adopt the expected-credit-loss standard on January 1, 2022, using the fair-value option for receivables then carried at amortized cost. It expected an increase to opening retained earnings and greater subsequent fair-value volatility; the size was not specified.
- Concentration and regulation: The five largest retail partners represented over 65% of point-of-sale managed receivables. The company relies on a bank partner for general-purpose cards and faces regulatory and litigation uncertainty, including a Maryland dispute involving bank-lending preemption and licensing. Management said no pending legal proceedings were expected to be material.
- Commitments: Unfunded consumer credit lines totaled $1.9 billion and unfunded auto floor-plan commitments $12.8 million. An Atlanta headquarters lease signed in August 2021 begins in June 2022, runs 146 months and has stated total commitments of about $27.8 million.
- Other unusual item: In September 2021, the company acquired the remaining interest in its equity-method investee. It also disclosed a new corporate headquarters lease and continued to monitor the planned phaseout of LIBOR, which it did not expect to have a material impact.
Important facts for investors to verify
- Whether receivable growth can continue without materially worsening delinquencies, credit losses or fair-value marks; in particular, track 30-plus-day delinquency, 90-plus-day delinquency and net charge-offs.
- How fair-value assumptions and the January 2022 accounting adoption affect opening equity and reported earnings volatility.
- Availability, cost and renewal terms of funding facilities, including the $63.9 million of identified maturities within 24 months and collateral or covenant requirements.
- Dependence on the largest retail partners and the bank partner, and developments in regulatory matters that could affect lending programs or collection rights.
- Cash available after restricted balances, debt service and cumulative preferred dividends; also monitor the Series A and Series B preferred terms and their priority over common shareholders.
- Whether the stated outlook is borne out by results: the filing provides management expectations, but no quantified formal earnings or revenue guidance.