Prepared remarks
Thank you. Greetings. Welcome to the Regional Management Second Quarter 2026 Earnings Call. Please note this conference is being recorded. I will now turn the conference over to Garrett Edson from Investor Relations. Thank you. You may begin.
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 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 Lakhbir Lamba, President and CEO of Regional Management Corp.
Thanks, Garrett, and good afternoon, everyone. Joining me on the call today is Harpreet Rana, our Chief Financial and Administrative Officer. I'll begin with a summary of our second quarter results and an update on our strategic priorities. And then Harpreet will walk through the financial details. In the second quarter, our franchise continued to perform well. We generated strong revenue, grew our higher quality auto-secured portfolio, improved our operating efficiency, and continued to return capital to shareholders. For the quarter we generated net income of $8.2 million or $0.85 of diluted earnings per share. On a year-to-date basis, net income and diluted EPS are up 14% and 17%, respectively, compared to the first half of last year. We delivered total revenue in the second quarter of $168 million, up 7% year-over-year, driven by continued portfolio growth. We also maintained strong operating leverage, improving our operating expense ratio by 80 basis points year-over-year to 12.4% while continuing to invest in the business. As we continue to grow our auto-secured product portfolio, which increased 32% year-over-year, it now represents 15% of our total portfolio and carries a 30-plus day delinquency rate of just 2%. At the same time, we operated in a more competitive environment for customer acquisition, and we made deliberate decisions to tighten underwriting in certain higher-risk segments that did not meet our risk-adjusted return hurdles. Portfolio growth came in below our outlook for the quarter, and our net credit loss rate was modestly above our forecast, driven in part by lighter portfolio growth. As I'll describe, we are acting decisively to improve both our growth trajectory and credit performance. In particular, we've identified and selectively tightened credit in certain geographic and channel-specific segments, and we've significantly strengthened our fraud detection and prevention capabilities, principally in our direct mail and digital affiliate channels. The early results from these enhanced controls are very promising, and we expect them to support improving credit performance. Consistent with what we discussed on prior calls, we remain committed to our long-term goal of a net credit loss rate below 10%. We are cautiously optimistic about the health of the consumer. We continue to monitor the potential impact of higher inflation, including continued elevated gas prices, and we remain disciplined and conservative in our underwriting as we navigate the current macro environment. We are also making meaningful progress across our strategic priorities as we invest to compete and win. First and foremost, we continue to expand our bank partnership program with Column. This program is an important enabler of our long-term strategy, providing greater product and operational uniformity across states, faster entry into new markets, expanded relationships with our customers, a wider addressable market, and attractive unit economics as this program scales. We've accelerated implementation of the program ahead of our internal plan. We've now fully implemented the program for branch originations in Texas, our largest market, and we expect to expand to additional states beginning later this year. We are encouraged by the early results, including origination trends, yield impact, and credit performance. Originations exceed $65 million under the program since its launch. On a run rate basis, originations under the program now represent roughly 28% of total originations. And we expect that ratio to increase materially as we transition additional products and states to the program later this year and next year. We are projecting that pre-tax margin will improve by at least 200 basis points under the program compared to like-for-like loans originated in our state-licensed operations. This lift in margin reflects an improvement in total revenue yield driven by marketing and servicing fees that are paid to us by the bank, and higher interest and fee income earned on originated loans, offset in part by program costs paid to the bank and a decline in insurance revenue from the elimination of personal property and non-file insurance. Early credit performance is also promising. As of the end of the second quarter, the 1-plus-day delinquency rate on the portfolio of bank partnership loans that we originated in March and April was 160 basis points better than the comparable portfolio of state-licensed loans originated in Texas over the same time period. We will continue to scale the partnership methodically as we evaluate results and refine the strategy. We expect nearly all states in our network to be operating under the bank partnership model by the end of 2027. We believe this will be transformative to the operations and returns of our business, and a key enabler for net income growth in 2027 and beyond. Second, and building directly on that foundation, in early July, we launched an end-to-end digital lending origination capability. This is a distinct step beyond our historical digitally sourced model in which we generate leads that are underwritten and closed in our branches. With this new capability, customers can complete the entire process online from application through funding in minutes. This technology positions us to compete more effectively with Fintechs and lean further into our omnichannel operating model. To be clear, our branch network remains at the core of our operations and our relationships with customers, and the digital channel complements it. Given the importance of credit performance in this channel, we're building it on strong fraud authentication and machine learning-based underwriting, and we will be deliberate and methodical in scaling it, expanding only as we confirm that it clears a risk-adjusted return hurdle. Third, we are accelerating the rollout of our new branch loan origination platform, and alongside it we're introducing an enhanced machine learning-based origination credit model. This is a continuation of the technology and analytics investments we've discussed previously. And moving them forward more quickly strengthens both our operating efficiency and credit decision. Fourth, we've made significant progress in enabling artificial intelligence across our operations, including in collections and customer service, which we expect to enhance both the customer experience and our operational effectiveness and efficiency. Finally, we continue to invest in growth. We are diversifying origination channels and our marketing capabilities to strengthen customer acquisition, and we're expanding into attractive new markets. In the second quarter, we entered the state of Florida, our 20th state, which represents a meaningful long-term growth opportunity. Turning to our outlook, we are revising our full-year guidance. We now expect full-year diluted earnings per share growth of 10% to 13% and portfolio growth of 5% to 7%. Harpreet will provide additional detail on the quarterly cadence, but we continue to expect sequentially stronger quarterly earnings in the third and fourth quarters. This reset on near-term guidance reflects a deliberate choice. We'd rather build from an even stronger foundation and grow profitably than pursue growth that doesn't earn an appropriate return. The actions we're taking across credit, technology, distribution, and our bank partnership while putting modest pressure on second half results, position us to re-accelerate profitable growth, improve our returns as we exit 2026, and deliver very strong results in 2027 and beyond for our shareholders. I am confident we are building from a position of strength and making the right decisions for the long-term health of the business. With that, I will turn the call over to Harpreet.
Thank you, Lakhbir, and good afternoon, everyone. I'll now take you through our second quarter results in more detail. On Page 4, we present our second quarter financial highlights. Net income was $8.2 million, and diluted earnings per share were $0.85. Our results reflect continued year-over-year portfolio and revenue growth and strong operating leverage offset by a higher provision for credit losses tied to portfolio growth and a net credit loss rate that was modestly above our forecast. Year-to-date through June, net income was up $2.4 million or 14% compared to the prior year period and return on equity was up 80 basis points year-over-year. As Lakhbir discussed, we've updated our full-year outlook, and I'll cover the details when we get to Page 14. Moving to Pages 5 and 6, total originations were $504 million, down 1.3% year-over-year. Large loan originations grew more than 10%, while small loan volumes declined as we tightened underwriting in higher-risk business and navigated a more competitive environment for new customer acquisition. Ending net finance receivables were $2.1 billion, up 9.6% year-over-year, driven by our large loan and auto-secured products and by the branches we've opened over the past year. Net finance receivables per branch increased to approximately $6 million, up 8% year-over-year. On a sequential basis, receivables grew $44 million as we returned to growth following the normal first quarter tax season liquidation, while remaining deliberate in our originations given the competitive backdrop and elevated gas prices. Looking ahead, we expect third quarter portfolio growth to be stronger than the second quarter in line with seasonally higher demand in the second half of the year. On Page 7, total revenue for the second quarter was $168 million, an increase of 6.7% year-over-year, driven by higher average net finance receivables. Our total revenue yield was 31.8%, down 110 basis points year-over-year, primarily reflecting the continued mix shift toward larger, lower-yielding loans. Total revenue yield was up 30 basis points sequentially, consistent with seasonality and the impact of our bank partnership, offset in part by lower insurance revenue yield. As we move into the third quarter, we expect total revenue yield to be higher on a sequential basis due to seasonal trends and the benefits of our bank partnership. Turning to Page 8, our 30-plus day delinquency rate was 7.0%, a 20 basis point improvement sequentially and a 40 basis point increase year-over-year. Our net credit loss rate was 12.2%, up 30 basis points year-over-year and modestly above our forecast. After adjusting for approximately 20 basis points of impact from slower portfolio growth, our net credit loss rate was in line with our expectations. Looking ahead to the third quarter, we expect delinquencies to rise on a seasonal basis while net credit losses improve. We continue to monitor macroeconomic conditions closely, including the impact of inflation and elevated gas prices on our customers. On Page 9, we increased our allowance for credit losses by $4.5 million during the quarter to support portfolio growth. Our allowance rate was 10.4%, steady sequentially and up 10 basis points from the prior year period, reflecting updates from macroeconomic assumptions. Subject to economic and credit conditions, we expect our allowance rate to hold roughly flat on a sequential basis in the third quarter. Flipping to Page 10, our annualized operating expense ratio was 12.4%, an improvement of 80 basis points year-over-year, even as we continue to invest in technology, digital capabilities, and growth. Total general and administrative expenses increased $2.5 million year-over-year, and the modest sequential uptick in our annualized operating expense ratio from 12.2% in the first quarter was consistent with our expectations. For the third quarter, we expect our operating expense ratio to increase sequentially. Under our state-licensed operations, we're able to defer certain labor and digital marketing expenses, which are recognized over the life of the state-licensed loans that we originate. For loans originated under the bank partnership model we'll instead recognize those labor and digital marketing expenses immediately at origination. While this change in accounting treatment will accelerate the timing of G&A expense recognition, the revenue benefits of the bank partnership program will far outweigh the impact on our operating expenses. Turning to Pages 11 and 12, interest expense was $23 million in the second quarter, or 4.4% of average net finance receivables on an annualized basis, with our cost of funds up 20 basis points year-over-year. We continue to maintain a strong balance sheet with $442 million of unused capacity, available liquidity of $128 million, diversified and staggered funding sources, and fixed-rate debt representing 80% of total debt at a weighted average coupon of 4.8%. We expect our funding costs to tick up to 4.5% in the third quarter due to the maturation of lower cost fixed rate funding. On Page 13, we continue to generate capital and deploy it in a disciplined manner. During the second quarter, we repurchased approximately 136,000 shares of our common stock at a weighted average price of $36.68 per share, and our Board declared a $0.30 per share dividend for the third quarter. On a year-to-date basis, we generated approximately $27 million of capital and returned approximately $18 million to shareholders through dividends and share repurchases. Finally, on Page 14, let me provide you some additional detail on how we expect the balance of the year to progress. As Lakhbir described, we now expect full-year diluted earnings per share growth in the range of 10% to 13% and portfolio growth in the range of 5% to 7%. For net income, we anticipate full-year growth of 6% to 9%. Within that outlook, we expect net income in the third and fourth quarters to be meaningfully higher than in the second quarter and for fourth quarter net income to be sequentially higher than third quarter net income. The primary driver is the expected growth in receivables as we exit the second quarter, which will support higher revenues across the back half of the year. Provision for credit losses will increase as we've reserved for that growth at levels comparable to the second quarter, allowing revenue growth to translate into stronger earnings. From a credit standpoint, we expect net credit losses to improve in the third and fourth quarters, and we expect the benefits of our strategic initiatives, including our bank partnership, to build as we move through the second half. That concludes my remarks. I'll now turn the call back over to Lakhbir.
Thank you, Harpreet. Before we open the call for questions, I want to leave you with a few thoughts. The second quarter did not meet our growth expectations, and we've adjusted our full-year outlook accordingly. We are choosing to prioritize a stronger operating foundation, one that we believe will support more sustainable growth, stronger returns, and greater value creation for shareholders. At the same time, we are moving with purpose and agility on the initiatives that will drive our next phase of growth. Advancing our bank partnership, leaning into our omnichannel operating model, accelerating our investments in technology and analytics, deploying AI across our operations, and expanding into attractive new markets. I am confident that the disciplined decisions we are making today will position us to increase returns in this business and re-accelerate profitable growth, with tangible progress on both fronts becoming increasingly evident over the next 12 months. Later this year, we plan to share a longer-term framework that will outline how our bank partnership will be transformative to the returns of our business and will begin to show up in our 2027 results in a material way. I want to thank our team across the company for their continued dedication to our clients and their hard work this quarter. We are building from a strong foundation, and I'm confident in our strategy, our people, and our ability to create long-term value for our shareholders. With that, operator, please open the line for questions.
Questions and answers
One moment while we poll for questions. Our first question is from Vincent Caintic with BTIG.
First question: you talked a lot about the loan growth trends and what drove the miss for the second quarter and the lower guide for the rest of the year. Could you separate out the different drivers or factors that have been causing this? Specifically, how much of this was macro-driven or consumer-driven, and are you still seeing those trends in July or have they eased? How much was competitive pressures and what are you seeing there — has that eased or accelerated? I don't think that Column Bank would yet have any impact, but you have several initiatives. I'm wondering how some of the initiatives could cause hiccups in the near term as things ramp up and systems are put in place. Also, please comment on where things stand today at the end of July.
Vincent, good afternoon. I think the factors are twofold. First, response rates in our direct mail campaigns were lower than expected, which impacted origination volumes. On competitive pressures, industry data shows the share of originations driven by Fintechs has been increasing in the personal lending business. Some consumers prefer to originate the asset digitally end-to-end and not come to the branch, and that has impacted response rates. Second, as I mentioned last quarter, we've been reviewing various segments of the business by geography, channel, product, and risk segment to identify where margins have compressed and returns have not met expectations. In certain cells we saw returns that did not clear our risk-adjusted return hurdles, and we tightened underwriting accordingly. In parallel, we enhanced fraud controls and implemented strong prevention and detection capabilities over the last four months, particularly in direct mail and digital affiliate channels. We wanted to get the returns before we unwind some of those tightening actions. Third, on your question about initiatives like Column, they are not creating the hiccups. When launching a new loan origination system or a bank partnership in branches, there is change management, but that is not, to our knowledge, causing the near-term issues. In summary, it is primarily the deliberate underwriting actions we took to protect returns and the lower response rates in our direct mail campaigns. Harpreet can provide commentary on July trends.
Yes. In terms of July, Vincent, we're tracking to the guidance we have given for both the third and fourth quarters. We lowered our guidance on ending net receivables growth as a result of the competitive pressures we are seeing in new borrower acquisition. However, many of our strategic initiatives will help address that. On digital end-to-end origination, we are seeing competitive pressure from Fintechs, but we are positioning ourselves to compete effectively in that channel. The fraud controls Lakhbir mentioned will help in the digital channel, our mail channel, and our branch origination channel. We're pleased with the early results from those tools. Once we are able to eliminate bad actors, we can open up policy for legitimate customers who want loans. We expect it will take a little time to fully implement and tune these initiatives, and that is why we've lowered guidance for the year. But these initiatives are embedded in our guidance and we believe they will help us compete and return to the origination levels we expected earlier in the year.
Okay, great. That's helpful. Following up on initiatives like Column and other efforts to generate origination volume, how much of that is contributing to third and fourth quarter guidance versus how much is coming in 2027 or beyond? I assume it takes time, but how much lift are you getting this year?
If you look at Page 14 of the supplement, the strategic initiatives are embedded in the earnings drivers slide. These initiatives are included in our guidance. They contribute about $2.5 million to the overall guidance for 6% to 9% year-over-year net income growth, 5% to 7% ENR growth, and 10% to 13% EPS growth. We expect about $5 million of contribution in the fourth quarter of 2026 from those initiatives. So the growth guidance of approximately $60 million per quarter already embeds these initiatives. For 2027 and beyond, Lakhbir mentioned we accelerated the bank partnership for branch originations in Texas and will likely do one or two more states before year-end. We expect to fully convert all states and branches through 2027, and that will deliver a meaningful lift. We currently estimate the unit economics lift between the bank partnership and state-licensed loans to be about 200 basis points in pre-tax margin on like-for-like loans.
Okay, great. That's super helpful. Thank you.
Our next question is from Zach Oster with Citizens Capital Markets.
I wanted to dig into the macro side and see if the change in competitive dynamics is the driver of the tightening in the different segments you mentioned, or if that was more macro trends, or if there's any weakness in customer health. This seems to contrast with a more benign competitive environment other lenders have spoken about this season, so can you give more color?
When it comes to the segments we tightened, I wouldn't characterize that as purely macro-driven. The competitive environment matters: personal loan originations in the U.S. are growing, and Fintechs are taking a larger share. In certain geographic or risk segments, when we reviewed margins and losses over time, we saw indicators such as first payment defaults and patterns consistent with synthetic fraud, first-party abuse, or credit builder trade lines embedded in those segments. That led us to focus immediately on enhancing fraud prevention and detection controls, which we've implemented and are close to fully implemented. We did analyze customer bands by debt-to-income or free cash flow and we do see some impact on customers with low free cash flow from elevated gas prices, but that is not the primary cause of the tightening. We are monitoring the macro environment cautiously as gas prices and inflation evolve.
Got it. That's helpful. I also want more color on segments: small loans versus large loans. Small loan growth was below expectations while large loans were in line. Is that a read-through to competitive trends at different APRs?
Think about it this way: large loans grew year-over-year driven by auto-secured products, which have performed well. Small loans were more affected by new borrower acquisition, where competition is strongest. Competition in new borrower acquisition tends to impact small loans more. That is what you're seeing. There is volume available if you want to pursue it, but we want responsible volume that meets our return hurdles. We will continue to originate small loans, particularly as our initiatives come fully online.
Our next question is from Alexander Villalobos with Jefferies.
On the funding side, you mentioned cost of funding ticking up to about 4.5%. Could you give a quick overview of where the current debt stack is and whether there are opportunities to lower cost of funds or efficiencies with Column that could help?
We have a diversified set of lenders and have kept our cost of debt relatively low through the cycle. We're a programmatic issuer of securitizations. Some debt we issued in 2021 is now rolling off and will be replaced at current market rates, which explains the tick up in cost of funds. We have sufficient liquidity for current plans, $442 million of unused capacity and $128 million of available liquidity. We continuously look to diversify our funding sources to ensure runway for our growth plans.
Our next question is from Bill Dezellem with Tieton Capital Management.
I'd like to pursue the Column relationship. You mentioned early results look promising. Could you dive into that further and explain how this is transformational and can change the trajectory of growth? You referenced that delinquencies will be lower when originating under the Column relationship. I would think you use the same lending criteria, so why would delinquency be lower?
On early results, we are seeing the program work as designed in terms of the income it generates. We recognize fees on other income and pay a platform fee. Compared to state-licensed loans, we estimate a lift of about 200 basis points on like-for-like loans over time, and early results are tracking to that. Regarding delinquency rates, today we are originating those loans under our current credit policy, so the expectation is like-for-like credit performance. We have observed a modest benefit in early delinquency performance for the bank partnership loans we started in March and April, but we are monitoring to ensure performance remains comparable or better as we scale. The partnership also enables revenue opportunities and cost efficiencies, which Lakhbir can expand on.
Bill, on Column, first is the increased revenue opportunity on existing products and customers. In some market segments we cannot take the risk because we can't price for that risk under state licenses. The partnership allows us to price in those segments and capture customers we previously could not serve, which creates revenue lift. Second, it increases speed to market. Using the Column charter and a more uniform product set enables faster market entry than building state-by-state branch infrastructure. Third, the Column tech stack and partnership can enable us to broaden our product ecosystem over time, which is more medium-term. On delinquencies, we want to ensure that credit performance under bank partnerships is not worse than state-licensed models. Early readings show we are not seeing negative credit impacts, and we are monitoring as we scale. Also, as we convert products, for example eliminating personal property insurance, we will ensure top-line and credit effects remain in line with our expectations.
That's very helpful. One additional follow-up: if you are able to charge higher rates to higher-risk customers you otherwise would not lend to, does that imply this will accelerate small loan originations and potentially increase the feeder pipeline for large loans as new borrowers demonstrate creditworthiness?
Yes, that's the goal. Today our feeder for new client acquisition is small checks and leads from digital affiliates. In some of those cells the loss rates are high and we cannot price for them under state-licensed models. The bank partnership allows us to price for certain of those cells and acquire new customers who can then, over time, be renewed into larger loans. That is a key opportunity as we scale the partnership.
This now concludes our question and answer session. I would like to turn the floor back over to Lakhbir for closing comments.
Thank you so much. In closing, I want to say four things. One, we are choosing to prioritize a stronger operating foundation. As I mentioned when I joined the company, we want to get returns up in the firm; it's our number one focus. Number two, we are moving with purpose and speed to ensure strong, consistent execution. That includes a number of initiatives, especially bank partnerships that we are pushing on. Number three, the bank partnership, as I mentioned, we believe is going to be transformational and accretive to the company as we move forward and will help us grow the firm and net income significantly. And finally, I want to thank our team. As we execute these initiatives, the team is working hard and is dedicated to our clients and helping us grow this company responsibly. Thank you. With that, back to you, operator.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines and have a wonderful day.