Atlanticus (NASDAQ:ATLC) reported record second-quarter profit and revenue as the consumer-credit company continued to expand its legacy businesses and integrate the Mercury acquisition.
Net income attributable to common shareholders rose 67% year over year to $47.4 million, or $2.50 per diluted share, for the quarter ended June 30. Return on average equity was 28.1%, exceeding the company’s long-term target of at least 20%.
“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,” Howard said.
Revenue, Receivables and Expenses Rise With Scale
Total operating revenue and other income increased 89% from a year earlier to $744 million. Chief Financial Officer Bill McCamey said the increase reflected Mercury’s contribution, growth in legacy general-purpose and private-label receivables, and a larger customer base.
Net margin rose 83% to $224 million. Managed receivables ended the quarter at $6.9 billion, up about 126% from the prior-year period and 2.5% sequentially. Excluding Mercury, managed receivables totaled about $3.8 billion, representing approximately 26% year-over-year growth.
Atlanticus recorded changes in fair value of negative $396 million, compared with negative $217 million in the prior-year quarter. McCamey said the increase was primarily driven by $433 million of principal and finance-charge charge-offs, compared with $212 million in associated items a year earlier, as receivables expanded from $3 billion to $6.9 billion.
Those charge-offs were partially offset by portfolio accretion, acquisition-related fair-value effects, favorable valuation-assumption updates and a $5.5 million favorable adjustment related to contingent consideration and other purchase-price adjustments.
Interest expense increased to $123 million from $54 million, reflecting debt assumed in the Mercury transaction and additional funding for growth. Operating expenses increased to $158 million from $82 million, driven by the larger employee base, higher marketing activity, servicing volumes and costs associated with a bigger platform.
McCamey said a substantial portion of the higher expenses was variable and linked to growth, while the company continued to see efficiencies in fixed platform costs as receivables and accounts scale.
Mercury Integration Ahead of Plan
Howard said the Mercury acquisition was performing better than originally modeled, with portfolio management, credit performance, originations, synergy realization, operational work and technology integration all at or ahead of plan.
The company has completed what Howard described as the third phase of portfolio repricing. He said the repricing effort has produced better-than-modeled yield realization and consumer adoption, while delinquency increases have been below expectations.
Atlanticus is also working to reduce marginal operating expenses through technology integration. Howard said the company expects that process to be completed around the middle of the first quarter of 2027.
In managing the acquired portfolio, the company has categorized accounts between those it intends to run off, those it would retain at an appropriate yield, and accounts it considers appropriately priced for long-term value creation. Howard said Atlanticus was about 90% through that process and was taking steps such as offering credit-line increases, encouraging balances and providing promotional balance-transfer opportunities.
The objective is to shift Mercury from a liquidating portfolio into a growing receivables base that produces returns on assets Atlanticus finds attractive, he said.
Credit Trends Remain Favorable, Though Rates May Rise Modestly
Delinquency rates improved sequentially in the second quarter, which McCamey attributed to stable consumer payment behavior and normal seasonal patterns. The combined principal net charge-off rate was 17.7%, with the modest sequential increase reflecting portfolio seasoning and the timing and mix of receivables growth.
Year over year, delinquency and loss rates improved due to stronger underlying portfolio performance and the lower-loss Mercury portfolio. However, management said delinquency rates could increase modestly as newer receivables season and the portfolio mix changes.
Howard said the next quarter will be the first with year-over-year comparisons that include Mercury. The company expects somewhat higher reported delinquency and charge-off rates because Mercury contributed only a partial quarter in the prior-year comparison and because faster-growing legacy portfolios are shifting the mix.
Management said it continues to observe prudent spending and stable credit behavior among consumers. Howard cited relatively unchanged unemployment, low jobless claims, real wage growth and household debt measures that remain below pre-COVID levels.
Competition Shapes Marketing Strategy
Atlanticus said competition in general-purpose credit cards remains robust, particularly in direct mail. Howard said third-party data indicated direct-mail solicitation volumes were up more than 50% year over year, pressuring response rates and raising acquisition costs in that channel.
The company remains behind its expectations for direct-mail originations entering the second half of the year, Howard said. However, digital originations are ahead of expectations as Atlanticus builds experience, underwriting models and offers tailored to that channel.
Despite higher solicitation volumes, Howard characterized the competitive environment as rational, saying the market now consists largely of experienced competitors that are responding to a stable consumer environment rather than relying on irrational pricing.
In private-label retail credit, Howard said receivables grew by roughly 27%, driven largely by ongoing expansion with the company’s five or six largest merchant partners. Purchase volume across those relationships was down year over year, but receivables continued to grow, and management expects that trend to continue even with flat purchase activity.
The healthcare business remains in an early-stage or “startup” phase, though Atlanticus is expanding product offerings and engaging with more enterprise healthcare networks and providers. The auto business remains a small, stable business that produces cash flow for reinvestment in faster-growing operations.
Atlanticus ended the quarter with $7.5 billion in total assets, nearly $700 million in total equity, and $645 million of cash and restricted cash. McCamey said the company also has portfolio cash generation, financing-facility availability and capital-market access to support growth and upcoming maturities. The company issued term asset-backed securities during the quarter at tighter spreads and more favorable terms, and achieved its first AAA ABS bond ratings.
Howard said Atlanticus expects earnings growth and returns on equity at or above its long-term 20% target, while prioritizing disciplined credit management, funding flexibility and returns over growth for its own sake.
About Atlanticus (NASDAQ:ATLC)
Atlanticus Holdings Corporation is a specialty financial services holding company that provides credit products and solutions to consumers across the United States. Through its subsidiaries, the company offers proprietary credit card programs, installment loan products and deposit accounts designed to serve customers who may have limited access to traditional credit. Atlanticus markets its offerings through a variety of channels, including direct?to?consumer online platforms, mail order, call centers and partnerships with retail and e-commerce businesses.
The company underwrites and services credit card portfolios under private-label and co-branded agreements, combining technology?enabled underwriting with tailored customer service.
