Atlanticus Holdings Corporation — Q1 2018 Form 10-Q
Business context and period. This unaudited filing covers the three months ended March 31, 2018, compared with Q1 2017. Atlanticus provides technology and servicing to lenders serving financially underserved consumers and generally invests in related receivables. Its two segments are Credit and Other Investments and Auto Finance.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Interest income | $35.7 million | $26.0 million |
| Fees and related income on earning assets | $6.2 million | $2.8 million |
| Net interest, fees and related income after loan-loss provision and fair-value charge-offs | $16.0 million | $20.1 million |
| Other operating income | $1.2 million | $1.5 million |
| Operating expenses | $21.7 million | $20.3 million |
| Net loss attributable to controlling interests | $4.7 million; loss per share $0.34 | Net income $0.7 million; earnings per share $0.05 |
| Operating cash flow | Use of $10.2 million | Provided $2.4 million |
Interest income growth reflected expansion in point-of-sale and direct-to-consumer receivables. However, the prior-year quarter included a $7.9 million net recovery of charge-offs on fair-value receivables; Q1 2018 instead recorded $1.8 million of losses, a $9.6 million adverse year-over-year swing. The loan-loss provision rose to $16.0 million from $10.7 million, which management primarily attributed to growth and maturation of newer receivables, rather than specific credit deterioration. Interest expense increased to $8.2 million from $5.8 million.
At March 31, 2018, total assets were $432.9 million, including net loans and fees receivable of $315.7 million. Total liabilities were $475.9 million and total equity was negative $43.0 million. Unrestricted cash was $35.4 million and restricted cash was $31.2 million. Total notes payable included $242.1 million at face value, net, $40.0 million owed to related parties, $7.9 million of structured-financing debt at fair value, and $61.7 million of convertible senior notes. Operating cash use and investing cash use of $8.9 million were partly funded by $15.5 million of financing cash inflows.
Changes, credit trends and segment results
- Credit and Other Investments reported a pretax loss of $6.9 million, versus a $0.4 million loss in Q1 2017. Auto Finance pretax income rose to $2.3 million from $1.7 million.
- Point-of-sale and direct-to-consumer receivables increased to $322.3 million from $225.6 million year over year. Total managed receivables in Credit and Other Investments were $337.8 million, up from $247.6 million.
- For Credit and Other Investments, the total yield ratio increased to 41.0% from 34.8%; the combined gross charge-off ratio increased to 24.2% from 22.4%. At quarter-end, 30-or-more-day and 90-or-more-day delinquency rates were 12.1% and 6.5%, respectively, versus 11.5% and 5.5% a year earlier. Management cautioned that newer, higher-yielding receivables carry higher expected losses and may show further charge-off increases as they mature.
- Auto Finance managed receivables were $78.4 million, versus $72.1 million a year earlier. Its Q1 combined gross charge-off ratio was 2.1%, compared with 2.5%.
- Accumulated other comprehensive loss increased by $2.3 million, primarily reflecting foreign-currency translation. The allowance for uncollectible loans and fees receivable was $58.3 million, down from $63.0 million at year-end, while gross receivables increased.
Outlook, risks and unusual items
- Management expected managed receivables and interest income to continue growing in 2018, particularly in point-of-sale and direct-to-consumer products, subject to new retail partners, existing partner growth, marketing activity, and available funding. No specific earnings or revenue guidance was provided.
- Management expected higher interest expense as new borrowing supports receivables growth, and anticipated continued elevated credit charge-offs in newer portfolios. It emphasized containing costs while growing receivables to better absorb its fixed infrastructure costs; failure to grow revenue or control overhead could pressure consistent profitability.
- Debt maturities identified as potentially significant near-term refinancing needs totaled $145.3 million, including a $40.0 million related-party term loan due November 21, 2018. Management viewed immediate refinancing risk as low, but facilities have covenants and collateral-performance tests that could require early repayment.
- The IRS Appeals office made an April 2018 settlement offer that could reduce a $7.4 million tax assessment to $3.7 million. Atlanticus was evaluating the offer; accrued related interest and penalties were $4.3 million. Any settlement-related income and payment remained contingent on acceptance and finalization.
- NASDAQ notified the company that it did not meet the $15 million minimum public-float listing standard and gave it until August 20, 2018 to regain compliance. Failure could lead to a transfer to another NASDAQ market or delisting, affecting share liquidity and access to capital.
- Unfunded consumer credit-line commitments were $453.4 million and unfunded auto floor-plan commitments were $8.8 million. Management said it could reduce or cancel consumer lines and did not expect contingent commitments to require material payments.
- The company adopted the customer-contract revenue standard in Q1 2018 with no material financial-statement impact. It expected the future credit-loss standard, effective for it after December 15, 2019, to increase the allowance, though the amount was not yet clear.
- Management identified risks including subprime borrower performance and economic sensitivity, reliance on lenders and major retail partners, availability and cost of financing, regulation and litigation, and operational and data-security risks. It also cautioned investors about uncertainty in achieving consistent profitability.
Important facts for investors to verify
- Whether receivables growth can generate sustainable profits and operating cash flow after funding costs, credit losses, and fixed overhead.
- Credit performance of newer point-of-sale and direct-to-consumer vintages as they mature, including delinquency, charge-off, and allowance trends.
- Availability, covenant compliance, refinancing, and maturity terms for debt facilities, especially the related-party loan due in November 2018.
- Outcome and cash consequences of the IRS settlement process and resolution of the NASDAQ public-float deficiency by its deadline.
- Concentration in retail partners and issuing-bank relationships, and whether growth assumptions depend on a small number of counterparties.