Atlanticus Holdings Corporation 9.25% Senior Notes due 2029 2026 Q2 Earnings Call

Thank you, operator, and good afternoon, everyone. Atlanticus released results for the second quarter ended June 30th, 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. 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, advance the Mercury integration, and maintain 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. 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%. 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 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, 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 by 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. Over the quarter, I 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, provide 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.