Atlanticus Holdings Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited consolidated results; amounts below are in millions except per-share data. Atlanticus facilitates consumer credit through technology and servicing, and invests in receivables. Its reportable segments are Credit and Other Investments and Auto Finance.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Interest income | $100.1 | $55.2 | $203.3 | $105.7 |
| Interest expense | $12.3 | $12.0 | $25.8 | $23.2 |
| Fees and related income on earning assets | $32.6 | $14.8 | $67.8 | $26.0 |
| Provision for loan losses on amortized-cost receivables | $32.5 | $48.4 | $99.9 | $83.0 |
| Net income | $23.1 | $5.2 | $28.5 | $10.8 |
| Net income attributable to common shareholders | $18.4 | $5.2 | $21.1 | $11.0 |
| Diluted EPS | $0.93 | $0.35 | $1.12 | $0.74 |
Q2 total interest income, fees and other operating income was $98.2 million, versus $87.5 million a year earlier. The comparison is affected by a $26.0 million reduction in a portfolio-related accrual recorded in Q2 2019. For the first half, the comparable unusual benefit was $41.4 million. Q2 results also included a $25.2 million fair-value loss on receivables; the six-month fair-value loss was $40.7 million.
Growth in point-of-sale and direct-to-consumer receivables drove higher interest and fee income. Q2 operating expenses were $37.2 million versus $31.4 million; higher card and loan servicing and marketing costs accompanied portfolio growth. Effective tax rates were 17.7% in Q2 and 18.0% for the first half, below the statutory rate primarily due to tax treatment of preferred distributions and share-based awards.
Balance sheet, cash flow and funding
- At June 30, 2020, total assets were $944.2 million and total liabilities were $783.6 million. Total equity was $21.4 million, including $40.0 million of Series A preferred stock and $99.2 million of Class B preferred units presented as temporary equity.
- Unrestricted cash was $139.2 million; restricted cash was $38.9 million. Some cash and receivables are held in variable interest entities or pledged and are not generally available for corporate use.
- Net loans and fees receivable were $738.4 million. Notes payable at face value were $691.9 million, with another $3.4 million of structured-financing notes carried at fair value; convertible senior notes had a $24.2 million carrying value.
- For the six months, operating cash flow was $84.0 million, investing cash outflow was $67.5 million and financing cash outflow was $14.8 million. Cash and restricted cash increased by $1.6 million to $178.0 million.
- Debt declined from $749.2 million at year-end 2019 to $691.9 million at June 30, excluding fair-value structured-financing notes. The company reported compliance with debt covenants at quarter-end. It identified $80.3 million of facilities with maturities through 2021 that could require refinancing or repayment.
Changes, credit performance and unusual items
- Managed Credit and Other Investments receivables reached $900.2 million, up from $610.1 million at June 30, 2019. Point-of-sale and direct-to-consumer receivables together were $895.1 million, compared with $602.3 million a year earlier.
- The managed portfolio’s 30-plus-day delinquency rate was 10.7% at June 30, down from 16.0% at March 31; the 90-plus-day rate was 6.9%, versus 9.0%. A bulk sale of charged-off accounts reduced the Q2 combined gross charge-off ratio to 26.9%; management said it would have been 29.1% without the sale. The ratio was 23.8% in Q2 2019.
- Gross receivables past due on the amortized-cost balance were $97.0 million, down from $153.2 million at December 31, 2019. The allowance for uncollectible loans was $158.1 million, compared with $186.3 million at year-end; the portfolio mix and transition to fair-value accounting affect comparisons.
- Beginning January 1, 2020, Atlanticus elected fair-value accounting for certain newly acquired point-of-sale and direct-to-consumer receivables. This recognizes fair-value changes in earnings and changes the timing of fee recognition, increasing earnings volatility and limiting direct period comparisons.
- In March, a subsidiary issued $50.0 million of Class B preferred units with a 16% preferred return, adding to units issued in 2019. Series A preferred stock carries a cumulative 6% dividend. Preferred dividends reduced income attributable to common shareholders by $4.7 million in Q2 and $7.5 million in the first half.
Outlook, risks and contingencies
- Management said COVID-19’s duration and financial effects were highly uncertain. Restrictions and reduced consumer spending could reduce receivable acquisitions; unemployment and payment stress could raise future credit losses. Certain borrowers received temporary payment deferrals and fee waivers; 1.4% of accounts, representing $16.9 million of gross receivables, were actively deferred at quarter-end. Most were current and excluded from delinquency statistics.
- Management expected receivable balances to remain broadly consistent with June levels during 2020, with modest Auto Finance growth, but cautioned that COVID-19, stimulus measures and funding conditions could change that outlook. It anticipated elevated charge-offs as recent vintages mature and said delinquency rates could rise as portfolio growth moderates.
- Capital markets, particularly asset-backed securities markets, were disrupted, slowing or preventing new financing. Atlanticus said operating cash flow and existing facilities were expected to support needs, while noting substantial dependence on borrowing to fund receivable purchases. In July 2020, after quarter-end, it issued $100 million of asset-backed securities secured by point-of-sale receivables at a 5.47% weighted-average fixed rate.
- Other significant risks include subprime borrower exposure, reliance on bank and retail partners, regulatory and litigation uncertainty, fair-value estimates based on unobservable inputs, and covenant or refinancing risks. The company cited no pending legal proceedings expected to be material. It had $1.4 billion of unfunded consumer credit commitments, which it can reduce or cancel, and $11.6 million of unfunded dealer floor-plan commitments.
- Management disclosed an unresolved IRS failure-to-pay penalty matter, with $0.9 million of penalties and accrued interest subject to a request for abatement. The filing states that indemnification payments on specified third-party obligations were assessed as remote.
Key facts for investors to verify
- How COVID-19 and the end or modification of relief measures affect payment rates, delinquencies, charge-offs and deferred accounts.
- Whether fair-value assumptions and portfolio performance support the reported receivable valuations, especially the $40.7 million first-half revaluation loss.
- Availability and cost of financing, refinancing of near-term facilities, and any restrictions on cash held in VIEs or pledged as collateral.
- Sustainability of receivable growth and concentration in retail partners; the five largest retail partners represented over 55% of point-of-sale managed receivables.
- The economic and dilution effects of preferred securities, including the 16% Class B preferred return and Series A redemption and conversion provisions.