Regional Management Corp.

Thank you for standing by. This is the conference operator. Welcome to the regional management fourth quarter 2023 earnings call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star, then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Garrett Edson, ICR. Please go ahead.

Thank you, and good afternoon. By now, everyone should have access to our earnings announcement 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 two 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 about 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. A 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 Rob Beck, President and CEO of Regional Management Corp.

Thanks, Garrett, and welcome to our fourth quarter 2023 earnings call. I'm joined today by Harp Rana, our Chief Financial Officer. In the fourth quarter, we took a series of actions to place the business back on a more normalized earnings trajectory, including putting the higher losses in our back book portfolio behind us. On this call, we'll cover our core operating results, provide details on the actions taken in the fourth quarter, and preview our expectations for the first quarter and full year 2024. Fourth quarter results came in better than an outlook when excluding the impact of three discrete items that we took in the quarter. While we had a net loss of $7.6 million, or $0.80 per share, our after-tax earnings were reduced by $12.6 million, or $1.34 per share, due to these three actions. However, these actions strengthened our balance sheet and realigned the business with further cost reductions, both of which position us for future growth with improved operating leverage and stronger earnings in 2024 and beyond. I'll provide an overview of these actions now before covering our fourth quarter results and 2024 expectations in more detail. First, we booked a $2 million pre-tax restructuring charge in the fourth quarter related to brands' consolidations and severance costs from the elimination of roughly 10% of our corporate positions. These restructuring actions will result in about $6 million of operating cost savings in 2024, which we'll utilize to self-fund our continued investment in growth, technology, data analytics, and expansion with our newer states of operation. As a result of these actions, we expect to hold our 2024 G&A expenses roughly flat to our fourth quarter run rate. Second, as we did in the fourth quarter of 2022, we undertook a sale of certain non-performing loans prior to their normal charge-off at 180 days past due, which impacted net income by $3.9 million in the quarter. As a result, we ended the year with 30-plus day delinquencies of 6.9%, an improvement of 20 basis points from the prior year. We took advantage of attractive pricing to sell these loans and put the associated losses behind us. The sale also frees up additional collection capacity going into 2024 to be put against assets with a higher probability of collection during tax season. The fourth quarter net income impact is largely timing related, as first quarter earnings will benefit from lower losses and interest accrual reversals. Third, we refined our description of loans included in our back book and built additional reserves for back book portfolio stress in the fourth quarter. Previously, our back book included all loans originated prior to the fourth quarter of 2022, though we excluded delinquent renewals associated with loans from these vintages. As of year end, 23% of our portfolio fit the prior description of our back book. Under our revised description of the back book, we are now including only those loans that were originated in the four quarters from fourth quarter 21 through third quarter of 2022, and the associated delinquent renewals for all loans originated prior to fourth quarter 2022. Under this description, we have a total of $390 million in our back book, representing 22% of our portfolio as of year end. Our analysis of this newly defined back book shows that it continues to be stressed. As a result, we increased the loan loss reserve rate on these vintages by 240 basis points to 14.8%. building $9.3 million in incremental loan loss reserves, or $7 million after tax. In comparison, the loan loss reserve rate on our front book is 9.5%. As the stress-backed loans flow through to loss, the incremental reserves will represent about 40 base points of net credit loss rate in 2024, which we charged against our loan loss reserves, resulting in no bottom-line impact in 2024, all else being equal. We are fully reserved for back book losses as of the end of the year. While we've broken out the various components of these actions we took in the fourth quarter, on a net basis, we effectively accelerated 14 million of net credit losses and 2 million of interest accrual reversals from first quarter 2024 to fourth quarter 2023 for the loan sale, held on to our existing reserve levels due to stress in the portfolio, particularly in the back book, and took a $2 million restructuring charge. While these actions clearly impacted our fourth quarter results, they also set us well to generate stronger earnings in 2024 and beyond. Overall, we had solid core operating results in the fourth quarter. Our revenue reached record levels from a combination of higher quality portfolio growth and total revenue yields that came in better than our outlook. Total revenue yields have benefited from our repricing actions and growth in our higher margin small loan portfolios. which grew by $30 million in the third quarter and $19 million in the fourth quarter. We've experienced strong returns in this segment as demand has been healthy, allowing us to be more selective in the loans we book. While growth in this segment will put some pressure on our normalized credit loss rate in the future, it comes with an attractive revenue and margin tradeoff. On our fourth quarter line items, G&A expenses came in better than our outlook on an adjusted basis. As we continue to manage expenses tightly, while still investing in our growth and strategic initiatives. Despite our strong portfolio growth, interest expense also came in better than our expectations, as we benefited from our fixed rate funding, which ended the year at 82% of our total debt, mitigating the impact of the higher interest rate environment. Finally, excluding the loan sale and additional reserve billed in our back book portfolio, our net credit losses and provision for credit losses were roughly in line with our expectations. Looking ahead, we're introducing full-year line item guidance for the first time. Based on the current economic environment, we anticipate a modest rebound in portfolio growth in 2024. We expect 2024 ending net receivables to grow by approximately 5 to 7 percent, up from just over 4 percent in 2023. We're forecasting revenue growth to be towards the higher end of this range, with revenue yields improving by 40 to 50 basis points due to our repricing actions, and growth in our higher margin small loan segment, offset in part by the impact of interest reversals associated with elevated losses from the back book. We expect full year 2024 G&A expenses to be approximately $256 million to $258 million, or roughly flat to the fourth quarter run rate. While the amount may vary in any given quarter, we will hold the line on expenses in 2024, barring a decision to lean into faster growth if warranted by improving economic conditions. We expect our cost of funds, which is our interest expense, as an annualized percentage of average net receivables to be approximately 4.5 to 4.6 percent. This assumes that benchmark rates improve consistent with current forward curves. Lastly, we anticipate that our net credit loss rate will be in the range of 10.7 to 10.8 percent in 2024, and our year-end loan loss reserve rate will be between 10.1 and 10.3 percent, subject to economic conditions. This is naturally very difficult to predict given the economic uncertainty. The 30-plus day delinquency rate on the back book is 10.4% compared to 5.8% on the front book, which is still maturing. Our front book continues to perform in line with our expectations despite macroeconomic stress. Credit tightening actions have improved overall portfolio quality as we have originated roughly 60% of our loans to our top two risk ranks in recent quarters. Our 1 to 59-day delinquency rate remains 70 basis points better at year-end 2023 compared to 2019. In projecting our 2024 NCL rate at 10.7 to 10.8 percent, we are assuming inflation continues to moderate, resulting in improvement in delinquency roll rates of between 30 and 80 basis points across all buckets, though those roll rates will remain elevated compared to 2019 levels. If roll rates do not improve in 2024, our net credit loss rate could increase to 11% to 11.3%. If roll rates were to improve to 2019 levels, our net credit loss rate could fall to as low as 9%, but we don't anticipate that outcome in 2024. To further understand the 2024 projected net credit loss rate range of 10.7 to 10.8%, we need to break this down in terms of our current underwriting and portfolio mix. We have said previously that we would expect a normalized net credit loss rate of 8.5% to 9% in a benign economic environment and where we have a portfolio growth rate that is consistent with our historical norms. However, as we have begun to lean back into our higher margins small loan business, we expect our normalized portfolio loss rate to increase to the 9% to 9.5% range. Broadly speaking, the difference between this range and the projected range of 10.7 to 10.8% in 2024 is due to a roughly 80 basis points impact associated with slower portfolio growth in 2024 compared to historical growth rates, as well as economic stress reflected in the portfolio, including the estimated 40 basis point impact from back book losses associated with the incremental fourth quarter reserves. We expect the newly defined back book to represent 8% of the portfolio by year end 2024. While it's impossible to predict the future, if economic conditions return to a more benign environment and we resume a higher portfolio growth rate, our net credit loss rate should return to more normalized levels sometime in 2025. As we've always done, we'll manage the business in a way that maximizes direct contribution margin and bottom line results. While the actions taken in the fourth quarter were difficult, particularly on those individuals impacted by the restructuring, they were necessary to position the business for a stronger 2024 and beyond. Having completed the fourth quarter loan sale and taken additional reserves related to our remaining back book portfolio, we are on a path towards a more normalized earnings trajectory as economic conditions continue to improve, including strong profits in the first quarter of this year. The team and I are excited as we continue to execute on our omnichannel strategy and remain positioned for stronger growth when the economic conditions are right. I'll now turn the call over to HARP to provide additional color on our fourth quarter results, as well as first quarter guidance.