REGIONAL MANAGEMENT CORP 2026 Q3 Earnings Call

Please go ahead. Thank you, and good afternoon.

By now, everyone should have access to our earnings announcement and supplemental presentation, which were released prior to this call and may be found on our website at regionalmanagement.com. Before we begin our formal remarks, I will direct you to page 2 of our supplemental presentation, which contains important disclosures concerning forward-looking statements and the use of non-GAAP financial measures. Part of our discussion today may include forward-looking statements which are based on management's current expectations, estimates, and projections about the company's future financial performance and business prospects. These forward-looking statements speak only as of today and are subject to various assumptions, risks, uncertainties, and other factors that are difficult to predict and that could cause actual results to differ materially from those expressed or implied in the forward-looking statements.

These statements are not guarantees of future performance, and therefore you should not place undue reliance upon them. We refer all you to our press release presentation and recent filings with the SEC for a more detailed discussion of our forward-looking statements and the risks and uncertainties that could impact our future operating results and financial condition. Also, our discussion today may include references to certain non-GAAP measures. Reconciliation of these measures to the most comparable GAAP measures can be found within our earnings announcement, our earnings presentation, and posted on our website at regionalmanagement.com. I would now like to introduce Lakhbir Lamba, President and CEO of Regional Management Corp.

Thanks, Garrett, and good afternoon, everyone. Joining me on the call today is Harp Rana, our Chief Financial and Administrative Officer. I'll begin with a summary of our third quarter results, spend some time on credit performance and the actions we've taken to improve credit quality, and then update you on our strategic priorities and outlook before Harp walks through the financial details. In the third quarter, we delivered strong net income, record quarterly revenue, 8% year-over-year portfolio growth, and 16% annualized return on equity. We grew net finance receivables by $62 million during the quarter and ended the quarter with a portfolio of $2.2 billion. We generated net income of $15.1 million, or $1.61 of diluted earnings per share, up 5% and 13% year-over-year respectively. We produced quarterly revenue of $179 million, up 8% year-over-year, driven by portfolio growth and fee income from our bank partnership.

We continued to manage expenses carefully, improving our operating expense ratio by 20 basis points year-over-year to 12.6%, even as we absorbed the upfront costs of an accelerated bank partnership rollout. Our auto secured portfolio, our best credit quality product, grew 25% year-over-year, now represents nearly 16% of our total portfolio and carries a 30-plus day delinquency rate of just 2.2%. Our net credit loss rate improved 130 basis points sequentially to 10.9% in the quarter, 20 basis points above our outlook, and 70 basis points above the prior year period. Our 30-plus day delinquency rate of 7.5% was up 50 basis points both sequentially and year-over-year. The drivers of the year-over-year variances are concentrated in specific segments of the portfolio, primarily loans originated in 2025. In addition, slower portfolio growth than last year has also lifted our loss rate.

While elevated gas prices and inflation continue to pressure borrowers with lower discretionary income. We've taken several actions to address these drivers of credit performance. First, we've tightened underwriting where performance has lacked. The largest driver is our digital affiliate channel. We exited or tightened score cutoffs in our highest-risk digital affiliate segments and eliminated other high-risk cohorts in our portfolio, which we believe accounted for roughly half of the 70 basis points year-over-year increase in net credit losses. As a result of these tightening actions, digitally sourced originations volume declined 13% year-over-year. Second, in June, we began implementing enhanced fraud controls across all of our channels. These include third-party fraud scores, step-up identity verification, and a dedicated central fraud operations team. Early first payment default reads on our July originations are better than a year ago in every channel, reflecting both the new controls and our earlier credit tightening.

We'll have a clearer view as these loans mature. Third, we are upgrading our credit decisioning with a new proprietary origination scorecard. The model delivers stronger rank ordering of risk and sharper separation between performing and non-performing accounts with the greatest lift among new borrowers and in our digital channel. It's live in the majority of states today, and we will complete the rollout in the fourth quarter. Finally, earlier today, we announced the appointment of Liz Canini as the Chief Credit Risk Officer. Liz brings more than 25 years of credit risk and consumer lending experience at Citi, PNC, and HSBC, and we are excited to have her on the team. I also want to thank Manish Parmar for his several contributions over the past six years.

The actions we are taking are already shaping the quality of what we are originating today, and we remain committed to our long-term goal of a net credit loss rate below 10%. Turning to our strategic priorities, the most important continues to be our bank partnership with Column. Since our last call, we've extended the program to three additional states, North Carolina, Louisiana, and Missouri. So far in October, just over 40% of total originations have come through the partnership, up from roughly 28% on a run rate basis when we spoke in July. We continue to expect substantially all of our branch network to be operating under the partnership by the end of 2027. The partnership is already contributing meaningfully to our results through fee income, as you saw in our record revenue this quarter.

It added roughly 120 basis points to total revenue yield in the quarter, and we are projecting that pre-tax margin will improve by at least 200 basis points under the program compared to similar loans originated in our state-licensed operations. Early credit performance on partnership loans has been broadly comparable to our state-licensed originations, though it is still early. Just as important, partnership enables pricing that is better aligned to risk, which should reduce adverse selection and support volume, credit performance, and risk-adjusted margins over time. We are scaling the partnership with discipline and will continue to expand it as results confirm its economics. We are also completing the rollout of our new front-end loan origination platform, which will be live in all of our branches this quarter.

The platform will enable significantly faster credit decisions than our legacy system, has been well-received by our branch teams, and gives us a scalable foundation to improve sales, the customer experience, and operating efficiency as we continue to enhance it and our origination process over time. We have also strengthened collections by centralizing late-stage accounts, enabling our branches to focus on sales and early-stage delinquency. In addition, we have enabled enhanced contact data, branded calling, and AI-enabled tools to improve customer engagement, cure rates, and overall collection efficiency. In addition, we launched an end-to-end digital lending in July and are scaling the channel with discipline, expanding only as credit performance validates our risk-adjusted return expectations. Over time, we expect digital originations to complement our branch network and become an important contributor to growth.

Looking further ahead, our bank partnership and our investments in technology, data, and analytics also creates opportunities for disciplined geographic expansion and, over time, a broader set of products for our customers. Finally, we are building the team to execute the strategy. In addition to Liz, we are adding leadership talent in the marketing and human resources functions, including a new chief marketing officer with deep financial services and digital marketing experience, who will join us in mid-November. Turning to our outlook, our expectations for the full year remain unchanged from last quarter. We continue to expect full-year net income growth of 6%-9%, diluted earnings per share growth of 10%-13%, and portfolio growth of 5%-7%. Harp will provide more detail on the fourth quarter. Looking beyond this year, we are targeting an annual return on equity above 18% over time.

We see three primary levers to improve returns. The first is higher yields from our bank partnership through higher fee income. The second is a lower net credit loss rate, driven in part by the credit actions I described today, continued improvements in underwriting, and enhanced risk-based pricing. The third is greater scale and efficiency from portfolio growth and our investments in technology, data, and AI. Each of those levers is already in motion and will contribute to strong growth on our bottom line in 2027. We will provide more detail with the 2027 outlook on our next earnings call early next year. With that, I will turn the call over to Harp.

Thank you, Lakhbir, and good afternoon, everyone. I will take you through our third quarter results in more detail and then provide additional color on our outlook for the fourth quarter. Beginning on page 4, net income for the third quarter was $15.1 million, or $1.61 of diluted earnings per share, compared to $14.4 million, or $1.42 per share in the prior year period. Revenue grew $13.3 million year-over-year, which largely offset higher net credit losses, G&A expense, and interest expense. A smaller reserve build than a year ago, reflecting slower portfolio growth accounted for the balance of the year-over-year increase in pre-tax income. Turning to pages 5 and 6, total originations were $530 million, up 5.3% sequentially and 1.5% year-over-year. Large loan originations grew 12% year-over-year, while small loan originations declined 22%, reflecting the tighter underwriting and higher risk segments that Lakhbir described.