Atlanticus Holdings Corporation — 2018 Form 10-K
Reporting period: Year ended December 31, 2018, compared with 2017. Although the request identifies Q4, this filing reports full-year results; selected quarterly portfolio metrics are noted below. Atlanticus provides technology, servicing and credit investments focused on financially underserved consumers, through Credit and Other Investments and Auto Finance segments.
Financial results and key metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total interest income | $161.2 million | $114.7 million |
| Interest expense | $36.9 million | $27.7 million |
| Net interest income before fees and credit-loss provision | $124.3 million | $87.0 million |
| Provision for loan losses, net realizable value receivables | $100.3 million | $77.6 million |
| Net income (loss) | $7.6 million | $(40.9) million |
| Net income (loss) attributable to controlling interests; diluted EPS | $7.9 million; $0.56 | $(40.8) million; $(2.93) |
| Cash from (used in) operating activities | $42.9 million | $(26.5) million |
| Cash used in investing activities | $134.5 million | $80.3 million |
| Cash from financing activities | $161.7 million | $84.6 million |
- Total interest income grew 40%, primarily as point-of-sale and direct-to-consumer receivables expanded. Fees and related income rose to $30.0 million from $14.3 million; other operating income was $42.4 million versus $6.4 million.
- 2018 other income included approximately $36.2 million of recognized income from a £34 million Barclays settlement. The settlement materially contributed to the return to reported profitability. Operating cash flow was also principally boosted by this settlement.
- Net interest income, fees and related income after provision was $53.4 million, up from $33.1 million. The higher provision largely reflected growth and maturation of newer receivables, according to management, rather than a specific broad credit deterioration.
- At year-end, total assets were $582.6 million, total liabilities $604.7 million and total deficit $22.1 million. Net loans, interest and fees receivable were $424.5 million; the allowance for uncollectible receivables was $79.2 million, versus $63.0 million in 2017.
- Unrestricted cash was $61.0 million and restricted cash $80.8 million. Notes payable at face value were $390.9 million, related-party notes $40.0 million, structured-financing debt carried at fair value $5.7 million, and convertible notes carried at $62.1 million. The filing separately describes $406.7 million of secured indebtedness and $93.3 million of other senior unsecured indebtedness, in addition to the convertible notes.
- Point-of-sale and direct-to-consumer receivables grew from $316.7 million at year-end 2017 to $453.3 million at year-end 2018. Credit and Other Investments managed receivables totaled $462.9 million, up from $333.3 million. Auto Finance managed receivables reached $88.1 million, versus $77.2 million.
- For Q4 2018, Credit and Other Investments managed receivables were $462.9 million; 30-plus-day delinquency was 13.2% and combined gross charge-off ratio 21.6%. The comparable Q4 2017 figures were $333.3 million, 13.7% and 20.1%. These are managed-basis measures, not GAAP financial-statement ratios.
Material changes versus 2017
- Atlanticus moved from a substantial net loss to modest net income. The Barclays settlement, higher interest and fee income from receivables growth, and changes in credit costs were important drivers; profitability excluding the settlement is not separately stated as a clear GAAP measure in the filing.
- Receivables growth was accompanied by sharply higher funding: notes payable at face value increased to $390.9 million from $226.2 million. Interest expense rose by $9.2 million.
- Point-of-sale receivables grew by $50.9 million and direct-to-consumer receivables by $85.7 million net during 2018. Direct-to-consumer delinquency rates were higher than the prior-year comparable quarters as the portfolio expanded and matured.
- The allowance for uncollectible receivables rose $16.2 million. Credit card receivables recorded at fair value continued to run off; related balances fell to $6.3 million from $11.1 million.
- Cash from operations improved from use of $26.5 million to generation of $42.9 million, while investing cash use increased with receivables purchases. Financing cash inflow also increased to support asset growth.
Outlook, risks and unusual items
- Management expects continued growth in point-of-sale and direct-to-consumer receivables during 2019, subject to new and existing retail partnerships, origination activity and availability of capital. It anticipates higher interest expense as borrowing supports growth, and increased marketing and servicing costs.
- Management expects elevated charge-offs in newer receivables relative to historical levels as higher-yielding, higher-risk vintages mature. Delinquencies and losses may rise as portfolio growth moderates; timing and levels remain uncertain. Auto Finance management anticipated modest receivables growth and some increases in delinquencies and charge-offs.
- Management said Credit and Other Investments cash inflows covered direct variable costs and part, but not all, of allocated overhead. Failure to contain overhead or grow revenue sufficiently could pressure consistent profitability. The company cautions that it has not achieved consistent earnings in recent years and that the future profitability of its business model is uncertain.
- Funding and refinancing remain key risks. The filing identifies $208.4 million of facilities as potentially significant near-term refinancing needs at year-end, while management characterized immediate refinancing risk as low. A $40 million related-party term loan was due in November 2019; the CAR revolving facility maturity was extended to November 2020 in February 2019. The company reported covenant compliance.
- Retail-partner concentration is material: the five largest partners accounted for more than 50% of point-of-sale receivables. Other principal risks include subprime credit exposure, economic downturns, regulatory or litigation actions, dependence on issuing-bank and servicing relationships, and access to financing.
- The Barclays litigation was settled in December 2018 for £34 million (approximately $42.9 million); no other pending legal proceedings were expected to be material. The 2018 tax benefit included effects of an IRS settlement; some interest and failure-to-pay penalty matters remained unresolved, and the company was seeking abatement.
- The company reported $631.0 million of unfunded consumer credit-line commitments and $7.7 million of unfunded auto floor-plan commitments; it said full utilization was not expected and it could reduce or cancel consumer credit lines. Management did not expect contingent indemnification commitments to result in material payments.
- Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2018. The independent auditor issued an unqualified opinion on the consolidated financial statements; it did not attest to internal control effectiveness.
Important facts for investors to verify
- How much of 2018’s reported profit and operating cash flow depended on the one-time Barclays settlement, and the underlying earnings and cash generation excluding it.
- Credit performance by vintage as newer point-of-sale and direct-to-consumer accounts mature, including allowance adequacy, delinquency migration and charge-offs.
- Whether receivables growth can generate returns sufficient to cover funding costs, servicing and marketing expenses, and fixed overhead.
- Availability, cost, covenants and renewal prospects for funding facilities, especially the related-party term loan and facilities approaching maturity.
- Retail-partner concentration, bank-partner continuity, and any material regulatory, litigation, tax or consumer-protection developments.