Atlanticus Holdings Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Atlanticus facilitates and invests in consumer credit, principally point-of-sale and direct-to-consumer lending, with a smaller auto-finance business. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless noted.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Consumer loan interest income | $103.1 million | $50.4 million | More than doubled, mainly reflecting growth in point-of-sale and direct-to-consumer receivables. |
| Interest expense | $13.6 million | $11.1 million | Increased with financing needs for receivables growth. |
| Fees and related income on earning assets | $19.8 million | $11.3 million | Included a $15.5 million fair-value revaluation loss in 2020; fair-value accounting also accelerated recognition of certain fees. |
| Provision for loan losses on loans at net realizable value | $67.3 million | $34.6 million | Higher primarily due to portfolio growth and maturation, according to management. |
| Net interest, fees and related income on earning assets, after provision and fair-value impairment losses | $41.7 million | $15.7 million | Reported subtotal; not a conventional net interest margin. |
| Income before income taxes | $6.6 million | $5.9 million | Increased modestly. |
| Net income | $5.4 million | $5.7 million | Decreased slightly. |
| Net income attributable to common shareholders | $2.7 million; $0.18 per basic share | $5.7 million; $0.40 per basic share | 2020 reflects $2.8 million of preferred stock and preferred unit dividends/accretion. |
| Operating cash flow | $34.9 million | $30.0 million | Investing cash outflow was $44.7 million; financing cash inflow was $36.3 million. |
Financial position, liquidity and credit indicators
- At March 31, 2020, total assets were $971.9 million and total liabilities were $830.0 million. Net loans receivable were $736.8 million, including $89.4 million carried at fair value.
- Unrestricted cash was $177.3 million and restricted cash was $25.6 million. Cash and restricted cash together were $202.9 million at quarter-end.
- Notes payable at face value were $739.0 million, plus $3.4 million of structured-financing notes carried at fair value; convertible senior notes had a $24.2 million carrying value. Notes payable declined from $749.2 million at year-end.
- Reported total equity was $2.8 million. The balance sheet also included $40.0 million of Series A preferred stock and $99.1 million of subsidiary Class B preferred units classified as temporary equity.
- Credit and Other Investments segment pretax income was $5.1 million versus $4.2 million; Auto Finance segment pretax income was $1.6 million versus $1.7 million.
- Credit and Other Investments managed receivables were $917.5 million, up from $480.9 million a year earlier. The segment’s 30-plus-day delinquency rate was 16.0% versus 13.7%, and its combined gross charge-off ratio was 29.0% versus 23.6%. These are managed-basis measures, not GAAP balance-sheet ratios.
Material changes and unusual items
- Receivables acquired in point-of-sale and direct-to-consumer operations grew substantially. At March 31, those managed receivables totaled $911.7 million, compared with $472.3 million a year earlier.
- Starting January 1, 2020, Atlanticus elected fair-value accounting for certain newly acquired point-of-sale and direct-to-consumer receivables. This changes the timing and volatility of fee and credit-loss recognition; the company recorded a $15.5 million fair-value loss in Q1. Older receivables generally remain at amortized cost.
- Q1 2019 other income included a $15.5 million reduction in a customer-claims accrual. This unusual item makes year-over-year comparisons of other income and total reported income less comparable.
- Atlanticus issued $50.0 million of additional subsidiary Class B preferred units on March 30, 2020. The units carry a 16% preferred return and include put rights and covenants. Financing cash flows also included $1.5 million of preferred dividends paid.
- Q1 2020 effective income tax expense rate was 19.3%, compared with 4.0% in Q1 2019; the filing attributes the 2020 rate principally to the tax treatment of preferred dividends and other offsetting tax items.
Outlook, risks and contingencies
- Management said COVID-19’s impact on consumers, merchants, credit losses, liquidity and results remained highly uncertain. Borrowers requesting hardship assistance could receive temporary payment relief; management nevertheless anticipated unemployment could raise future credit losses, partly offset by government stimulus.
- Management expected managed receivables to remain broadly consistent with March 31 levels during 2020, subject to pandemic effects. It anticipated elevated charge-offs as newer loan vintages matured and said delinquency rates could rise as portfolio growth moderated.
- Management reported that COVID-19 had severely disrupted debt and capital markets, including the asset-backed securities market, preventing establishment of new facilities. The company cited operating cash flows and existing facility availability as liquidity sources, while acknowledging uncertainty and seeking additional liquidity when available. It listed $112.5 million of facilities with identified near-term refinancing or repayment dates.
- As of March 31, Atlanticus said it was in compliance with debt covenants. It also disclosed $1.2 billion of unfunded consumer credit commitments and $9.1 million of unfunded auto floor-plan commitments; it can reduce or cancel consumer credit lines.
- The company reported no legal proceedings expected to be material. It continued to pursue abatement of $0.9 million in IRS failure-to-pay penalties and accrued interest related to a previously settled tax matter.
- Management identified material risks including dependence on borrowed funding and a bank partner, sub-prime credit exposure, COVID-19-related losses and market disruption, regulatory and litigation risk, and reliance on estimates for Level 3 fair values and loan-loss allowances. No specific earnings guidance was provided.
Important facts for investors to verify
- How COVID-19 affected subsequent-quarter delinquencies, charge-offs, payment deferrals, receivable purchases and funding access.
- How much Q1 earnings and future results depend on Level 3 fair-value assumptions, including expected credit losses, payment rates and discount rates.
- Whether the company can renew, refinance or replace facilities as they mature, and maintain covenant compliance if collateral performance weakens.
- Whether portfolio growth can cover fixed infrastructure costs, particularly if major retail partners or the bank relationship change.
- The effect of preferred returns, redemption and put rights, and possible conversion on liquidity and common-shareholder earnings or dilution.