Regional Management Corp. (RM) Earnings

Management highlights

### Overall Q2 Performance - Q2 2026 results came in below management's original portfolio growth outlook, with a modestly higher net credit loss rate partially driven by slower growth. Management took decisive action to tighten underwriting in high-risk geographic and channel segments and strengthened fraud detection capabilities, with early promising results from these changes. - Management remains cautiously optimistic about consumer health, but continues to monitor impacts from high inflation and elevated gas prices, and maintains disciplined underwriting through the current macro environment. ### Bank Partnership Program with Column - The bank partnership program is a core long-term strategic initiative that enables uniform operations across states, faster new market entry, a wider addressable market, and improved unit economics as it scales. Implementation has been accelerated ahead of internal plan. - Full implementation for branch originations is complete in Texas (Regional Management's largest market), with expansion to additional states planned to begin later in 2026. Cumulative originations under the program exceed $65 million, and current run-rate originations represent roughly 28% of total originations, a share that is expected to grow materially through 2026 and 2027. - The program is expected to improve pre-tax margin by at least 200 basis points on like-for-like loans compared to state-licensed originations. Early credit performance is strong: 1+ day delinquency for early originations was 160 basis points better than comparable state-licensed Texas originations. Nearly all states are expected to operate under the bank partnership model by the end of 2027. ### Digital and Technology Investments - In early July 2026, the company launched an end-to-end digital lending origination capability, allowing customers to complete the full application-to-funding process online in minutes, complementing the existing core branch network and improving competitiveness with fintech lenders. The platform includes robust fraud authentication and machine learning underwriting, and will be scaled gradually only after meeting risk-adjusted return hurdles. - Rollout of a new branch loan origination platform and an enhanced machine learning-based credit model is being accelerated, improving operating efficiency and credit decisioning. Artificial intelligence is being deployed across collections and customer service to improve both customer experience and operational efficiency. ### Growth and Capital Return - The company entered the state of Florida (its 20th operating state) in Q2 2026, creating meaningful long-term growth opportunity. - In Q2, the company repurchased 136,000 common shares at a weighted average price of $36.68 per share, and the board declared a $0.30 per share third quarter dividend. Year-to-date, the company generated $27 million in capital and returned $18 million to shareholders via dividends and repurchases. - 80% of total debt is fixed rate, with a weighted average coupon of 4.8%, and the company maintains a strong balance sheet with $442 million of unused capacity and $128 million in available liquidity.

Guidance

- Management revised full year 2026 guidance downward from prior levels, now expecting: full year diluted EPS growth of 10% to 13%, full year net income growth of 6% to 9%, and total portfolio growth of 5% to 7%. The downward revision reflects deliberate choices to prioritize a stronger risk-adjusted foundation over unprofitable near-term growth. - Management expects sequentially stronger quarterly earnings in the third and fourth quarters of 2026, with fourth quarter net income expected to be higher than third quarter net income, driven by growing receivables exiting Q2 that will support higher back half revenue. - For Q3 2026: management expects stronger portfolio growth than Q2 aligned with seasonal demand, higher sequential total revenue yield from seasonal trends and bank partnership benefits, a seasonal sequential increase in delinquencies with improving net credit losses, a sequential increase in the operating expense ratio driven by accounting changes for the bank partnership model, and funding costs ticking up to 4.5% as lower-cost legacy fixed rate debt matures. - Net credit losses are expected to improve across the second half of 2026, with benefits from strategic initiatives building through the back half of the year. All current strategic initiative contributions are already embedded in the full year 2026 guidance, with an expected $5 million contribution to Q4 2026 net income. Material margin and net income growth from the bank partnership program is expected to begin in 2027. - The guidance reset reflects near-term pressure from ongoing strategic changes, but positions the company to reaccelerate profitable growth and improve returns exiting 2026, with strong results expected in 2027 and beyond.

Segment performance

For Q2 2026, Regional Management recorded total revenue of $168 million, a 6.7% year-over-year increase driven by higher average net finance receivables. Net income was $8.2 million, with diluted earnings per share (EPS) of 85 cents. Year-to-date net income was up 14% compared to the prior year period, and return on equity increased 80 basis points year-over-year. Total originations for the quarter were $504 million, down 1.3% year-over-year: - Large loan originations: grew over 10% year-over-year, led by strong performance in the auto-secured segment. The auto-secured portfolio grew 32% year-over-year, now representing 15% of the total portfolio, with a 30+ day delinquency rate of just 2%. - Small loan originations: declined year-over-year, following deliberate underwriting tightening in higher-risk segments and a more competitive new customer acquisition environment, which disproportionately impacted small loan new borrower acquisition. Ending net finance receivables were $2.1 billion, up 9.6% year-over-year, driven by large loan and auto-secured portfolio growth. The 30+ day delinquency rate for the overall portfolio was 7%, down 20 basis points sequentially but up 40 basis points year-over-year. The net credit loss rate was 12.2%, up 30 basis points year-over-year and modestly above management forecast. The annualized operating expense ratio was 12.4%, an 80 basis point improvement year-over-year. Interest expense was $23 million for the quarter, with an annualized cost of funds of 4.4% of average net finance receivables, up 20 basis points year-over-year.

Risks & headwinds

- Intensifying competitive pressure in consumer lending, with fintech lenders capturing growing share of originations by focusing on end-to-end digital origination, which has weakened response rates for Regional Management's traditional direct mail channels and pressured new borrower acquisition, particularly for small loans. - Elevated inflation and high gas prices are creating marginal pressure on consumer cash flow, especially for customers with lower free income, creating some upside risk to net credit loss rates. - Fraud and first-party credit abuse in digital and affiliate origination channels has negatively impacted credit performance in some segments, requiring tightened underwriting and additional investment in fraud controls that temporarily slowed near-term originations. - Accounting treatment for the bank partnership model accelerates recognition of labor and digital marketing expenses compared to state-licensed originations, which will create near-term upward pressure on reported operating expense ratios, even as long-term revenue benefits outweigh this impact. - Funding costs are expected to rise gradually as lower-cost fixed rate debt issued in 2021 matures and is replaced with new debt at current higher market rates.

Analyst Q&A

• Q: What are the separate contributions of macro conditions, competition, and strategic initiatives to Q2's lower-than-expected growth, and what are trends in July? /

  A: Lower growth stemmed from two main factors: lower-than-expected response rates in direct mail campaigns, and deliberate tightening of underwriting in underperforming segments paired with new fraud controls that temporarily constrained originations. Strategic initiatives including the Column bank partnership did not cause the Q2 growth miss. July performance is tracking in line with the revised full year guidance. Management notes that growing fintech origination share has created competitive pressure, but new fraud controls will let the company safely expand originations to creditworthy borrowers over time.

• Q: When will the Column bank partnership generate meaningful contribution to results, and how much benefit is already in 2026 guidance? /

  A: All current expected benefit from the partnership is already embedded in the 2026 guidance, with a projected $5 million contribution to Q4 2026 net income. One to two additional states will be converted to the partnership model before the end of 2026, with full conversion of all states expected to complete in 2027. The partnership is expected to deliver a 200 basis point pre-tax margin lift on like-for-like loans, with material net income growth from the program coming in 2027 and beyond.

• Q: Was underwriting tightening driven by competition or macro consumer weakness, and why is small loan growth weaker than large loan growth? /

  A: Tightening was primarily driven by the discovery of higher fraud and first-party abuse in specific segments, not broad macro consumer weakness, though elevated gas prices do have a small marginal impact on low free income consumers. Large loan growth (led by auto-secured loans) remains strong, while small loan volumes are hit harder by competitive pressure on new borrower acquisition. Management is only willing to originate loans that meet its risk-adjusted return hurdles, and will expand small loan originations once strategic initiatives are fully in place.

• Q: What early benefits has the Column partnership delivered, why is delinquency lower for partnership loans, and how will the partnership change long-term growth? /

  A: Early results for income and margin track to the expected 200 basis point pre-tax lift on like-for-like loans, confirming the model works as planned. The slightly lower early delinquency rate is an observed early trend, not a structural difference, as credit criteria are identical between partnership and state-licensed loans. The partnership unlocks long-term growth by allowing the company to price risk for customer segments it previously could not serve, enabling faster entry to new markets, and creating opportunities to expand the product portfolio over time. It also creates a feeder pipeline of new small loan borrowers that can be upgraded to larger loans over time, driving long-term portfolio growth.