Atlanticus Holdings Corporation — FY 2019 Form 10-K
Reporting period: Year ended December 31, 2019; comparisons are with FY 2018. This is an annual filing, not a standalone fourth-quarter report. Atlanticus provides technology and servicing to consumer lenders and invests in receivables, principally point-of-sale and direct-to-consumer credit, alongside its auto finance business.
Key financial results
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Total interest income | $261.2 million | $161.2 million |
| Interest expense | $50.7 million | $36.9 million |
| Provision for loan losses | $248.4 million | $100.3 million |
| Income before income taxes | $31.8 million | $3.5 million |
| Net income | $26.2 million | $7.6 million |
| Net income attributable to common shareholders | $25.3 million; $1.74 per basic share | $7.9 million; $0.56 per basic share |
| Cash from operating activities | $100.0 million | $42.9 million |
| Cash used in investing activities | $433.7 million | $134.5 million |
| Cash from financing activities | $368.7 million | $161.7 million |
Revenue and costs expanded with the receivables portfolio. The $248.4 million provision was substantially higher year over year, which management primarily attributed to growth and maturation of newer receivables. The filing does not provide a single comparable operating-margin measure.
At year-end, unrestricted cash was $135.4 million and restricted cash was $41.0 million. Gross loans, interest and fees receivable were $998.2 million; net receivables were $726.0 million. Notes payable at face value were $749.2 million, convertible senior notes had a $24.1 million carrying value, and fair-value structured-financing notes were $3.9 million. Total equity was $0.3 million, alongside $40.0 million of Series A preferred stock and $49.1 million of subsidiary Class B preferred units classified outside permanent equity.
Material changes and unusual items
- Point-of-sale and direct-to-consumer receivables grew to $908.4 million from $453.3 million at year-end 2018. Credit and Other Investments managed receivables reached $914.8 million, up from $462.9 million.
- FY 2019 other income included a $105.9 million reduction in accruals for customer claims on a portfolio; no reserve remained for that matter at year-end. FY 2018 included approximately $36.2 million of income from a litigation settlement. These items materially affect year-over-year comparisons.
- Atlanticus repurchased $54.4 million face amount of convertible notes in 2019, recognizing a $5.1 million gain. In December, it exchanged a $40.0 million related-party loan for Series A preferred stock carrying a 6% cumulative annual dividend.
- A subsidiary issued $50.5 million of Class B preferred units with a 16% preferred return. Terms include put and call rights and covenants.
- Asset-backed securities issuances included $200 million in June and $200 million in November, secured by credit card receivables. Point-of-sale receivables also supported a 2018 $167.3 million ABS issuance.
Portfolio performance, outlook and risks
- Credit and Other Investments reported $25.0 million of pretax income in 2019, compared with a $6.8 million pretax loss in 2018; Auto Finance pretax income was $6.8 million, down from $10.2 million.
- For Credit and Other Investments in Q4 2019, managed receivables were $914.8 million; 30-plus-day delinquencies were 15.3%, 90-plus-day delinquencies 8.1%, total yield ratio 50.0%, and combined gross charge-off ratio 22.4%. These portfolio measures are not GAAP results and may be affected by portfolio age, acquisitions, collections and other factors.
- Management expected receivables growth in 2020, supported by new and existing retail partners and direct-to-consumer originations, and anticipated higher interest expense and marketing and servicing costs as the business expanded. It also expected elevated credit losses as newer vintages matured.
- COVID-19 emerged after year-end. Management stated it could not estimate its effect on 2020 results, liquidity or financial condition. The filing also notes that the CARES Act may provide assistance, which management was assessing.
- From January 1, 2020, certain newly originated point-of-sale and direct-to-consumer receivables are measured at fair value, with valuation changes recognized in earnings and certain fees and origination costs no longer deferred. Management cautioned that estimates rely on significant unobservable inputs and actual performance may differ.
- Key risks include dependence on financing facilities and lender relationships; subprime borrower credit losses and economic sensitivity; concentration among the five largest retail partners, which represented over 50% of point-of-sale receivables; regulatory and “true lender” uncertainty; and operational, cyber-security and data-privacy risks. Management said the Credit and Other Investments segment’s cash inflows covered direct variable costs and part, but not all, of its overhead allocation.
- At year-end, management reported compliance with debt covenants and viewed near-term refinancing risk as low. A $19.4 million revolving facility was scheduled to mature March 31, 2020. Legal proceedings were described as customary, with no pending matter expected to be material. The company reported no off-balance-sheet arrangements and did not expect contingent commitments to require material payments.
Most important facts for investors to verify
- How much of reported 2019 profitability depended on the $105.9 million accrual reduction, and what recurring earnings look like excluding unusual items.
- Whether receivables growth can continue without worsening delinquencies, charge-offs, loss provisions or funding costs as loan vintages mature.
- Current liquidity, facility renewals and covenant headroom, particularly for facilities near maturity and funding needed to support growth.
- COVID-19’s subsequent effects on borrower payments, originations, credit losses, funding access and liquidity.
- The financial impact and volatility introduced by fair-value accounting for eligible receivables originated from 2020 onward.
- Terms, cash obligations and potential dilution associated with the preferred stock and Class B units, and the continued dependence on major retail and bank partners.