Atlanticus Holdings Corporation 6.125% Senior Notes due 2026 (ATLCL) Q2 2026 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Atlanticus Second Quarter 2026 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Dan Mauch.

Thank you, operator, and good afternoon, everyone. Atlanticus released results for the second quarter ended June 30, 2026, this afternoon after market close. If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at investors.atlanticus.com. We have also posted an updated investor presentation. With me on today's call are Jeff Howard, President and Chief Executive Officer; and Bill McCamey, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website. Today's discussion may contain forward-looking statements that reflect the company's current views with respect to, among other things, earnings growth, returns on equity, portfolio performance, the sufficiency of available capital, delinquency and charge-off rates and future financial and operating results. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those included in the forward-looking statements. Please review our earnings release and the risk factors discussed in our SEC filings. The forward-looking statements speak only as of the date on which they are made, and except to the extent required by federal securities laws, the company disclaims any obligation to update any forward-looking statement. In addition, during this call, we may refer to certain non-GAAP financial measures. Please refer to our earnings release for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures. And with that, I'll turn the call over to Jeff.

Thanks, Dan. Good afternoon, everyone, and thank you for joining us. Let me open by saying this month marks Atlanticus' 30th anniversary. Over that history, we have funded over $53 billion in receivables, raised over $20 billion in capital, and we have weathered numerous economic cycles, regulatory changes and competitive pressures. Most importantly, we have served over 23 million consumers and played a vital role in meeting their families' daily financial needs, often at times when others would not. What gives us the greatest sense of accomplishment, however, is the culture we have built and the many colleagues with whom we have had the privilege of working over the course of our careers. Together, through both our successes and the challenges from which we have learned, we have created a culture grounded in shared achievement and an uncompromising commitment to our purpose, empowering better financial outcomes for everyday Americans. It is our team and its collective experiences built over those 30 years that makes Atlanticus an industry leader. To all of our current and former team members, thank you and happy 30th anniversary. I'll now turn to our second quarter specifics. During the quarter, we continued to drive growth in the legacy platform, advanced the Mercury integration and maintained favorable credit performance. We delivered record profits for the quarter, demonstrating the strength of One Atlanticus and the benefits of the scale we have added over the past year. The record profits were driven by record revenue, record new customers served and record total number of customers served, all while exceeding our 20% return on equity target. On the operations front, our Mercury acquisition continues to perform better than modeled. Our portfolio management activities, portfolio performance, new originations, synergy realization and operational and technical integration are all on or ahead of plan. Growth outside of Mercury remained a major driver as well. Excluding Mercury, managed receivables increased 26% from the prior year period. We continue to add customers across both legacy general purpose and private label programs and the number of active accounts increased by more than 1 million year-over-year, excluding Mercury. Credit metrics show year-over-year improvement, largely driven by the Mercury acquisition and continued consumer stability. Within our portfolios, we see credit performance in line with our models. Next quarter will be the first where we have year-over-year comparisons that include the Mercury acquisition, and we expect to see slightly higher delinquency and charge-off rates due to having only a partial quarter of Mercury performance in 2025 as well as intentional mix shifts as our legacy portfolios continue to be faster growing. Across our observable metrics, we continue to see prudent spending and stable credit behaviors from the consumers we serve. While we are mindful of above-target inflation and once again volatile gas prices, we also note that the unemployment rate remains relatively unchanged and well below historical averages. Jobless claims were recently at 50-year lows, real wages continue to grow and real wage growth for lower-income consumers since 2019 has outpaced all other segments. Additionally, household debt service ratios, credit card debt to household income and credit card debt to GDP all remain below pre-COVID levels. As we've said before, we will continue to let the actual data guide our decision-making and leverage our now 30 years of data aggregation to identify real changes in consumer behavior and then act accordingly. As we mentioned last quarter, the competitive environment for general purpose credit cards remains robust and high solicitation volumes continue to impact response rates. At the same time, our expanded product set, proprietary analytics, multiple origination channels and greater scale are enabling us to deploy capital at attractive risk-adjusted returns. As a result, we were able to add a record 790,000 new customers served in the quarter. We will, however, continue to prioritize unit economics over volume and adjust our marketing and underwriting as conditions warrant. For the quarter, net income attributable to common shareholders was $47.4 million, a 67% increase over prior year or $2.50 per diluted share. Return on average equity was 28.1%, reflecting the continued strength and earnings power of our business. In conclusion, our priorities are clear: continue to integrate and optimize the Mercury portfolio, support profitable growth across our portfolios, maintain disciplined credit management and preserve the funding flexibility needed to capitalize on attractive opportunities. Based on the performance of the business and the opportunities in front of us, we continue to expect earnings growth and returns on equity at or above our long-term targets of 20%. And as we celebrate our 30 years in business, I believe Atlanticus has never been better positioned for the future. With that, I'll turn the call over to Bill.

Brilliant. Thanks, Jeff. I'll begin with the income statement. Total operating revenue and other income was $744 million (sic) [ $744.3 million ] for the second quarter, an increase of 89% from the prior year period. The increase reflects the contribution from Mercury, continued expansion of our legacy general purpose and private label receivables and growth in the number of customers served. Net margin increased 83% year-over-year to $224 million. The larger receivable base and corresponding revenue growth more than offset the higher funding costs and the increased charge-offs and fair value impacts associated with the expanded portfolio. Changes in fair value were negative $396 million compared to negative $217 million in the prior year quarter. The increase primarily reflects $433 million in principal and finance charge-offs versus $212 million in associated items last year as managed receivables grew to $6.9 billion from $3 billion. These charge-offs were partially offset by other fair value items, including normal portfolio accretion, acquisition-related fair value impacts, favorable updates to valuation assumptions and a $5.5 million favorable adjustment to related contingent consideration and other purchase price adjustments. Portfolio trends remain favorable. Total managed receivables ended the quarter at $6.9 billion, up approximately 126% year-over-year and approximately 2.5% sequentially. Excluding Mercury, managed receivables were approximately $3.8 billion and an increase of roughly 26% from the prior year period. Delinquency rates improved sequentially during the quarter, reflecting stable consumer payment behavior and normal seasonal payment patterns. The combined principal net charge-off rate was 17.7%. The modest sequential increase from the first quarter primarily reflects normal portfolio seasoning and the timing and mix of receivable growth. Year-over-year, delinquency and loss rates improved, reflecting better underlying portfolio performance and the addition of the lower loss Mercury portfolio. Looking ahead, delinquency rates may increase modestly as newer receivables season and the portfolio mix evolves. We evaluate delinquency in the context of each vintage's overall unit economics. Our focus remains on vintage level profitability of our portfolio and disciplined risk-adjusted returns, not growth for growth's sake. Interest expense was $123 million compared with $54 million in the prior year quarter. The increase reflects the debt assumed with Mercury and additional financing used to support growth. We continue to see strong demand from funding partners and over the quarter have issued term ABS at tighter spreads and on more favorable terms. We are pleased to have achieved our first AAA ABS bond ratings. Total operating expenses were $158 million compared with $82 million a year ago. The increase reflects the combined company's larger employee base, higher marketing activity, greater servicing volumes and other costs associated with operating a substantially larger platform. Although reported expenses increased meaningfully, a significant portion of the increase is variable and directly connected to growth. We continue to see operating efficiencies in the fixed cost portions of the platform as receivables and accounts scale. Turning to the balance sheet. We ended the quarter with total assets of $7.5 billion and total equity of almost $700 million. Cash and restricted cash totaled $645 million. This capital, together with cash generated by the portfolio, availability on our financing facilities and access to the capital markets provides substantial capacity to support continued growth and address upcoming maturities. In summary, the second quarter delivered strong year-over-year earnings growth, continued organic receivables expansion, sequential improvement in key delinquency measures and further progress on the Mercury integration. We remain focused on allocating capital to opportunities that meet or exceed our return thresholds while maintaining disciplined credit and liquidity management. With that, I'll turn the call back to the operator for questions.

[Operator Instructions] And our first question comes from Vincent Caintic with BTIG.

Great to see the consistency of the great results over the past couple of quarters. First question, I wanted to go over the fundamentals or the organic part. It was great to see the year-over-year growth even if you exclude the Mercury acquisition. I was wondering if you could talk about the industry opportunity set? Like what is the opportunity to win more merchant partners? Are there a lot of potential partners out there that you could win? And then is there a lot of competition that's also pursuing that pipeline of potential partners?

Yes. Thanks, Vincent. Yes, look, we still see a lot of long-term opportunity in our retail credit platform. The merchant landscape is still, I would say, underserved or underpenetrated. Some of the largest merchants in the world still don't have second look programs. That being said, right, the pipeline and the process by which that pipeline develops into new receivables, new receivables growth, as we've talked about, takes a long time, isn't within our control and is a bit unpredictable. So we see good long-term opportunity. It's hard to really say how much of that's going to manifest itself in the next 4 quarters, but feel like given our platform positioning, the brand that we've created in the market over the course of our now 15 years being in the retail credit space that we're going to get all of those phone calls. We're going to get all of the swing opportunities, and we're going to win our fair share of those opportunities long term.

Okay. Great. And like on the competitive side, is there -- I guess, what's your view of the kind of competitive landscape for that pipeline?

Look, I would say there's probably only one, what I would consider direct competitor for us to go kind of head-to-head in the space that we compete in. That being said, we have seen the primes who sit ahead of us in most of our partnerships expand and go deeper. And we've seen some pressure from tertiaries or what I would consider some more structured lenders beneath us moving upmarket. And so we're getting competitive pressure from above and below more so than we are from our direct competitors. But again, we still feel like given our technology, our risk orientation, our ability to create custom solutions for our merchants that we're well positioned, but it is certainly a competitive landscape.

Okay. Got it. That's very helpful. So next question on the Mercury integration. If you could talk about like where we are in the process, it sounds like you're ahead of where you thought you'd be. When we look at earnings this quarter, what areas of the P&L and balance sheet are already showing kind of the run-rate synergies from the Mercury acquisition? And where could we -- where should we be still seeing additional synergy upside to numbers in the future?

Yes. Great question. Thank you. It sort of sprinkled throughout and shows in different ways, right? And some of it you won't see in synergy because it is portfolio management optimization and opportunities that we've set forth post acquisition, where we're seeing the biggest return on our time and investment. We've undertaken now the third part of our portfolio repricing. The performance of that repricing has been better than we modeled in our acquisition forecast, both in terms of realization of yield, but importantly, consumer adoption as well as any anticipated increase in delinquency have come in well below those expectations. So we've outperformed that as a primary metric. We're also in the process of realizing overhead synergies. You wouldn't have seen that because you didn't see what Mercury looked like pre-acquisition. And then on the sort of marginal operating expenses, right, we're already driving down the aggregate operating expense with more to come as our technology integration continues to run its course, all of which we expect to have completed probably mid-Q1 of next year.

Our next question comes from John Hecht with Jefferies.

I guess another question on the Mercury acquisition. I know you were repricing some portion of the portfolio. Capital One calls, it was going through a brownout with just sort of identifying customers in the discover portfolio and maybe trying to reorient them because they didn't meet the return hurdles. And so just thinking about that, have you kind of gone through where are you in that process? And what opportunities are you seeing there?

Yes. Thanks, John. Sort of referencing back to this being our 30th year in business, during a lot of that 30-year period, we were very active buyers of other portfolios. I think we bought probably 8 other what I would consider materially sized portfolios that gave us a good bit of practice and muscle building opportunity around portfolio management, repricing, how to manage these portfolios. And that experience has really led us to sort of segment the portfolio into kind of 3 broader buckets typically. One is, hey, there's not really a price that we -- like these assets. We view the risk differently than whoever we bought the asset from, we want to run those off as quickly as we can and recognize the discount that we purchased the asset on as quickly as possible. There's another part of the portfolio that at the right yield, we would love to maintain that relationship and continue to stimulate borrowings on that account. We are probably 90% of the way through that exercise. And then the other part of the portfolio, or portfolio that we'll continue to be active in engaging with, and that's the assets that we think are appropriately priced. We want to stimulate long-term value out of by continuing to have consumers use the card and repay the card responsibly. And we're undertaking more and more of those activities, which include things like credit line increases, right, stimulating balances, promo balance transfer opportunities, things you would do to manage a portfolio for long-term value creation, which will both create good positive spread assets, but help minimize the runoff of that portfolio as we increase the origination tempo and turn the Mercury asset itself from a liquidating asset into a growing receivable base at ROAs that we really like.

Okay. Great. And then I know that the core Atlanticus portfolio is showing very strong growth on its own. But maybe can you update us like on the private label business, some of the other new partnerships, the health care segment and the auto segment? Anything just that is worthy of updating us on those businesses?

Yes. I'll start with the retail credit portfolio. We obviously saw, as we said in our release, good growth in that line of business as well. I think it was sort of 27%-ish, if I recall correctly, of receivables growth on retail credit, largely due to continued growth with our top 5 or 6 merchants. We have seen good year-over-year growth across the board with those merchant relationships. The purchase volume is actually down year-over-year with those relationships in total, but the AR growth continues at a pretty good clip. So our expectation is over the course of the next years, as we forecast out that business, even at flat year-over-year purchase activity, that AR will continue to grow. So the pipeline will develop as it develops, as we've talked about in the past, we don't actively forecast asset growth or profit growth from new relationships just because of the unpredictability of that business. But with the relationships that we have and the purchase activity that we see today, we're going to continue to have good year-over-year AR growth. On the health care line of business, again, that's still, I'll call it, a start-up kind of mode business for us. We continue to expand our product offerings and engage with more and more enterprise-level health care networks and health care providers. And that's starting to accelerate. Adding products and features and new tools for our health care providers to engage with us on has proven to be a winning recipe in the market for us. We're excited about the activity that represents, but it's still a very small part of our overall portfolio and contribution to the bottom line. And you asked about the auto segment. And I would say that segment of our business remains a small piece of the overall business. As we've said before, it consistently generates a bit of cash flow that we use to reinvest in our other high-growth business, and it's -- I would categorize it as a stable asset and category for us.

[Operator Instructions] Our next question comes from David Scharf with Citizens Capital Markets.

Jeff, I'm wondering if you can provide maybe just a little more color on the general purpose competitive landscape. You noted competition remains robust in your words and solicitation rates are challenging. At the same time, you're obviously still seeing tremendous organic growth in the portfolio and credit is outperforming your expectations. Based on the unit economics you're seeing and also just based on the ROE that's trending so far above your, sort of, 20% long-term target, do you see any room for more aggressive marketing? Or do you think that at this point, there's no need to pursue any growth for growth's sake?

Thanks, David. Well, as you know, we are never of the mindset of pursuing growth for growth's sake. When we do see opportunities, we're going to lean in pretty heavily, and I think our performance is indicative of that. It's an interesting dynamic that we're seeing in the general purpose space, particularly around direct mail. The increase in direct mail solicitations at least based on the third-party data that we've aggregated, are up 50-plus percent year-over-year, which is an extraordinary amount of mail volume. And obviously, our response rates are impacted by that. Therefore, our cost to acquire an account in that channel has been impacted by that. We're still able to grow and have year-over-year growth. But in that channel, we are behind where we thought we would be heading into the second half of this year. That being said, we are ahead of where we thought we'd be on digital originations. And that's really a byproduct of us as we've said in the past, being late to the game on the digital channel and our learnings aggregating over time and us building the skill set around how to compete in that channel, how to build models specific to that channel, how to underwrite create offers specific to that channel. And I think we've made a lot of progress there, and it's indicative of the underlying growth that you see in the general purpose business being driven by more rapid rate of growth on the digital channel relative to direct mail. So does that give you the color you're looking for?

Yes. No, that's helpful. And just to be clear, is it accurate to say that notwithstanding this tremendous increase in industry-wide solicitations, you'd still characterize the competitive landscape is being very rational?

Yes. Thank you. That's a great clarification. 5 or 6 years ago, the offers that we would see in the mail, we wouldn't characterize as rational. And as the market has matured and some of the newer entrants have either gotten smarter about the space or exited the space, we're really left with 5 or 6, what I would consider legacy competitors and a couple of newer entrants who are a lot smarter today than they were 10 years ago. So we don't see as much in the terms of irrational pricing. And so you've got legacy competitors who've been in the space a long time, who are just leaning into what I think we all collectively see as a pretty good consumer environment. We're all looking at data in a very rigorous way and seeing a consumer that is stable, receptive to new offers of credit, but using credit responsibly. And I think that's led to the tempo of marketing that we're seeing as increasing competition.

Got it. Understood. And maybe just one last follow-up. I'm not sure if this is a loaded question, but your ROE is running materially above your long-term targets. And I guess it's maybe a 2-part question. One is, is there anything in just the recent quarter, couple of quarters that you would call out as maybe unique one-off unsustainable and that you -- that we should expect a reversion to sort of a 20% level soon? Or alternatively, if it remains in the high 20s, does that have any implications for capital actions?

I would say if it remains in the high 20s, we would probably do some more expanding and maybe take some of the capital actions that you referenced. The reality of where we are today is we are earning above our return thresholds. We will more likely than not be delevering a bit over the course of the forecasted period that we look ahead to and are running our business on sort of an adjusted basis as we look at that sort of future state of what our capital stack will look like. So that number will revert towards the 20% target. But we're certainly pleased to be exceeding that number, and we'll do so whenever we can. I think there was a reference to a release in some of the liability for the earn-out that would be paid as part of the Mercury acquisition. So that did contribute to, if you want to call it, over-earning in the quarter a little bit. But for the most part, it was core operating performance that led to that exceeding our return for equity return capital.

Thank you. I would now like to turn the call back over to Jeff Howard for any closing remarks.

Thank you. Look, I'll just close by saying thank you all for your interest. We're obviously very pleased with the results for this quarter. We feel like we're very, very well positioned to achieve our stated goals for the remainder of this fiscal year and for continued long-term success. We've got 30 years of operating history to leverage and looking forward to continued success over the next 30 years as well. So thank you again, and we look forward to our next report.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.