Atlanticus Holdings Corp (ATLC) Q3 2026 Earnings Call Transcript

Good afternoon, and welcome, everyone, to the Atlanticus third quarter 2026 earnings call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. At this time, I would like to turn the conference over to Dan Muck, Investor Relations. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Atlantikist's release results for the third quarter ended September 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.atlantikist.com. We have also posted an updated investor presentation. With me and today's call are Jeff Howard, President and Chief Executive Officer, and Bill McKamey, 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, underwriting, delinquency and charge operates, the use of proceeds from the sales of the car auto finance operations and the Mercury intellectual property, the rebranding of the Mercury program, 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 accept to the extent required by federal securities laws. The company disclaims any obligation to update any forward-looking statements. In addition, during the 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. We are pleased to report another very strong quarter reflecting the strength of our core business and continued progress in executing our strategy. Diluted EPS was $4.87, including $1.87 from one-time items associated with two transactions completed during the quarter, which we will address later in our comments. Excluding these one-time items, adjusted diluted EPS was $3, and adjusted return on average equity was 30%. Well-exceeding our 20% return goals and reaffirming the earnings power of our platform. During the quarter, we achieved record performance across almost every operating metric. We achieved records for managed receivables, account originations on behalf of our bank partners, customers served, purchase activity, revenue, and most importantly, profitability. This success was derived from sustained organic growth, the ongoing and successful integration of the Mercury acquisition, and the continued resiliency of the customers we serve. Our sustained organic growth is being driven by our third consecutive quarter of record new account originations on behalf of our bank partners. While I talk about growth, it's important to reiterate that a tight focus on unit-level profitability remains our guide for account origination levels. We lean into growth as we see attractive returns. We have over 40 models in production at any given time and are continuously updating and refining those models for better outcomes within the subsegments across our business. Growth is a byproduct of that process. Accordingly, the increases in originations are not the result of risk expansion. Our growth stems from ongoing investment in newer marketing channels and model development within those channels, along with continued growth with strategic clients in our retail credit business. The Mercury acquisition continues to deliver better-than-modeled performance on both the back book and new origination volumes. The Mercury acquisition was a significant contributor to both revenue and earnings growth, compounded by the fact that we only owned the business for approximately half of September in the prior year period. As for the consumer, we are still mindful of inflation levels being above target, bottle of gas prices, and ongoing macroeconomic uncertainty. The headlines regarding the state of the consumer are not new, but our data continues to show that the consumers we serve remain resilient and rational, making appropriate changes to spending while exhibiting consistent payment behaviors. Much of the negative headwinds appear to be offset by a very stable employment market. That being said, we will continue to monitor metrics across numerous acquisition, portfolio, customer service, and third-party data attributes and lean heavily on our dynamic infrastructure to quickly enact empirically-derived changes in underwriting when necessary. Now let me briefly cover the one-time items this quarter. First, we completed the sale of our car auto finance operations to an unaffiliated buyer for approximately $71.2 million in total consideration, which resulted in a gain of approximately $20 million. While CAR had been a contributor to our business for over 20 years, the sale represented an opportunity to concentrate our capital and management resources on the consumer credit products where we see the strongest opportunities for long-term value creation. Second, we completed the sale of the Mercury wordmark and related intellectual property for $27.5 million in cash. The transaction did not include any credit card receivables associated with the Mercury-branded program. Under the agreement, we have the right to use the brand for marketing purposes for 12 months and for servicing for an additional five years, giving us ample time for the necessary rebranding. We view these transactions as a continued refinement of our strategic focus, and the proceeds will be invested in our higher-return, higher-growth lines of business. We are pleased with another record-breaking quarter for Atlanticus and a period of important strategic progress. We are making deliberate decisions to direct capital towards opportunities with the greatest growth and return potential. This reflects our long-term focus on building the capabilities and reach to become the preferred financial partner for everyday Americans. We're proud of the progress our team has made and are committed to carrying that work forward. Now I'll turn it over to Bill to walk through our financial results in more detail. Bill?

Fantastic. Thanks, Jeff. It really was a great quarter. Let me start by addressing a few reporting notes. First, on CAR auto finance, CAR comprised our entire auto finance segment, so that will be reported as discontinued operations going forward. Second, because we acquired Mercury near the end of Q3 last year, the year-over-year comparisons vary by metric. Period and measures, such as managed receivables, reflect the full Mercury portfolio at both quarter ends. Quarter-long measures, such as revenue and charge-offs, reflect Mercury's results only for the portion of the prior year quarter that we owned it. Now, let me turn to the income statement. Total operating revenue and other income was $776 million, up 60% from a year ago. The increase reflected growth in both general purpose and private label receivables, along with a $205 million contribution from Mercury. Net margin reached $238 million, up 80% versus the prior year period, as higher revenue offset increased funding costs and fair value. Changes in fair value of loans were negative $418 million compared with negative $277 million a year ago. Changes in fair value of loans were partially offset by favorable assumption changes, improvements in customers served, continued favorable performance of the Mercury portfolio, as well as an $8 million gain related to a reduction in the fair value of contingent consideration. Net income attributable to common shareholders was $93 million, or $4.87 per share, up 300% from last year's third quarter. Adjusted diluted EPS, excluding the transactions-related gains Jeff described earlier, was $3. At quarter end, managed receivables totaled $7.1 billion, up 8% year-over-year, and 3.4% sequentially. Growth was broad-based across both private label and general purpose receivables. We'll continue to grow where we meet or exceed our return thresholds, relying on our 30 years of data aggregation to drive decisions. Credit remains stable quarter-on-quarter. The combined principal net charge-off ratio declined to 17.3% from 17.7% last quarter. We expect delinquency ratios to increase marginally as our bank partners' offerings makeshift to a broader range of consumers. These receivables carry higher yields, which we expect to result in a more profitable asset overall. Interest expense was $118 million compared with $75 million in the prior quarter. The increase reflected the larger receivable base and the financing used to support it. Total operating expenses were $162 million compared with $103 million. Higher servicing and marketing activity along with the larger operating platform contributed to the increase. We continue to see customer service CPAs lower sequentially as we integrate the Mercury portfolio and realize benefits of scale on the combined platform. As well, revenue growth outpaced expense growth during the quarter, and our operating expense ratio improved modestly as the platform continues to scale. Turning to the balance sheet, total assets were $7.8 billion, and total equity was $808 million. Cash and restricted cash totaled $736 million. Along with cash generated by the portfolio availability under our financing facilities and access to the capital markets, these resources support our operating and financing needs for future growth. We appreciate the continued engagement from our investors and the increased interest in Atlanticus. Our focus remains on executing our strategy and managing the business with our long-term perspective on unit profitability and earnings growth. With that, I'll turn the call back over to the operator.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. We'll go first to Randy Benner at Texas Capital.

Hey, yeah, thanks for that. That was a good quarter for sure. So I'll ask a few on the top line and kind of revenue and production if I can. I guess the first is, um, And I apologize if I missed if you broke this out, but did you break out kind of organic growth ex-mercury, or is that getting harder to do? How would you kind of burst out growth of kind of, you know, Atlanticus before mercury and then with mercury?

Yeah, we did not break that out, but, you know, happy to share it. And I'm giving you an estimation. It's probably in the high teens, low 20% growth rate, top line without mercury.

So, near 20X Mercury. Yeah, okay. Well, that's high. So, I guess, is it growth partnerships? I mean, I feel like in previous calls, there's been, you know, competition is a concern. There's always, you know, this kind of perpetual worry about the consumer, which seemingly is delayed here. But what, you know, What is it? Are you having less competition? Are you just winning because your analytics are better? Are there particular partners that are, you know, delivering more? Just kind of love to understand how that velocity of your organic growth is so strong.

Yeah, no, great question, and thank you for asking. I would say it really boils down to two things. One, you know, on a retail credit business, we just continue to grow with some of our strategic partners on a year-over-year basis. And again, that's top line and AR growth. And it's just due to us continuing to deliver for those partners to find ways to add more value to those partners. And they lean on us for more of their volume over time. So, you know, we're winning share there in that market. On the general purpose side, it's a continuation of what we've talked about in previous quarters. We are seeing, you know, I would say heightened competition on the direct mail channel. Although it's rational, there's just more volume in that channel than we experienced 18 months ago. But we continue to invest in our digital marketing channels, and we've talked about us continuing to get smarter on those channels, to add more funnels across those channels, to build models that are specific to those channels, get better results, therefore, and then continue to invest more in marketing dollars in those channels. So that's what's really driving the growth on our GPCC side.

All right, that's helpful. I'll drop back in the queue. Thank you.

And as a reminder, if you would like to ask a question, please press star 1. We'll go next to David Scharf at Citizens Capital Market.

All right. Good afternoon. Thanks for taking my questions, and congrats on the results. Jeff, maybe one follow-up a little bit on the last question. You know, you had been noting... As you said, heightened competition in direct mail for quite a while. I think last quarter you may have said that overall CAC was up about 5%. As you think about just the trends in direct mail as well as just the marketing channel mix, Do you feel like kind of CAC has reached a high watermark as we think about kind of modeling overall OPEX as well as just marketing efficiencies near term?

Yeah, look, some of it comes down to mix shift across our lines of business as well. You know, we are spending more on marketing because we do see good, stable credit performance, and some of the channels that we're leaning into do have higher acquisition costs. And again, with GPCC, that's our general purpose credit card portfolio, outgrowing the other parts of our business which have lower acquisition costs, I would say, you know, it's more likely than not that our CPAs at the portfolio-wide level We'll continue to go up.

Got it. That's helpful. And I guess as a follow-up, it may be a related question. You know, the box has not changed at all. You did reference a comment about kind of expect a little bit higher delinquencies in lieu of kind of a, I think in your words, a broader range of consumers. Can you just expand on that a little bit?

Yeah, look, we're constantly tweaking our models and looking for opportunities where we see at or above target-level returns. Our digital channel is a great example of that. We're seeing a broader swath of the consumer in those channels. We're able to, at very attractive returns, bring in what I would consider a broader range of consumers at prices and returns that we find attractive. They tend to have, on average, higher delinquencies and higher yields and therefore higher returns, and that's just where we're seeing the investment opportunity right now.

Got it. Understood. Thank you.

And that concludes our Q&A session. I will now turn the conference back over to Jeff Howard for closing remarks.

Yeah, thank you all for your participation. In closing, we continue to see really strong performance across our core general purpose and retail credit lines of business. And we obviously remain very pleased with the performance of our Mercury acquisition. Our team continues to deliver, and this quarter delivered record-breaking results, which we're also very, very proud of. You know, this reflects our continued progress and our commitment to expand access to financial services for everyday Americans. And we're proud to now serve and help almost 7 million of those Americans meet their day-to-day financial needs. It's our belief that, you know, we at Atlanticus are a better position now than at any point in our 30-year history, and we look forward to building on that progress in the quarters ahead. So we appreciate your support and look forward to our next call.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.