Operator: Greetings, and welcome to the Regional Management Q3 2026 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Garrett Edson. Please go ahead.
Garrett Edson: 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.
Garrett Edson: These statements are not guarantees of future performance, and therefore, you should not place undue reliance upon them. We refer all of 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 or earnings presentation and posted on our website at regionalmanagement.com. I would now like to introduce Lakbir Lamba, President and CEO of Regional Management Corp.
Lakhbir Lamba: Thanks, Garrett, and good afternoon, everyone. Joining me on the call today is Harp Rana, our Chief Financial and Administrative Officer. I will begin with a summary of our Q3 results, spend some time on credit performance and the actions we have taken to improve credit quality, and then update you on our strategic priorities and outlook before Harp walks through the financial details. In Q3, 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.
Lakhbir Lamba: 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.
Lakhbir Lamba: While elevated gas prices and inflation continue to pressure borrowers with lower discretionary income. We have taken several actions to address these drivers of credit performance. First, we have tightened underwriting where performance has lagged. 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.
Lakhbir Lamba: We will 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 is live in the majority of states today, and we will complete the rollout in the Q4. And 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.
Lakhbir Lamba: 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 have 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.
Lakhbir Lamba: 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.
Lakhbir Lamba: 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.
Lakhbir Lamba: 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% to 9%, diluted earnings per share growth of 10% to 13%, and portfolio growth of 5% to 7%. Harp will provide more detail on the Q4. Looking beyond this year, we are targeting an annual return on equity above 18% over time.
Lakhbir Lamba: 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.
Harp Rana: Thank you, Lakbir, and good afternoon, everyone. I will take you through our Q3 results in more detail and then provide additional color on our outlook for the Q4. Beginning on page 4, net income for the Q3 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 in higher-risk segments that Lakbir described.
Harp Rana: Ending net finance receivables were $2.2 billion, up $157 million or 7.6% year over year and up $62 million sequentially in line with our outlook. Large loans now represent 79% of our portfolio, compared to 74% a year ago. Net finance receivables per branch were $6.2 million, up 6% year over year, and same-store receivables grew 6.7%. On page 7, total revenue was a record $178.8 million, up 8% year over year, driven by an 8.5% increase in average net finance receivables and by fee income from our bank partnership. Other income, which includes bank partnership fee revenue, more than doubled from the prior year period to $12.3 million. Our total revenue yield was 32.9%, down 20 basis points year over year.
Harp Rana: Interest and fee yield declined 100 basis points, reflecting the continued mix shift towards larger and auto-secured loans, which carry lower yields and lower loss rates, as well as pricing changes and the impact of higher credit losses on revenue. Insurance income also declined, in part because certain insurance products are not offered on bank partnership loans. Bank partnership fee income added approximately 120 basis points to our total revenue yield, offsetting most of those declines. Sequentially, total revenue yield increased 110 basis points, driven by bank partnership fee income and seasonality. Turning to page 8, our 30-plus day delinquency rate was 7.5%, up 50 basis points both sequentially and year over year.
Harp Rana: Our net credit loss rate was 10.9%, down 130 basis points sequentially as losses seasonally declined, but up 70 basis points year over year and 20 basis points above the outlook we provided in July, driven by the factors Lockyer described. On page 9, our allowance for credit losses increased $6.8 million during the quarter to $230.8 million, primarily to support portfolio growth. Our allowance rate was 10.4%, flat sequentially and up 10 basis points year over year. Our allowance of $230.8 million compares favorably to $165.8 million of loans that were 30 or more days past due at quarter end. Moving to page 10, G&A expenses were $68.6 million, up $4.6 million year over year. Our annualized operating expense ratio was 12.6%, a 20 basis point improvement year over year, achieved despite approximately 40 basis points of upfront origination costs associated with our bank partnership.
Harp Rana: As a reminder, under our state-licensed model, we defer certain origination costs and recognize them over the life of the loan. For the bank partnership loans, we recognize those costs at origination. As the partnership scales, the difference increases our near-term operating expense ratio. It changes the timing of expense recognition, not the underlying economics of the program, which continue to be accretive to our earnings. Turning to pages 11 and 12, interest expense was $24.1 million, and our annualized cost of funds was 4.4%, stable both sequentially and year-over-year. We ended the quarter with $324 million of unused capacity, available liquidity of $104 million, and fixed rate debt representing 74% of our total debt with a weighted average coupon of 4.8%.
Harp Rana: Several of our older, lower cost securitizations have now exited their revolving period, and as they amortize, we expect our cost of funds to move higher. On page 13, during the Q3, Regional repurchased approximately 266,000 shares of our common stock at a weighted average price of $37.64 per share, or $10 million in total. On a year-to-date basis, we have generated $50 million of capital and returned $31 million to shareholders through dividends and share repurchases while growing stockholders' equity by $8 million. Our board also declared a dividend of $0.30 per share for the Q4. Finally, on page 14, let me provide additional detail on the Q4. As Lockyer noted, we continue to expect full year net income growth of 6% to 9%, diluted earnings per share growth of 10% to 13%, and portfolio growth of 5% to 7%.
Harp Rana: I also want to be clear about one change in the shape of the year. In July, we said we expected Q4 net income to exceed the Q3. We now expect Q4 net income to be lower than the Q3. That reflects seasonally higher net credit losses at a level above our prior outlook, higher upfront costs from a further acceleration of our bank partnership implementation, higher funding costs, and a shift in the timing of certain G&A expenses from the Q3 into the Q4. Turning to the specific drivers, we expect Q4 portfolio growth of approximately $60 million, supported by seasonal loan demand and a reserve build of approximately $6 million with our allowance rate flat sequentially. We expect a net credit loss rate of approximately 11.5%, reflecting a seasonal increase from the Q3 and the credit trends we have discussed.
Harp Rana: We anticipate that total revenue yield will increase sequentially, driven by continued growth in bank partnership fee income, partially offset by lower interest and fee yield and lower insurance income. We expect our operating expense ratio to rise sequentially, primarily reflecting higher bank partnership origination volume and the G&A timing shift, as well as continued investments in technology and digital capabilities. Our cost of funds will increase to approximately 4.7% as lower cost fixed rate funding continues to amortize and rates on our variable rate debt rise. We expect an effective tax rate of approximately 20%, reflecting a reduction in state tax expense in the quarter. Finally, we anticipate that our strategic initiatives, principally the bank partnership, will contribute approximately $5 million of net income in the Q4 compared to approximately $3 million in the Q3. That concludes my remarks.
Harp Rana: I'll now turn the call back over to Lockyer.
Lakhbir Lamba: Thank you, Harp.
Lakhbir Lamba: Before we open the call for questions, let me leave you with three points. First, we delivered strong net income, record quarterly revenue, and solid portfolio growth in Q3, and we expect the same for Q4. Second, we've diagnosed and addressed underperforming segments of our portfolio, and we are confident in the quality of loans we are originating today. Third, through our bank partnership and investments in talent, technology, data analytics, and AI, we are building the foundation to generate consistent returns on equity above 18% over time. Looking ahead, we're still completing our 2027 planning, but we expect it to be a strong year with faster portfolio growth, the expansion of our bank partnership to substantially all of our branches, continued progress on credit, and subject to the macroeconomic environment, strong growth in net income compared to 2026, even as funding costs rise.
Lakhbir Lamba: We'll share our full 2027 outlook on our Q4 call. Our commitment to disciplined execution is firm, and we look forward to updating you on our progress. I want to thank our team members across the company for their hard work and dedication to our customers. I also welcome Liz to our leadership team. With that, operator, please open the line for questions.
Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Again, that is star 1. Our first question will come from Zach Oster with Citizens Capital Markets.
Zach Oster: Hi, everyone. Good afternoon. Thank you for taking my question. I wanted to dig in a little bit more on the mix shift between the large loans and the small loans and see if we can get a little bit more color on what drove the specific decisioning to move around on the credit side and drive those metrics a little bit differently. Also, what the outlook is for small dollar loans going forward.
Harp Rana: Zach, it's Harp. The mix shift on large loans and small loans is very much what we've been talking about in other quarters. It is we are growing our auto-secured, so our book is moving more towards large loans. We have not abandoned small loans by any means. We will go ahead and meet demand where it is, as long as it fits our risk-adjusted box. In terms of small loans, what you're seeing there is just the mix shift of where the demand has been, which fits our risk box.
Zach Oster: Got it. Is there any within the context of the discussion on the credit decisioning, any updates on that mix shift based off of that? Or is it still just that same high level shifting to a higher share of larger loans?
Lakhbir Lamba: Yeah, Zach, this is Harpreet. I think when it comes to credit and even pricing, I think what we are basically talking about going forward is sloping our loan offers to customer risk and customer affordability, and then doing the same on the pricing side, having risk-based pricing. As we slope things to risk or products, I think the mix of the products that will evolve. To Harp's point, relatively low-risk clients that have auto security, doing an auto-secured loan at a larger amount with the appropriate LTV and all, we can price it right. We can take that risk. On the smaller end, where we are getting paid for the risk, and by the way, bank partnership helps us with that. Where we are getting paid for the risk, we will do more of that business.
Lakhbir Lamba: We're just looking at all those elements as we make the decisions on product mix as we go forward.
Zach Oster: Understood. If we could just squeeze in one more question, if you guys can just give a little bit more color on the consumer health and the consumer trends in the past 3 months.
Lakhbir Lamba: Yeah, I can take that, Zach, and then Harp, feel free to add. Consumer, I would say overall, we see still being resilient. As you can see, even from the Fed minutes today, I think consumer spending remains strong. The inflation and the energy prices are clearly impacting what we can tell, like consumers with low discretionary income or low, quote-unquote, "free income," as we call it. So where that band usually ends, so consumers who's on fixed income or doesn't have a lot of cushion, we see the delinquencies there rise a bit. But overall, I would say it's pretty resilient consumer.
Harp Rana: Yeah, Zach, the only thing that I would add to that is that, you know, we always watch the unemployment rate. We also look at the number of open jobs. They still stand at about 7 million. We are keeping an eye on oil and gas prices just because that plays into affordability. Again, we are watching the customers that have lower discretionary income to see the impact of that. Then we are making adjustments for credit boxes as we need to based upon what we are seeing there. But again, the customer remains resilient. There is plenty of loans to be done. We are just being very diligent about the loans that we do.
Zach Oster: Understood. Thank you very much.
Operator: Again, that is star 1 if you would like to ask a question. We will go next to Alexander Villalobos-Morsink with Jefferies.
Alexander Villalobos-Morsink: Hey, guys. Thank you for taking my question. Just wanted to ask if you could maybe describe a little more the 200 basis point increase on the yields with the partnership with Column Bank. Just kind of high level there. Then second question on the reserve. Just curious how we should think about that going forward based on the mix shift as you leverage the partnership as well. Thank you.
Harp Rana: I will take the question on the reserve first, and then I will come back to the one on bank partnership. In terms of the reserves, we look at product, we look at FICO, we look at delinquency status, and we look at macroeconomic factors. We look at both quantitative and qualitative factors when we set the reserve. We will continue to look at that the same way that we have always looked at it, with those metrics and how we calculate that every quarter. Now, I cannot tell you where the reserve is going to go, because where the reserve was at the 10.4%, is our best guess of lifetime losses right now based upon the data that we have. But of course, as macro changes, we will pull that into sort of the qualitative as well as into the quantitative.
Harp Rana: Now, in terms of bank partnership or large loans, our credit box is the same, for large loans under state license versus large loans under bank partnership. So you really should not see any changes in the reserve just due to that variable. The variables really are the ones that I spoke to. It is the product, it is the delinquency status, it is the FICO, it is qualitative factors that cannot be in your history. So right now, the reserve is set at our best estimate of lifetime losses. Moving over to bank partnership, we have talked a little bit about this in the last call. What you all will see is some changes in the lines of where BP, the impact on the revenue and the impact on expenses will be. On the revenue line, you are seeing this on the other income.
Harp Rana: We do get a marketing fee from Column, so you are seeing that show up in the other income line. That is a very large driver in terms of revenue. But what you will also see is an offset on the expense line. Under the state license loans, there were things that we could defer, marketing fees and some digital affiliate costs. Those we can no longer defer. They will now be booked at origination. So what you will see is higher revenue, but you will see a higher expense. And then there are other fees. There are servicing fees that are paid to us, and then we pay a platform fee. But those are smaller, and when you put all of that aside, on a loan-per-loan basis, the lift that we expect from bank partnership.
Harp Rana: Again, same loan, same place, same customer, same product, keep all of those variables constant. What you should see is a net of all of that is, we approximate that to be a 200 basis point lift.
Alexander Villalobos-Morsink: Perfect. Thank you so much.
Operator: Our next question will come from Bill Dezellem with Tieton Capital Management.
Bill Dezellem: Thank you. A group of questions here for you. First of all, let's start with the digital originations, if we could please. What do you see as the biggest opportunities and the biggest challenges, maybe in the opposite order, maybe biggest challenges and biggest opportunities with the end-to-end originations?
Lakhbir Lamba: Bill, I think with end-to-end business, we've just literally launched, and we've originated very few loans. The challenge is it's a competitive marketplace. You have a number of players in the market that are originating billions in assets every quarter. To compete in that marketplace, not only your digital experience has to be really smooth, which our capability we are building is, I'll put it against anybody in the marketplace. Your brand recognition, your pricing, your loan amount offers, they have to be rock solid. The fraud and authentication capabilities have to be rock solid, which we have built. The opportunities, the way I see it is, there are segments of the client base that we serve today and we want to serve more of in the future that is more digital by nature. Right?
Lakhbir Lamba: The propensity of some of that customer persona is to go originate the assets through a digital app or their mobile app. They don't necessarily want to go to the branches. For that persona, I see a big opportunity for growth. I also see an opportunity for us to, in a very responsible, prudent way, obviously, expand into other markets, not just be dependent on branches to be able to expand in other markets. If we can underwrite the asset right, price the asset right, and reach that consumer, then we can enter new markets. By the way, the bank partnership capability allows us to have a simpler national contract that we can leverage as we scale up. As I said in the call, we believe it's another channel that we can add to our mix. It doesn't replace the branches. It's an addition to it.
Lakhbir Lamba: The way we are thinking about it is we serve a number of customer persona types. There are a lot of customers we serve today that want that relationship in the branch, and that doesn't go away. There is a persona that wants to originate asset digitally, and we want to be able to enable that for them. We are going to do this prudently. We want to make sure we underwrite it right, watch the credit performance right before we scale it.
Bill Dezellem: That's very helpful. Thank you. I have a couple of questions relative to the small loans. You had referenced, and I'm actually making an inference here, that when you reference consumers with lower free income, that those tend to be consumers that would fall under your small loan bucket rather than the large loan bucket. Maybe that's inaccurate, and if so, you can correct me here. Those consumers with a lower free income, are you raising rates essentially to increase your ROE and making them fit your profitability metrics? Are you simply saying for now, you're going to really reduce the number of those loans and just in terms of the quantity that you originate?
Lakhbir Lamba: Let me take that, Bill, and then Harp feel free to add. The way we underwrite, Bill, small loans to your point, or underwrite large or small loans, I guess, is we have a matrix of our proprietary score that we have using the scorecards we have, and we sort of do an orthogonal of that to the discretionary income or free income the consumers have. Based on those two metrics, we decide what kind of loan size and yield we can offer. In each cell, to your point, at the end of the day, we are trying to optimize the return on capital, right? If there is an opportunity to increase price but still meet the customer's need, we obviously will look at that.
Lakhbir Lamba: There are markets where there are caps on these rates in a non-bank partnership model, so we need to obviously follow the regulation there. We also want to be careful in each cell not to price outside of the bounds in the marketplace. Otherwise, we will get adversely selected. So we are constantly talking about those cells and what we can do in terms of pricing. In terms of risk, I think it is really just about making sure we are monitoring various cohorts, we are originating by cell, and then constantly we are looking at, hey, what cells we can expand or do more of. What cells can we get a return on capital if we were to actually do lower the loan size, versus do a higher loan size and actually make money.
Lakhbir Lamba: That is the constant analyses we are doing as a team, and that is kind of what is showing up in the numbers. Harp, anything you want to add?
Harp Rana: No, I do not think there is anything I want to add to that, Bill, unless you have a follow-up question.
Bill Dezellem: Totally separate but related. Relative to the small loans, given what you are seeing and how you are managing the business, when do you anticipate that small loan origination growth will turn positive or that you will return to growth?
Lakhbir Lamba: It is hard to give an exact timing, but what I can share is we are actively talking about making sure we are balanced in terms of higher margin, small loan business and lower risk, large loan business. That balancing act has to play out. We want to meet customers' needs on both ends of the spectrum. We are actively actually talking about adding some offers to enable that. By the way, in certain states, through our bank partnership, we can price precisely for risk, and we will leverage that to be able to compete in some of those states better.
Bill Dezellem: Thank you both, and congratulations on a solid quarter.
Lakhbir Lamba: Appreciate that, Bill. Thank you.
Operator: This now concludes our question and answer session. I would like to turn the floor back over to Lakbir Lambah for closing comments.
Lakhbir Lamba: Thank you. To just close the quarter, I want to thank you all for joining us and the questions tonight. To reiterate, we delivered a strong quarter. We are acting decisively on credit. We have a clear momentum, as you can tell, behind the bank partnership and our investments in technology, data, AI, talent, as we're building the company for the long term with returns above 18%. Most of all, I want to thank our team across Regional. They show up for our customers every day, and they deliver this quarter with discipline and care. Everything we talked about tonight is possible only because of them. We look forward to sharing our 2027 outlook on our next call. Thank you, and have a great evening.
Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.
