Regional Management Third Quarter 2026 Earnings Call - REGIONAL MANAGEMENT CORP

Financial Performance:

• Generated record quarterly revenue of $179 million (up 8% YoY), driven by portfolio growth and $12.3 million in bank partnership fee income.
• Reported net income of $15.1 million ($1.61 diluted EPS), representing a 5% and 13% increase YoY, respectively.
• Net finance receivables grew 8% YoY to $2.2 billion, with an annualized return on equity (ROE) of 16%.
• Net credit loss rate improved sequentially to 10.9% (down 130 bps) but remained 70 bps above the prior year; 30+ day delinquency rate rose to 7.5% (+50 bps).
• Operating expense ratio improved 20 bps YoY to 12.6%, despite absorbing upfront costs from accelerated bank partnership origination.
• Allowance for credit losses increased $6.8 million to $230.8 million, with an allowance rate of 10.4%.
• Cost of funds remained stable at 4.4% with 74% of debt in fixed-rate instruments; unused capacity stood at $324 million.

Guidance and Future Outlook:

• Full-year 2026 outlook unchanged: Net income growth of 6-9%, diluted EPS growth of 10-13%, and portfolio growth of 5-7%.
• Q4 2026 outlook revised: Net income expected to be lower than Q3 due to seasonally higher credit losses (~11.5% net loss rate), higher upfront partnership costs, rising funding costs (projected to 4.7%), and timing shifts in G&A expenses.
• Long-term strategic target is an annualized ROE of approximately 18%, driven by higher yields from the bank partnership, lower net credit losses, and operational scale.
• 2027 outlook to be detailed in Q4 earnings call, anticipating faster portfolio growth and near-complete branch transition to the bank partnership.

Business Segments and Product Lines:

• Auto-secured portfolio (best credit quality) grew 25% YoY, now comprising nearly 16% of the total portfolio with a 30+ day delinquency rate of just 2.2%.
• Total originations reached $530 million (+1.5% YoY); large loans grew 12% YoY while small loans declined 22% due to tightened underwriting in high-risk segments.
• Bank partnership with Column Bank expanded to three new states (NC, LA, MO); partnership originations represented >40% of total volume in October (up from 28% in July), adding ~120 bps to revenue yield.
• Rolled out new front-end loan origination platform to all branches for faster credit decisions; launched end-to-end digital lending channel in July, currently scaling with discipline.
• Appointed Liz Canini as Chief Credit Risk Officer and hiring a new Chief Marketing Officer to strengthen leadership.

Market and Competitive Landscape:

• Market trends show resilient consumer spending overall, though inflation and elevated gas prices are pressuring borrowers with low discretionary income.
• Bank partnership model enables risk-based pricing better aligned with borrower risk, reducing adverse selection and improving pre-tax margins by ~200 bps compared to state-licensed loans.
• Digital lending faces a competitive marketplace; the company emphasizes superior fraud controls and digital experience to compete, with digital channels intended to complement rather than replace branches.
• Competition in the small-dollar loan segment is intense; the company is actively re-evaluating offer mixes and pricing to maintain profitability in lower-credit cohorts.

Risks and Challenges:

• Credit quality pressures driven by higher-risk digital affiliate cohorts and specific loan segments originated in 2025 contributed to the YoY increase in net credit losses.
• Macroeconomic headwinds, including inflation and energy prices, continue to erode discretionary income for lower-income borrowers, impacting delinquency rates.
• Accounting treatment for the bank partnership shifts origination costs from deferral to immediate expensing, causing a temporary increase in the operating expense ratio.
• Funding costs are expected to rise as lower-cost securitizations exit revolving periods and variable rate debt rates increase.

Management Commentary and Tone:

• Management tone was confident yet cautious, emphasizing "disciplined execution" and decisive actions to address credit issues.
• CEO Lakbir Lamba highlighted strong momentum in the bank partnership and credit quality improvements, projecting a path to >18% ROE.
• CFO Harp Rana provided transparent detail on the accounting impacts of the partnership and the specific drivers behind the revised Q4 outlook.
• Confidence was expressed in the new credit scorecard and fraud controls, with early data on July originations showing improvement.

Analyst Questions and Answers:

• Zach Oster (Citizens Capital Markets): Asked about mix shift between large/small loans and consumer health. Management clarified that the shift to large loans reflects demand fit within risk boxes, not abandoning small loans; consumer resilience remains but lower-income segments face pressure from inflation.
• Alexander Villalobos (Jefferies): Inquired about the 200 bps margin uplift from the partnership and reserve outlook. Management explained the uplift comes from fee income offsetting higher immediate origination costs; reserves are set based on product, FICO, and delinquency status, unchanged by the partnership model itself.
• Bill DeZellum (Trian Capital Management): Asked about digital lending challenges/opportunities and small loan growth. Management identified digital as an opportunity for specific customer personas and new markets, while noting the need to prudently underwrite before scaling; small loan growth timing is uncertain as the company balances high-margin small loans with lower-risk large loans.

Other Key Points:

• Digital originations declined 13% YoY following the exit/tightening of high-risk affiliate score cutoffs, which accounted for roughly half of the YoY credit loss increase.
• Share repurchases of ~$10 million in Q3 (266k shares) and dividends declared at $0.30/share for Q4.
• The company expects the bank partnership to contribute ~$5 million to net income in Q4, up from $3 million in Q3.
• Full 2027 outlook will be released during the Q4 earnings call, promising details on accelerated portfolio growth and credit performance.