Regional Management Third Quarter 2026 Earnings Call - REGIONAL MANAGEMENT CORP

Explicit Guidance:

• FY2026 Full Year: Net income growth of 6% to 9%; diluted EPS growth of 10% to 13%; portfolio growth of 5% to 7%.
• Q4 2026 Specifics: Net income expected to decline sequentially from Q3 due to seasonality and partnership ramp-up costs; portfolio growth of approx. $60M; reserve build of approx. $6M; net credit loss rate of approx. 11.5% (seasonally higher); operating expense ratio expected to rise sequentially; cost of funds expected to rise to approx. 4.7% (vs. 4.4% in Q3); effective tax rate of approx. 20%; strategic initiatives (mainly bank partnership) expected to contribute approx. $5M in net income (vs. $3M in Q3).
• Long-Term Target: Annual Return on Equity (ROE) targeting approx. 18% over time.
• Dividends: Q4 2026 dividend declared at $0.30 per share.

Business-Segment Outlook:

• Bank Partnership (Column): Expansion to 3 additional states (NC, LA, MO) in Oct; expectation that "substantially all" branch network will operate under partnership by end of 2027; pre-tax margin improvement of at least 200 basis points vs. state-licensed operations; partnership currently contributes 40% of originations (up from 28% in July), projected to drive pre-tax margin improvement and reduce adverse selection via better risk-aligned pricing.
• Auto-Secured Portfolio: Best credit quality segment; grew 25% YoY to nearly 16% of total portfolio; 30+ day delinquency rate of 2.2%.
• Digital Lending: End-to-end digital channel launched in July; currently scaling with discipline contingent on credit performance validation; expected to complement, not replace, branch network; potential for disciplined geographic expansion outside branch footprint.
• Loan Mix Shift: Continued shift toward large loans (79% of portfolio) and auto-secured products; small loan originations declining 22% YoY due to tighter underwriting in high-risk cohorts; management actively evaluating offers to rebalance mix toward higher-margin small loans where risk-adjusted returns allow.
• Technology: New proprietary origination scorecard rollout 90% complete; full completion expected in Q4 2026; new loan origination platform live in all branches in Q4 2026 to enable faster decisions and improved efficiency.

Market and Competitive Outlook:

• Credit Quality: Long-term goal to maintain net credit loss rate below 10% driven by tighter underwriting (score cutoffs raised in highest-risk digital affiliates), enhanced fraud controls, and risk-based pricing; digitally sourced volume declined 13% YoY as a direct result of tightening.
• Pricing Strategy: Implementation of risk-based pricing across all segments to align yield with borrower risk and affordability; leveraging bank partnership to overcome state usury caps and price precisely for risk in smaller loan segments.
• Consumer Trends: Overall consumer sentiment viewed as resilient; however, inflation and elevated gas prices are pressuring borrowers with low discretionary income, leading to higher delinquencies in that specific cohort; unemployment rate (~12M+ open jobs) and oil/gas prices monitored closely.
• Market Competition: Acknowledges competitive digital marketplace; differentiating factors include brand recognition, smooth digital experience, and robust fraud/auth capabilities.

Macro / Industry Outlook:

• Funding Costs: Expected to rise in Q4 2026 (approx. 4.7%) and beyond as lower-cost fixed-rate securitizations exit revolving periods and variable rate debt costs increase; current fixed-rate debt represents 74% of total debt with weighted average coupon of 4.8%.
• Regulatory/Structure: Bank partnership model allows for structural pricing advantages over state-licensed models where caps exist; management emphasizes adherence to regulation while optimizing returns.
• Inflation/Energy: Elevated gas prices and inflation identified as key drivers of credit deterioration in lower-income cohorts; monitoring impact on borrowers with thin discretionary income.

Strategic Initiatives:

• Bank Partnership Expansion: Accelerated rollout with fee income already adding ~120 basis points to revenue yield in Q3; structural changes in expense recognition (front-loaded costs) will increase near-term opex ratio but are expected to improve long-term economics.
• Leadership Appointments: Appointment of Liz Canini as Chief Credit Risk Officer (ex-Citi, PNC, HSBC) and hiring of new Chief Marketing Officer joining mid-November to strengthen execution.
• Collections Optimization: Centralization of late-stage accounts to free branch capacity for sales and early-stage delinquency management; implementation of AI-enabled tools, branded calling, and enhanced contact data to improve cure rates.
• 2027 Planning: Planning underway for FY2027; expected to feature faster portfolio growth, broader partnership footprint, continued credit improvements, and strong net income growth despite rising funding costs; full 2027 outlook to be provided in Q4 2026 earnings call.

Risks and Headwinds to Outlook:

• Credit Performance: Net credit loss rates currently 20 bps above July outlook; elevated gas prices and inflation continue to pressure lower-income borrowers; reliance on specific segments (RONs originated in 2025) for year-over-year variance.
• Expense Timing: Near-term operating expense ratio pressure due to upfront recognition of bank partnership origination costs (vs. deferred recognition in state-licensed model) and G&A timing shifts.
• Funding Cost Increases: Rising cost of funds as low-cost debt amortizes and variable rates climb, potentially compressing net interest margins if not fully passed through.
• Digital Scaling: Digital channel growth is conditional on credit performance validation; failure to meet risk-adjusted return expectations could limit scaling speed.
  External Factors: Macroeconomic environment, specifically unemployment, inflation, and energy prices, remains a key variable impacting borrower affordability and delinquency trends.

Management Tone on the Future:

• Confidence: High confidence in the quality of current originations and the strategic direction; firm commitment to disciplined execution.
• Trend: Positive trajectory on credit quality following recent tightening actions; momentum building behind bank partnership and technology investments.
• Hedges: Guidance is explicitly conditional on the "macroeconomic environment"; management notes that actual results may differ due to "various assumptions, risks, uncertainties, and other factors" (standard legal disclaimer); Q4 2026 income is expected to be lower than Q3 due to specific, known seasonal and structural headwinds.

Miscellaneous:

• Capital Return: YTD capital generation of $50M; $31M returned to shareholders via dividends and buybacks; $10M in share repurchases in Q3 (266k shares).
• Share Count: Buyback activity continues; 100% of Q4 2026 dividend secured.
• Credit Loss Rate: Q3 net credit loss rate was 10.9% (up 70 bps YoY); Q4 guidance is 11.5% (seasonal increase).
• Allowance: Allowance for credit losses increased to $230.8 million (10.4% allowance rate); reserve build of ~$6M expected in Q4.