Atlanticus Holdings Corporation — Q2 2021 Form 10-Q
Business and period: Unaudited results for the three and six months ended June 30, 2021, compared with the same 2020 periods. Atlanticus provides technology and services supporting consumer credit, invests in receivables originated by bank partners, and operates an auto-finance business. Its reportable segments are Credit and Other Investments and Auto Finance. Dollar amounts below are in millions unless otherwise noted.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $182.1 | $135.7 | $326.8 | $276.3 |
| Net margin, as reported | $98.5 | $65.3 | $199.3 | $109.7 |
| Net income | $36.8 | $23.1 | $80.9 | $28.5 |
| Net income attributable to common shareholders | $32.1 | $18.4 | $71.5 | $21.1 |
| Diluted EPS | $1.56 | $0.93 | $3.47 | $1.12 |
Q2 revenue increased 34% year over year; six-month revenue increased 18%. Q2 net income margin was approximately 20.2% of revenue versus 17.0% a year earlier; six-month margin was approximately 24.7% versus 10.3%. The reported “net margin” line is a distinct income-statement measure, not net income margin.
- Revenue drivers: Consumer loan revenue was $122.7 million in Q2, up from $100.1 million; fees and related income were $49.6 million, up from $32.4 million. Management cited growth in point-of-sale and direct-to-consumer receivables, as well as fair-value accounting that recognizes certain annual and merchant fees earlier.
- Credit costs and fair value: The provision for losses on amortized-cost receivables was $11.1 million in Q2 versus $32.5 million. However, the fair-value change line was a loss of $58.8 million versus $25.7 million a year earlier, offsetting part of the improvement. Fair-value marks depend on estimates of collections, losses, payment rates, servicing costs and discount rates and can create earnings volatility.
- Expenses and taxes: Q2 operating expenses rose to $46.1 million from $37.2 million, with increases in servicing and marketing among other categories. Income tax expense was $10.1 million; the Q2 effective tax rate was 21.6%, versus 17.7%.
- Cash flow (six months): Operating activities provided $124.5 million, investing activities used $159.8 million, and financing activities provided $110.1 million. Cash, cash equivalents and restricted cash ended at $333.8 million.
- Balance sheet at June 30: Unrestricted cash was $265.9 million; restricted cash was $67.9 million. Net loans and receivables were $1.066 billion; total assets were $1.420 billion and total equity was $216.4 million. Notes payable, net, were $966.6 million, with an additional $2.6 million of structured-financing notes carried at fair value and $9.2 million of convertible senior notes. The filing reports covenant compliance at quarter-end.
Material changes and operating trends
- Point-of-sale and direct-to-consumer managed receivables increased to $1.244 billion at June 30, 2021, from $895.1 million a year earlier. Total managed receivables were $1.248 billion.
- Q2 annualized combined net charge-off ratio for Credit and Other Investments was 15.2%, down from 26.9% in Q2 2020, but up from 13.6% in Q1 2021. Managed receivables 30 or more days past due were 10.1%, versus 10.7% a year earlier; 90 or more days past due were 4.5%, versus 6.9%.
- The allowance for uncollectible amortized-cost receivables declined to $95.2 million from $125.0 million at year-end 2020. Management attributed lower provision expense partly to the fair-value accounting mix and stronger customer payments, including effects of government stimulus.
- In June, the company issued $300 million of asset-backed securities secured by credit-card receivables, with a weighted-average fixed interest rate of 4.24%. It also issued 2.8 million Series B preferred shares for $70 million gross proceeds. After quarter-end, it issued a further 388,533 Series B shares for $9.7 million gross proceeds.
- The company repurchased $21.1 million face amount of convertible notes during the first half for $28.9 million cash, recording a $13.3 million loss. After quarter-end, $11.8 million principal was elected for conversion and the remaining $0.9 million was redeemed on July 19, 2021.
Outlook, risks and contingencies
- Management expected continued 2021 growth in point-of-sale and direct-to-consumer receivables and related interest and fees, subject to consumer demand, retail partner additions, capital availability and COVID-19 effects. It anticipated additional debt financing and higher quarterly interest expense as receivables grow. The filing provides no quantified earnings or revenue guidance.
- Management expected credit performance to remain affected by pandemic relief and stimulus. It warned that delinquencies and charge-offs could rise as newer receivables mature and stimulus effects recede; Q2 managed charge-offs had already increased sequentially. The duration and effects of COVID-19 remain uncertain.
- Funding and concentration are key risks: the business depends substantially on borrowing facilities and receivable collections; five retail partners accounted for over 65% of point-of-sale managed receivables. The company identified $36.6 million of facilities with maturities within 24 months and characterized near-term refinancing risk as low.
- Other material risks include consumer-credit losses, Level 3 fair-value estimation, regulatory and “true lender” challenges, dependence on a bank partner, competition, system-provider conversion and cybersecurity. The company reported $2.0 billion of unfunded consumer credit lines and $11.6 million of unfunded auto floor-plan commitments; it can reduce or cancel consumer lines. It reported no litigation expected to be material and assessed specified indemnification payments as remote.
- The Series B preferred stock carries a 7.625% cumulative, non-compounding dividend and ranks ahead of common stock but behind debt and Series A preferred stock. Preferred dividends and accretion reduce income available to common shareholders.
Most important facts for investors to verify
- Whether growth in receivables can continue and be funded on acceptable terms, particularly given retail-partner concentration and reliance on financing facilities.
- Whether credit quality holds up as stimulus and payment deferrals diminish; monitor sequential delinquencies, charge-offs, recoveries and reserve adequacy.
- How fair-value assumptions and marks affect reported earnings, especially as fair-value receivables expand.
- The ongoing cash cost and potential dilution from Series B dividends, preferred securities and conversion of the remaining convertible notes.
- Whether management’s expectations for receivable growth, charge-offs and refinancing remain consistent with subsequent filings and results.