Atlanticus Holdings Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Dollar amounts below are in millions unless stated otherwise. Atlanticus provides technology and services to lenders and invests in consumer credit receivables through its Credit as a Service (CaaS) and Auto Finance segments. The financial statements are unaudited.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $278.0 | $203.9 | $777.8 | $530.8 |
| Net margin | $92.4 | $123.6 | $304.4 | $322.9 |
| Income before income taxes | $39.3 | $57.9 | $119.5 | $156.6 |
| Net income | $32.4 | $47.1 | $110.9 | $128.0 |
| Net income attributable to common shareholders | $26.3 | $40.3 | $92.8 | $111.9 |
| Common EPS, basic / diluted | $1.81 / $1.41 | $2.67 / $1.96 | $6.32 / $4.85 | $7.41 / $5.43 |
- Revenue and earnings: Q3 revenue increased about 36% year over year, led by consumer-loan revenue and growth in card receivables. Common-shareholder income declined about 35% in Q3 and 17% for the nine-month period.
- Fair-value effects: The reported fair-value line for loans and associated structured-financing notes was a loss of $163.6 in Q3 and $414.9 for nine months, versus losses of $58.7 and $145.0 in the corresponding 2021 periods. This is a major driver of the lower reported net margin and earnings; it is sensitive to estimated credit losses, payment rates, discount rates and other Level 3 assumptions. The fair-value election also changed the timing and presentation of fees and losses, so year-over-year comparisons require care.
- Expenses and taxes: Q3 operating expenses were $53.1, up from $49.6; nine-month expenses were $184.9, up from $136.8. Q3 interest expense rose to $21.5 from $12.4. Effective tax rates were 17.6% for Q3 and 7.1% for nine months, compared with 18.7% and 18.3% in 2021.
- Cash flow: Nine-month operating cash flow was $245.6, versus $139.4 in 2021; investing used $524.4, versus $293.9, largely reflecting increased receivables investment; financing provided $158.9, versus $110.3. Cash and restricted cash decreased $119.9 during the period to $386.7.
- Balance sheet and liquidity: At September 30, unrestricted cash was $352.9 and restricted cash was $33.8. Total assets were $2,252.3; net loans and receivables were $1,817.2. Notes payable, net, were $1,544.1 and senior notes, net, were $144.0; total liabilities were $1,806.2 and total equity was $306.3. Most card-receivable financing is secured and held in consolidated variable-interest entities (VIEs); $1,473.0 of notes payable was associated with VIEs. Management said it believed operating cash, borrowing availability and capital-market access would meet needs, but funding availability and asset performance remain important.
- Portfolio and credit metrics: CaaS managed receivables reached $2,050.4, up from $1,446.1 a year earlier. Its annualized managed yield was 45.5%, combined principal net charge-off ratio 18.0%, interest-expense ratio 4.2% and net interest margin ratio 23.3%. The corresponding 2021 Q3 figures were 45.3%, 10.0%, 3.6% and 31.7%. CaaS managed receivables 30–59, 60–89 and 90-plus days past due were 4.8%, 5.2% and 10.0%, respectively, versus 3.2%, 2.6% and 6.3% a year earlier. These are company-defined, non-GAAP managed metrics.
Material changes and financing
- Atlanticus adopted CECL on January 1, 2022 and elected fair-value accounting for remaining eligible CaaS receivables previously measured at amortized cost. Adoption increased opening retained earnings by $8.6 and moved substantially all CaaS card receivables into fair-value measurement.
- Receivables at fair value increased to $1,728.1 from $1,026.4 at year-end 2021; CaaS managed card receivables grew $608.0 year over year. General-purpose card receivables grew faster than private-label receivables, contributing to higher yields and credit losses.
- Notes payable, net, rose from $1,278.9 at year-end 2021. The company added asset-backed financing, including a $250.0 facility in May 2022 (with $150.0 outstanding at quarter-end), a $100.0 facility in August (with $10.0 outstanding), and a $100.0 private-label ABS issuance in September. It reported compliance with debt covenants at September 30.
- In August 2022, Atlanticus established an at-the-market program for up to $100.0 of Series B preferred stock and senior notes; Q3 sales of 8,229 Series B shares generated $0.2 net proceeds. The company repurchased $89.0 of common stock during the first nine months and repurchased 3,500 Series B shares for $0.07 in Q3.
Outlook, risks and unusual items
- Management expected continued receivables and revenue growth, but anticipated a slower growth pace after tightening underwriting standards in Q2 and Q3 2022. It expected elevated CaaS delinquencies through the remainder of 2022 and charge-off rates to continue rising through Q2 2023, with normalization thereafter conditional on successful inflation-control efforts and effective underwriting changes.
- Management expected higher interest expense as the company continued to fund growth and new financing reflected higher rates. It noted that more than 90% of debt interest rates were fixed, while floating-rate debt and refinancing availability still create exposure. A 100-basis-point rate increase was estimated to reduce next-12-month pretax earnings by $7.7 on debt subject to rate risk.
- Key risks include inflation, higher interest rates, recession and weaker consumer repayment; the less-than-prime concentration of receivables; reliance on financing facilities and a small number of retail partners; fair-value estimates based on unobservable inputs; and extensive consumer-finance regulation. The five largest retail partners represented over 70% of retail period-end managed receivables.
- The company disclosed a Maryland administrative dispute involving its bank partner and a subsidiary over state licensing and interest-rate rules; the requested remedy includes invalidation of loans to Maryland residents. Management believed federal preemption should apply, but noted an unfavorable outcome could affect operations in Maryland and other states. It reported no pending legal proceedings expected to be material.
- An $8.5 litigation settlement accrual related to Auto Finance was included in Q1 2022 expenses. Separately, Atlanticus reported an investment in a private company pursuing a patent-infringement case against Apple, Walmart and PayPal; the filing describes potentially very large claimed damages but gives no clear value for Atlanticus’s investment or a reliable estimate of any potential proceeds.
- No specific numerical full-year earnings or revenue guidance was provided. The filing states that subsequent-event review identified no events requiring adjustment or additional disclosure.
Most important facts for investors to verify
- How actual credit losses, delinquency trends and payment rates compare with management’s assumptions, especially as stimulus effects fade and inflation pressures consumers.
- How much reported earnings volatility comes from Level 3 fair-value estimates, and whether managed non-GAAP credit metrics reconcile appropriately with GAAP results.
- Availability, pricing, maturities and covenant headroom for receivables funding; also the company’s capacity to meet parent-level obligations and preferred-stock claims.
- Progress and outcomes in the Maryland regulatory dispute, changes in bank-partner or retail-partner relationships, and any other material legal or regulatory developments.
- The rationale and returns for share repurchases and further capital raising while receivables investment and debt balances are increasing.