Atlanticus Holdings Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Atlanticus provides technology and servicing to consumer lenders and invests in receivables, primarily serving financially underserved borrowers. Its reportable segments are Credit and Other Investments and Auto Finance. Amounts below are in millions unless otherwise stated.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Comparable period / December 31, 2016 |
|---|---|---|
| Total interest income | $26.0 | $18.2 |
| Net interest income before fees and loan-loss provision | $20.1 | $13.6 |
| Fees and related income on earning assets | $2.8 | $7.9 |
| Provision for losses on loans at net realizable value | $10.7 | $4.7 |
| Income before taxes | $1.3 | $4.8 |
| Net income attributable to controlling interests | $0.7; $0.05 per basic and diluted share | $4.6; $0.33 per basic and diluted share |
| Operating cash flow | $2.4 | $8.8 |
| Unrestricted cash | $78.3 | $76.1 |
| Total assets | $371.1 | $362.5 |
| Net loans and fees receivable | $246.6 | $239.4 |
| Total liabilities / total equity | $364.1 / $7.0 | $356.8 / $5.8 |
Interest expense was $5.8 million, versus $4.6 million. Cash used in investing activities was $3.7 million, compared with $0.6 million provided; financing activities provided $3.5 million, compared with $11.3 million used. Restricted cash was $16.2 million at quarter-end.
At March 31, gross loans and fees receivable were $297.8 million and the allowance was $39.5 million. Total debt reflected on the balance sheet, including convertible notes and related-party and structured-financing debt, was approximately $256.9 million. The $40.0 million related-party term loan bears 9% interest and matures November 22, 2017. The filing reports $122.1 million of facilities with identified near-term refinancing needs; management characterized imminent refinancing risk as low.
Changes versus Q1 2016
- Net income attributable to controlling interests fell to $0.7 million from $4.6 million. The company cited lower fee and related income, higher loan-loss provision, and lower equity-method income; Q1 2016 also benefited from a $5.0 million reversal of a U.K. VAT-related reserve.
- Interest income increased $7.7 million, primarily as point-of-sale and direct-to-consumer receivables grew from $115.0 million to $225.2 million. Historical credit-card portfolios continued to liquidate.
- Loan-loss provision increased to $10.7 million from $4.7 million, which management attributed mainly to portfolio growth and seasoning, rather than principally to deterioration in credit quality.
- Fees and related income declined to $2.8 million from $7.9 million, including a $4.1 million reduction in rental revenue as rent-to-own operations wound down. Management said it did not expect meaningful rental revenue in 2017.
- Credit and Other Investments reported a pretax loss of $0.4 million, versus pretax income of $3.3 million; Auto Finance pretax income rose to $1.7 million from $1.4 million.
- Credit and Other Investments managed receivables grew to $253.3 million from $155.4 million year over year. Its combined gross charge-off ratio increased to 23.6% from 18.2%, and adjusted charge-off ratio to 20.1% from 14.1%. Auto Finance managed receivables were $75.3 million; its gross charge-off ratio was 2.4% versus 2.7%.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance was provided. Management expected further growth in point-of-sale and direct-to-consumer receivables during 2017, subject to retail-partner additions, originations, and available funding. It expected additional debt financing and quarterly interest expense above prior-period levels.
- Management anticipated higher period-over-period charge-off rates in coming quarters as newer personal-loan and point-of-sale vintages season, while historical credit-card portfolios continue to run off. It also expected increased marketing and other growth-related costs and warned that the business may face pressure to achieve consistent profitability if revenue growth does not cover infrastructure costs.
- On February 9, 2017, Atlanticus established a receivables-backed funding program with capacity of up to $90 million; $10 million was outstanding at quarter-end. The facility matures in 2022 and includes covenants and collateral-performance tests.
- The company had a $7.3 million unpaid IRS assessment, plus $3.6 million of accrued interest and penalties. It filed a protest after IRS examination staff denied claims that would eliminate the assessment; an IRS lien had been filed. The company planned to litigate if the appeals process was not resolved satisfactorily.
- Unfunded consumer credit commitments were $281.0 million and Auto Finance floor-plan commitments were $8.5 million. The company said it could reduce or cancel consumer credit lines and did not expect these commitments to result in material payments.
- Credit and Other Investments managed receivables had 10.9% at least 30 days past due and 5.2% at least 90 days past due. Management noted that newer, higher-yielding portfolios carry higher expected delinquency and loss rates and that first-quarter payment trends can be seasonally favorable.
- Fair-value estimates rely on significant unobservable assumptions, including expected yields, payment rates, credit losses, and discount rates. The company expected adoption of the expected-credit-loss standard, effective for it after December 15, 2019, to increase its loan-loss allowance; the amount was not yet clear.
- Management identified financing availability, subprime borrower credit performance, regulation, retail-partner and bank relationships, competition, and data-security and operational disruptions as material risks. It reported no legal proceedings expected to be material and no material change in internal control over financial reporting.
Investor verification points
- Verify whether receivables growth translates into sustainable earnings and operating cash flow after losses, funding costs, and infrastructure expenses.
- Track charge-offs, delinquency trends, vintage seasoning, and allowance adequacy as newer portfolios mature.
- Confirm renewal or refinancing of the identified debt facilities, particularly the $40 million related-party term loan due November 2017 and the $34.8 million facility due October 2017.
- Follow the IRS appeal, lien, and potential litigation regarding the $7.3 million assessment and accrued interest and penalties.
- Assess dependence on a concentrated group of retail partners, funding and issuing-bank relationships, and the assumptions underlying Level 3 fair values.