Atlanticus Holdings Corporation — Q3 2019 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2019. Atlanticus provides technology and services to consumer lenders and invests primarily in receivables. Its reportable segments are Credit and Other Investments and Auto Finance.
Financial performance and position
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Interest income | $70.6 | $42.0 | $176.2 | $115.5 |
| Interest expense | $13.1 | $9.3 | $36.3 | $26.2 |
| Provision for loan losses | $65.5 | $32.8 | $148.5 | $65.3 |
| Net income (loss) | $13.0 | $(16.2) | $23.9 | $(15.3) |
| Net income (loss) attributable to controlling interests | $13.1 | $(16.1) | $24.0 | $(15.1) |
| Diluted earnings (loss) per share | $0.83 | $(1.16) | $1.59 | $(1.09) |
- Q3 income before taxes was $16.5 million, versus a $16.0 million loss a year earlier. Nine-month pretax income was $29.8 million, versus a $20.0 million loss.
- Earnings included portfolio-related accrual reductions recorded in other income of $26.7 million in Q3 and $68.1 million year to date, plus a $5.1 million gain on repurchasing convertible notes in Q3. These unusual items materially contributed to reported profit.
- Net interest income before fees and loan-loss provision was $57.5 million in Q3 and $140.0 million year to date. After fees and loan-loss provision, net interest and related income was $12.2 million and $37.6 million, respectively.
- Net loans receivable were $644.8 million at September 30, up from $424.5 million at December 31, 2018. Gross loans were $858.5 million; the allowance was $134.6 million and deferred revenue was $83.6 million.
- Total assets were $791.9 million and total liabilities $789.7 million; total equity was only $2.3 million, compared with a $22.1 million deficit at year-end 2018.
- Unrestricted cash was $42.6 million and restricted cash $69.5 million. Combined cash and restricted cash of $112.1 million was down from $141.8 million at year-end.
- For the first nine months, operating cash flow was $70.2 million, investing cash flow was $(289.8) million and financing cash flow was $190.3 million. Investing outflows largely reflected purchases of earning assets, funded in part by borrowings.
- Notes payable at face value were $617.9 million, with $40.0 million of related-party debt; the balance sheet also showed $24.0 million of convertible notes and $4.0 million of structured-financing debt at fair value. The filing reports $657.9 million of notes payable outstanding after unamortized costs and discounts.
Changes versus comparable periods
- Growth in point-of-sale and direct-to-consumer lending drove interest income higher. Managed Credit and Other Investments receivables reached $776.1 million, up from $406.1 million a year earlier; retail and direct-to-consumer balances were $365.7 million and $403.4 million.
- Loan-loss provision rose with portfolio expansion and maturation. Management attributed the increase primarily to higher receivable volume and newer vintages, while warning that delinquencies and charge-offs could rise as those loans age.
- Q3 operating expenses increased to $32.0 million from $24.7 million, including higher servicing and marketing costs. Nine-month operating expenses rose to $90.9 million from $68.8 million.
- Managed Credit and Other Investments 30-day delinquency was 12.9%, versus 12.7% a year earlier; 90-day delinquency was 6.1%, versus 6.4%. Its combined gross charge-off ratio was 17.6%, versus 19.7%. Auto Finance 30-day delinquency was 14.5%, versus 13.3%, and its gross charge-off ratio was 2.7%, versus 0.9%.
- In August, the company repurchased $54.4 million face amount of convertible notes for $16.3 million cash, including accrued interest, and issued a $17.4 million term note due 2024. The transaction generated the $5.1 million gain.
Outlook, risks and contingencies
- Management expected continued growth in point-of-sale and direct-to-consumer receivables through 2019 and into 2020, subject to new and existing retail partnerships, marketing, and available funding. It anticipated higher interest expense as borrowing supported growth and elevated charge-offs as newer loan vintages matured. No specific earnings guidance was provided.
- Management said approximately $36 million remained accrued for customer claims relating to one portfolio and expected a significant majority to be reduced or paid by early 2020. Further accrual reductions could produce additional income; estimates depend on uncertain claims volumes and resolution costs.
- At September 30, $87.7 million of facilities were identified as potential near-term refinancing needs, including a $40.0 million related-party term loan due November 21, 2019 and two revolving facilities totaling $34.0 million due in December 2019. Management characterized refinancing risk as low, but this depends on lender access and asset performance. The company reported covenant compliance at quarter-end.
- Subsequent to quarter-end, on November 14, a subsidiary issued $50.5 million of preferred units carrying a 16% preferred return; up to six percentage points could be paid in additional units or cash at the company’s election. The units include put rights and covenants, and the subsidiary may issue up to an additional $50.5 million subject to conditions.
- Key risks include reliance on borrowing and a single bank partner for card issuance, concentration among retail partners, subprime borrower credit risk, regulatory and litigation exposure, and sensitivity of fair-value estimates and loan-loss allowances to payment, default and economic assumptions. The company noted that its infrastructure costs could continue to pressure profitability if receivables and revenue do not grow sufficiently.
- The filing reported no pending legal proceedings expected to be material and no material changes in internal control over financial reporting. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How much reported profit is repeatable after considering the $68.1 million year-to-date portfolio accrual reduction and the $5.1 million debt-repurchase gain.
- Actual claims, payments and further reserve adjustments for the portfolio liability, including the remaining approximately $36 million accrual.
- Refinancing or repayment outcomes for the $40.0 million related-party loan and near-term revolving maturities, and the terms and restrictions of the November preferred-unit financing.
- Whether growth in receivables can be funded while maintaining credit performance: monitor delinquency, charge-off, allowance and collection trends as new vintages mature.
- Whether the company’s very limited reported equity and available unrestricted cash are adequate relative to its debt, funding needs and growth plans.