Regional Management Corp.

Good afternoon and welcome to the Regional Management Third Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then on your telephone keypad. To withdraw from the question queue, please press star then two. Please note this event is being recorded. 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 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 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, or recent findings at the SEC for a more detailed discussion of 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 gap 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 third quarter 2024 earnings call. I'm joined today by Harp Rana, our Chief Financial Officer. On this call, we'll cover our third quarter financial and operating results, provide an update on our portfolio credit performance and growth, and share our expectations for the fourth quarter. However, before I discuss our results, I want to share some thoughts on the recent hurricane activity. As you know, Hurricanes Beryl, Helene, and Milton brought catastrophic wind, rain, and flooding to many areas in the southern and southeastern United States. While Hurricane Milton did not affect our operations, Hurricanes Helene and Beryl did. Hurricane Helene, in particular, had a devastating impact on several communities where we operate, particularly in western North Carolina. Our thoughts have been with all individuals in the affected areas, including our customers and team members. We're thankful for the first responders, healthcare workers, linemen, government agencies, and others who have been working tirelessly to assist and restore our communities. I also want to extend a special thank you to our team members in the impacted areas, including those in our headquarters in upstate South Carolina and others across the country who stepped up by working nights and weekends to support our customers and communities. many of our team members were providing support to our customers while their own families were without power and dealing with the storm's impact. For our impacted customers, we've offered special borrow assistant programs, including loan payment deferrals, loan modifications, and fee waivers, and we're actively helping eligible customers as they submit personal property and other credit insurance claims. For our team members, we've offered support through our internal care fund, a dedicated employee assistant program that provides short-term aid to team members who are experiencing a financial need due to unexpected emergencies or catastrophic events. We'll continue to be there for our customers, communities, and team members throughout the recovery process. We have a truly special team at retail, and I'm proud of how they responded to these unfortunate events. Now, turning to our third quarter numbers, the team once again delivered strong results. We were pleased with our improved credit performance in the quarter, including a 40 basis point decline in our net credit loss rate year over year. despite having leaned into our higher margins following business over the past several quarters. On the bottom line, we posted net income of $7.7 million and diluted EPS of $0.76. Our net income and EPS results are inclusive of a $5.6 million pre-tax impact from the third quarter hurricane activity, primarily from the impacts of Hurricane Helene in North Carolina. We reserve $2.1 million for incremental net credit losses and $3.5 million for estimated personal property insurance claims caused by the hurricanes. While these charges created a drag on our third quarter results, we're pleased to be able to provide our customers with special borrow assistant programs and valuable personal property insurance benefits that will help them rebuild their lives. On a post-tax basis, the incremental expenses from the hurricane activity lowered net income by $4.3 million and diluted EPS by $0.42. Despite the hurricane challenges, we grew our portfolio by 46 million sequentially, or 2.6%, to a record 1.82 billion, an annualized growth rate of just above 10%. Our net income results reflect the impact of this portfolio growth, which required a $4.6 million provision for credit losses or $3.5 million after tax. As a reminder, we're required to reserve for expected lifetime credit losses at origination of each loan, while the revenue benefits are recognized over the life of the loan, highlighting the impact of portfolio growth on our bottom line. As a result, we often internally measure success by our growth in pre-provision net income, which we define as net income excluding the tax-affected impact of the provision for credit losses, but including the impact of recognized net credit losses. Year over year, we drove a meaningful increase in our pre-provision net income in the third quarter. Our quality portfolio growth drove our quarterly revenue to a record high of $146 million, despite the $3.5 million charge to revenue to cover the estimated personal property insurance claims associated with the recent hurricanes. We also improved our interest in fee yield by 90 basis points year over year to 29.9%, the highest it's been in over two years, from a combination of increased pricing, growth of our higher margin small loan portfolio, and improved credit performance. Meanwhile, we kept a tight grip on G&A expenses while still investing in our growth and strategic initiatives. As a result, our G&A expense increased by less than 1% year-over-year. We improved our operating expense ratio by 50 basis points from the prior year period to 13.9%, and year-over-year revenue growth outpaced expense growth by 15 times. We also continued to carefully manage our portfolio's credit quality and performance in the third quarter. Our credit quality has improved as we've maintained a tight credit box while also increasing the growth of our higher margin small loan business. Our quality originations in our front book make up a larger portion of our portfolio, continue to perform in line with our expectations, and are delivering at lower loss levels than our stressed back book integers. We've also begun to observe modest improvements in roll rates in our late stage delinquency budgets. Our third quarter 2024 net credit loss rate of 10.6% was 40 basis points better than the third quarter of last year, despite an estimated 30 basis point impact from the growth in our higher rate small loan segments, having APRs above 36%. As we've discussed in the past, our net credit loss rate peaked in 2023, and we've experienced gradual improvement since then. We expect continued improvement in portfolio quality and net credit loss performance in 2025. Our 30 plus day delinquency rate remained at 6.9% as of September 30th, unchanged sequentially and 40 basis points better year over year. Our quarter end delinquency rate is inclusive of an estimated 20 basis point negative impact from growth in our higher margin small loan business and a roughly 40 basis point benefit from special borrow system programs offered to customers impacted by the hurricanes. Our loan loss reserve rate of 10.6% was higher than our guidance of 10.4 to 10.5% due to the impact of the incremental hurricane reserves that I discussed earlier. We've been able to improve our credit results despite the growth in our higher risk small loan portfolio by maintaining an overall tighter credit box and by growing our higher quality auto-secured book. As a reminder, Our current slower pace of portfolio growth negatively impacts both our delinquency rate and NCL rate, as the denominator of both ratios has grown more slowly than in prior years. On a growth-adjusted basis, we're very pleased with the improvement in our delinquency and NCL rates. Of course, we have the capability to grow our portfolio more rapidly than our current pace of growth, but in light of economic conditions over the past several quarters, we believe our growth rates have appropriately reflected the need to maintain strong portfolio credit performance. We continue to closely monitor the economy, particularly inflation, the labor market, and prevailing interest rates. We have solid sequential growth in revenue and ending receivables this quarter and will lean further into growth when appropriate in future quarters. On our last earnings call, I talked about our strategic approach to portfolio composition and growth, including the implications of a shift in product mix to yield, net credit losses, and other key performance indicators. It's been important to our growth and our customers' financial well-being that we offer both small and large installment loan products, including auto-secured loans and loans with APRs greater than 36%. Our broad product set provides us with a competitive advantage. It uniquely positions us to offer credit access to a wide set of customers and to adjust our loan offerings to our customers as their needs evolve and credit profiles improve. In the third quarter, we continue to see strong demand in our higher margin small loan segment. We grew our small loan portfolio by $51 million, or 11%, from the prior year period. And our portfolio of greater than 36% APR loans grew to nearly 18% of our portfolio as of quarter end, compared to 15% this time last year. We have deep experience lending to small loan consumers. We typically have weaker credit profiles than our large loan customers. In the third quarter, the average APR of our small loan originations was 44.9%, while the average APR at origination for our total portfolio was 36.6%, up from 36.2% in the prior year period due to growth in small loans. We've been pleased with the margins of our small loan product, including the improvements we observed in recent quarters. The interest and fee yield of our small loan portfolio is up 120 basis points over the past year, while the delinquency rate of the portfolio is down 20 basis points to 9.4%, inclusive of 40 basis points of benefit from special hurricane borrow assistant programs. Our small loan delinquency rate is up year over year on an adjusted basis due to a 30 basis point impact from the shift within that portfolio to higher APR loans, but the higher APRs on those segments more than make up to the higher delinquency and loss rates. The smaller loan size and higher yields of our small loan product allow us to offer solutions to consumers who wouldn't otherwise have access to credit. We're comfortable lending to this credit profile because while the credit risk is greater, so are the yields and margins. Highly qualified consumers are currently driving much of the demand in this segment, as fewer consumers are qualifying for sub-36% APR loans due to credit tightening across the industry. Continuing to provide access to credit is essential for our small loan customers. Many of them improve their credit profiles by establishing a responsible payment history with us and ultimately qualifying to graduate to our large loan product at a lower APR, including our auto-secured product. Our auto-secured product is reserved for our higher quality credit customers, requires auto collateral, and is the lowest priced of our products. This graduation strategy has resulted in higher customer satisfaction and retention, as well as improved credit performance over time. Our auto secured segment grew by 51 million or 35% from the prior year period. It now represents 197 million or nearly 11% of our total portfolio as of September 30th, up from 8% at the end of the third quarter of last year. The growth in the auto secured portfolio balance is at the risk from the growth in our higher margin small loan portfolio. This portfolio is performing very well with a 30 plus day delinquency rate of 2.6% at the end of the quarter and the lowest credit losses of all our products. The interest in fee yield of our total large loan portfolio, which includes auto-secured loans, is up 40 basis points over the past year, while the delinquency rate of the portfolio is down 60 basis points to 5.9%, inclusive of 40 basis points of benefit from special hurricane borrow assistant programs. Our auto-secured loans generate healthy margins and will continue to be a focal point of our growth. Our diversified product offerings provide us with multiple levers that we can pull to maximize our growth and returns. We'll continue to monitor the economic environment, competitive dynamics, consumer health, and other factors as we allocate capital to grow the different pieces of our portfolio. Ultimately, we'll build our portfolio in a way that will generate strong margins that meet our return hurdles and optimize short and long-term results while also appropriately balancing credit outcomes and customer needs. It's important to note that we also continue to bring our valuable product set to new geographies. We've expanded to eight new states and increased our addressable market by more than 80% since 2020. As previously stated, we plan to open 10 new branches primarily within our newer states of operation in areas where we've left the addressable market largely untouched. We're on track to open seven of these branches by year end, with the remaining branches opening early next year. We're excited about this investment in new branch locations, which will drive incremental volume and revenue benefit in 2025 while leveraging our existing management structures and corporate resources. Despite the challenges we faced in 2024, including the inflationary environment and hurricanes, we've generated very strong results through the third quarter. We've done so by adjusting our strategies and pulling on various levers to improve yields and manage expenses, driving strong net incomes. For the full year 2024, we now expect net income of roughly $40 million. Our net income projections reflect an expectation of stronger receivable growth in the fourth quarter and into 2025, which, of course, creates a drag on earnings as we must reserve for lifetime losses under our CISO model. As we continue to grow, there will be a growth effect on our bottom line as we build for these lifetime losses, making it important to evaluate the increases in both our net income and pre-provision net income over time. The change in our full-year net income guidance from last quarter is attributable to our outperformance in the third quarter, offset by the hurricane impacts that I previously discussed. Adjusting for the hurricane impacts, our latest full-year net income guidance is at the high end of our prior guidance range. HARP will provide you with line item guidance for the fourth quarter in remarks. Over the long term, we expect that our returns will continue to normalize with the benefits of a stable macroeconomic environment, further scale through disciplined portfolio growth, a well-balanced product mix, and prudent expense management. As always, I'd like to thank the regional team for their hard work, dedication, and superior execution, especially as the team faced unique weather events and challenges over the past several months. I continue to be impressed by the team's talent and commitment. I'll now turn the call over to HARP, who will provide more detail on our third quarter results and additional line-end guidance for the fourth quarter.