Atlanticus Holdings Corporation — Q1 2019 10-Q
Reporting period: Three months ended March 31, 2019; comparison is the three months ended March 31, 2018 unless otherwise noted. Amounts are in U.S. dollars; financial statement figures are in millions unless stated.
Business context
Atlanticus provides technology and related services supporting consumer credit for financially underserved borrowers. It reports two segments: Credit and Other Investments, including point-of-sale and direct-to-consumer receivables, and Auto Finance. The company generally invests in receivables originated by lending partners and relies substantially on debt facilities to fund those investments.
Financial results and liquidity
- Income: Interest income was $50.5 million, up from $35.7 million. Net interest income before fees and loan-loss provision was $39.3 million, versus $27.6 million. Fees and related income on earning assets rose to $11.3 million from $6.2 million.
- Credit costs and earnings: Provision for losses on loans, interest and fees receivable increased to $34.6 million from $16.0 million. Net income was $5.7 million, compared with a $4.7 million net loss; income attributable to controlling interests was $5.7 million, or $0.40 per basic share ($0.39 diluted), versus a $4.7 million loss, or $0.34 per share.
- Unusual income item: Other income included a $15.5 million benefit from reducing an accrual related to customer claims on a portfolio. The company still reported approximately $92 million accrued for the liability at quarter-end.
- Segments: Credit and Other Investments reported $4.2 million pretax income, versus a $6.9 million loss. Auto Finance reported $1.7 million, versus $2.3 million.
- Receivables and credit quality: Net loans, interest and fees receivable were $435.3 million, up from $424.5 million at year-end; gross receivables were $562.5 million. Allowance for uncollectible amounts increased to $85.3 million from $79.2 million. Credit and Other Investments managed receivables reached $480.9 million, up from $337.8 million a year earlier; 30-plus-day delinquencies were 13.7% versus 12.1%, and the gross charge-off ratio was 23.6% versus 24.2%.
- Cash flow: Operating activities provided $30.0 million, compared with $10.2 million used in Q1 2018; investing activities used $23.2 million and financing activities provided $17.6 million. Management attributed part of the operating cash-flow improvement to a roughly $26 million reclassification from unrestricted cash and to increased collections as receivables grew. Cash and restricted cash totaled $166.2 million at quarter-end, including $101.0 million unrestricted and $65.2 million restricted.
- Debt and funding: At March 31, notes payable were $408.2 million at face value, with $40.0 million owed to related parties, $4.8 million of structured-financing notes carried at fair value, and $62.3 million of convertible senior notes. The company reported $97.0 million of additional committed but undrawn bank capacity and said it was in compliance with debt covenants. It identified $217.3 million of facilities with maturities through November 2019 and 2020 as potential near-term refinancing needs, and characterized refinancing risk as low under then-current conditions.
- Equity and leases: Total shareholders’ deficit was $16.0 million, improved from $22.1 million at year-end. Adoption of the lease standard brought $17.0 million of operating lease right-of-use assets and $27.7 million of lease liabilities onto the balance sheet at quarter-end.
Material changes, outlook and risks
- Growth in point-of-sale and direct-to-consumer receivables drove higher interest income, fees, funding needs, marketing and servicing costs. Those receivables increased from $322.3 million a year earlier to $472.3 million.
- Management expected receivables and related interest income to continue growing in 2019, subject to retail-partner additions, existing-partner growth, direct-to-consumer solicitation timing and funding availability. It anticipated higher interest expense as borrowing supported further acquisitions.
- Management expected elevated charge-offs in coming quarters as newer, higher-yielding portfolios mature, higher-risk products are tested and recent vintages reach peak charge-off periods. It also noted that growth can temporarily mute delinquency and loss ratios, and that delinquencies can rise as portfolios mature.
- The company said it was focused on containing costs while expanding receivables, but warned that Credit and Other Investments cash inflows covered direct variable costs and only part of allocated overhead. Failure to control overhead or grow revenue sufficiently could pressure consistent profitability.
- The remaining customer-claims accrual was expected to be mostly reduced or paid by December 31, 2019; any further reduction could produce future earnings. The assumptions underlying the accrual are subjective and depend on claims volume and resolution costs.
- Key risks include subprime borrower credit performance and economic sensitivity; dependence on financing facilities and a single issuing-bank relationship for certain products; concentration among retail partners; regulatory, litigation and consumer-protection exposure; and the uncertainty of fair-value estimates and credit-loss assumptions. Unfunded consumer credit lines totaled $717.0 million, and auto floor-plan commitments were $8.0 million; the company said it could reduce or cancel consumer lines.
- No numerical earnings or revenue guidance was provided. Management’s outlook statements are forward-looking and subject to the risks described in the filing.
Important facts for investors to verify
- Whether the $15.5 million accrual release is nonrecurring and whether the approximately $92 million remaining customer-claims liability is adequate.
- How portfolio seasoning affects charge-offs, delinquency rates and loan-loss provisions as newer receivables mature.
- Whether receivables growth can generate sufficient cash earnings to cover overhead, funding costs and higher servicing and marketing expenses.
- Availability, pricing and renewal of funding facilities, particularly facilities maturing in 2019 and 2020, and compliance with their collateral and performance covenants.
- Concentration in major retail partners and dependence on the bank partner that originates certain credit products.
- Progress in resolving the remaining IRS interest and penalty liabilities, including the effort to abate approximately $0.9 million of penalties.