Atlanticus Holdings Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Atlanticus provides technology and servicing for consumer credit and invests in receivables, principally across its Credit and Other Investments and Auto Finance segments.
Financial performance and position
Unless noted otherwise, dollar amounts are in millions. The filing presents financial results in thousands.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total interest income | $103.6 | $70.6 | $306.9 | $176.2 |
| Net interest income before fees and loan-loss provision | $91.0 | $57.5 | $268.4 | $140.0 |
| Fees and related income on earning assets | $35.9 | $20.1 | $103.7 | $46.1 |
| Income before taxes | $48.3 | $16.5 | $83.0 | $29.8 |
| Net income | $38.8 | $13.0 | $67.3 | $23.9 |
| Net income attributable to common shareholders | $34.1 | $13.1 | $55.2 | $24.0 |
| Diluted EPS attributable to common shareholders | $1.72 | $0.83 | $2.85 | $1.59 |
MD&A’s aggregate income measure was $102.8 million in Q3, down from $114.2 million, and $313.0 million for the nine months, up from $270.0 million. The filing does not provide a conventional operating-margin measure.
- Credit quality: Q3 provision for losses on receivables carried at net realizable value was $17.0 million, versus $65.5 million a year earlier. Nine-month provision was $116.9 million, versus $148.5 million. Fair-value receivables had a separate $3.3 million Q3 net impairment loss.
- Cash flow: Nine-month operating cash flow was $147.8 million (2019: $70.2 million); investing cash flow was negative $180.9 million (2019: negative $289.8 million); financing cash flow was $33.6 million (2019: $190.3 million). Cash and restricted cash increased $0.5 million to $176.9 million.
- Balance sheet and liquidity: September 30 unrestricted cash was $149.2 million; restricted cash was $27.7 million. Total assets were $1,040.6 million and total liabilities $845.6 million. Shareholders’ equity was $56.4 million, with total equity of $55.7 million.
- Debt and capital: Notes payable at face value were $746.4 million, plus $3.4 million of structured-financing notes carried at fair value and $24.3 million carrying value of convertible senior notes. Weighted-average interest on revolving facilities was 5.5%. The company reported covenant compliance at quarter-end. Series A preferred stock had a $40.0 million liquidation preference; subsidiary Class B preferred units totaled $99.3 million and carry a 16% preferred return.
- Receivables: Net loans, interest and fees receivable were $838.1 million. Credit and Other Investments managed receivables were $987.4 million, up from $776.1 million a year earlier; point-of-sale and direct-to-consumer receivables together were $982.5 million, up from $769.0 million.
Material changes versus the prior comparable period
- Q3 interest income rose $33.1 million and fees on credit products rose $15.8 million, reflecting growth in point-of-sale and direct-to-consumer receivables. Nine-month interest income increased $130.7 million and fees on credit products increased $58.2 million.
- Q3 fair-value changes on loans were a $29.1 million loss, versus a $0.4 million gain in Q3 2019; the nine-month fair-value loss was $69.8 million, versus a $0.7 million gain. Atlanticus began electing fair-value accounting for certain receivables acquired from January 1, 2020, making estimates and valuation changes more consequential to earnings.
- Q3 other income fell to $4.2 million from $30.5 million. The 2019 comparison included a $26.7 million release of an accrual related to customer claims and a $5.1 million gain on repurchase of convertible notes. The nine-month 2019 other-income comparison included $68.1 million of the accrual release.
- Lower provision expense on amortized-cost receivables supported earnings; management attributed the decline to fair-value accounting shifting some receivables out of the provision calculation and to lower delinquency, partly reflecting government support programs.
- Unrestricted cash increased from $135.4 million at December 31, 2019, while total liabilities were broadly stable. Class B preferred units increased by $50.0 million during 2020.
Outlook, risks and unusual items
- Management expected continued growth in point-of-sale and direct-to-consumer receivables, additional financing needs to support that growth, and higher interest expense as borrowing expands. It also expected higher marketing and servicing costs and forecast that credit losses would remain elevated versus historical levels as newer receivable vintages mature.
- Management said recent delinquency improvements could reduce charge-off rates in the remainder of 2020 and first quarter of 2021, but cautioned that stimulus, payment deferrals, portfolio growth and pandemic effects make future credit performance uncertain. At September 30, 5.2% of accounts had received a COVID-related deferral; 1.4% remained actively deferred, representing $19.1 million of gross receivables. Most were treated as current and excluded from delinquency statistics.
- COVID-19 effects on consumer spending, repayment, merchants, the bank partner, funding markets and liquidity remained uncertain. Management reported that ABS markets had been disrupted, though it believed operating cash flow, facility availability and possible capital-market or government funding would provide adequate resources.
- After quarter-end, Atlanticus received $2.0 million in dividends following an investee recapitalization and retained its minority stake. In October 2020, it issued $250.0 million of point-of-sale ABS at a 4.1% weighted-average fixed rate, using part of the proceeds to repay existing term ABS and the remainder to fund receivable acquisitions.
- Other key exposures include dependence on borrowed funding and a single bank partner for certain products, concentration among major retail partners, regulatory and “true lender” uncertainty, fair-value estimation risk, and potential deterioration in subprime consumer credit. The filing reported no pending legal proceedings expected to be material.
Most important facts for investors to verify
- How the fair-value loan model’s assumptions and the $69.8 million nine-month revaluation loss affect reported earnings and asset values.
- Whether delinquency and charge-off trends remain favorable after stimulus and deferral effects fade; compare reported measures with the accounts excluded from delinquency data.
- Whether receivable growth, funding access and financing costs support the company’s growth plans, including upcoming facility maturities and the post-quarter $250 million ABS transaction.
- The sustainability of earnings after considering the prior-year customer-claims accrual release, fair-value volatility, preferred dividends and the 16% return on Class B preferred units.
- Potential liquidity demands, including preferred-stock redemption rights, debt covenants, and the company’s maximum exposure to consolidated VIEs, reported as $687.6 million.