Regional Management Corp.

Greetings, and welcome to the Regional Management Fourth Quarter 2024 Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star 1 on your telephone keypad. If anyone should require operator assistance, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Garrett Edson with ICR. Please go ahead, Garrett.

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, 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 Rob Beck, President and CEO of Regional Management Corp.

Thanks, Garrett, and welcome to our fourth quarter 2024 earnings call. I'm joined today by Harp Rana, our Chief Financial and Administrative Officer. On this call, we'll cover our fourth quarter financial and operating results, provide an update on our portfolio credit performance and growth, and share our expectations for 2025. We're very pleased with how our team and company performed in the fourth quarter. We generated strong bottom line results of 9.9 million of net income and 98 cents of diluted earnings per share. These results were better than our guidance and a sharp improvement from the prior year period net loss of 7.6 million. As a reminder, in the fourth quarter of 2023, we incurred restructuring expenses and closed a special delinquent loan sale that had the effect of pulling forward net credit losses and revenue reversals from the first quarter of 2024 to the fourth quarter of 2023. We didn't experience similar events in the fourth quarter of 2024, so there will be noise in some of our year-over-year comparisons, which we'll highlight for you. Loan demand remained strong in the fourth quarter. We began to ramp up our portfolio growth and increase our investment spend in the quarter, including by opening four new branches. We'll also open another eight new branches in the first quarter to drive future growth. We grew our portfolio by 73 million sequentially in the fourth quarter to nearly 1.9 billion, an all-time high for our company. The portfolio generated record quarterly revenue of 155 million, up 9.3% from the fourth quarter of 2023. or 7.8% when adjusted for the impact of the prior year's loan sale. Our fourth quarter total revenue yield was 33.4%, up 110 basis points from the prior year period, or 80 basis points after adjusting for the 2023 loan sale. Our total revenue yield in the fourth quarter was the highest it's been in two years. As we've discussed in prior quarters, we've improved our yields from increased pricing, a mixed shift to higher margin loans, and improving credit performance. At the same time, we held G&A expenses in check as we grow while continuing to invest in our strategic initiatives, and we're leveraging our improved scale to increase our returns. Our fourth quarter G&A expenses were roughly flat to the fourth quarter of 2023, and our operating expense ratio was 14 percent, an 80 basis points improvement from the prior year period, or 30 basis points better when adjusting for the fourth quarter 2023 restructuring. We also continue to carefully manage our portfolio credit quality and performance in the fourth quarter. Credit performance continues to improve thanks to tighter underwriting in our front book, which represented 89% of our portfolio at year end. The loans in our front book are performing in line with our expectations and are delivering at lower loss levels than our stressed back book's integers. We ended the fourth quarter with a 30 plus day delinquency rate of 7.7%, up 80 basis points from the end of 2023, but 10 basis points better year over year when adjusting for the fourth quarter 2023 loan sale. Our fourth quarter net credit loss rate was 10.8 percent, which was 430 basis points better than our prior year period, or 110 basis points better after adjusting for the prior year's loan sale. Our growth in our higher margin portfolio increased both our delinquency and net credit loss rates by 20 basis points in the fourth quarter. Also, as a reminder, Our slower pace of portfolio growth in 2024 negatively impacted 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 are very pleased with the improvement in our delinquency and NCL rates. By managing credit tightly and growing our high-quality auto-secured books, we're experiencing better credit performance despite having leaned into growth in our higher margin greater than 36% APR loan portfolio, which grew from 16% of our portfolio to 19% of our portfolio year over year. As we've discussed in the past, our net credit loss rates peaked in 2023, and we've experienced gradual improvement since then. We expect continued improvement in portfolio quality and credit loss performance in 2025, assuming inflation continues to moderate and economic conditions remain stable, including low unemployment and continued real wage growth. The fourth quarter capped a strong 2024 in which we improved our results from the prior year on nearly all lines. We grew our loan portfolio by $120 million in 2024, and that, in turn, drove our revenue higher. Our 2024 revenue was up 7 percent compared to 2023, and our total revenue yields improved by 70 basis points year-over-year from increased pricing, portfolio niche shift, and improved credit performance. Our net credit loss rate improved by 120 basis points in 2024, and our operating expense ratio improved by 40 basis points year over year. Importantly, our net income more than doubled from 2023, and our return on assets improved to 2.3% in 2024 from just under 1% in 2023. While economic conditions prevented our bottom line results and returns from fully normalizing in 2024, we're pleased with how we navigated the inflationary environment over the past couple years. We're also encouraged by the signs of strength that we're observing in the subprime consumer and the economy, and that strength is reflected in our improving credit performance. 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. During our past couple of earnings calls, I spoke with you about our portfolio mix, our higher margin loan business, our auto secured book, and how we think about constructing our portfolio as we grow. This quarter, as we enter a period with a more constructive economic environment and an expectation of stronger portfolio growth, I want to spend a few minutes discussing the impact of growth on our bottom line and how we think strategically about the balance between portfolio growth and net income in the short and long term. Portfolio growth, of course, impacts all lines of our income statement. It's the fuel that generates our revenue growth. It increases our provision for loan losses and net credit losses, no matter the quality of new loans added. It requires us to increase our G&A investment, and it creates the denominator effect on both our operating expense ratio and net credit loss rate. It drives up our interest expense, including our average interest rate, as we use more costly funding to grow the portfolio. Some of these growth impacts are beneficial to our income statement and performance metrics, while others are detrimental and the severity of the impact varies across lines and time periods. As we develop our short and long-term plans, we balance these dynamics to optimize short and long-term returns to our investors. Looking back to the five years prior to 2020, we grew our portfolio at an average of more than 15% per year and over 19% in 2019 prior to the pandemic. After holding our portfolio flat in 2020 due to COVID, we grew our portfolio at an average of roughly 22 percent per year in 2021 and 2022, while at the same time benefiting from a highly constructive credit environment supported by government stimulus. However, over the past two years, we substantially slowed our portfolio growth to 4 percent in 2023 and 7 percent in 2024 due to inflationary economic conditions and the corresponding impact on credit performance. Now, for the first time since we adopted the CECL Reserve Model in 2020, we've entered a year where we expect to accelerate our growth in a more normalized credit environment. As you know, under the CECL Model, we're required to reserve for expected lifetime losses at the origination of each loan, while the revenue benefits are recognized over the life of the loan. For example, in the fourth quarter, we grew our portfolio by $73 million sequentially, requiring a $7.7 million provision for credit losses that created an after-tax drag of $6 million on our fourth quarter net income. Our return to faster growth in 2025 will likewise create an immediate drag on 2025 net income due to the associated expenses of provisioning for lifetime credit losses at origination, but it will create benefits over the long term as loan growth drives increased revenue and bottom line returns. As we determine our growth rate, we not only consider the health of the consumer, the strength of the economy, and the credit performance of our portfolio, we also balance our need to continue to deliver short-term results for our investors while also generating the portfolio growth that will fuel our success and normalization returns over long-term. The faster we grow in 2025, the more provision we must occur and the larger the drag on our 2025 net income. But that portfolio growth will be beneficial to the bottom line and our returns in 2026 and beyond. As a result of these dynamics, we internally measure success by our growth in both net income and in pre-provisioned 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. Assuming no change in our expectations for the economy, we're committed both to a minimum of 10 percent portfolio growth and a meaningful improvement to our net income results in 2025. We're increasing our pace of growth due to our confidence in our credit performance improving consumer health, and strengthening macroeconomic conditions, including lower inflation, real wage growth, low unemployment, and a large number of open jobs, particularly for our customer set. While we feel we're capable of growing our bottom line by 30 percent or more in 2025, we believe that doing so would require slower portfolio growth that doesn't appropriately balance near-term results with our long-term aspirations. While we've clearly established our internal targets for 2025 portfolio growth and net income based on our short and long-term strategic priorities, where we ultimately land on portfolio growth and net income in 2025 will depend on our continued assessment of the health of the customer, the economy, and credit performance over short and long terms. For now, beyond our expectation of minimum portfolio growth at 10% in 2025, we won't be sharing full-year 2025 guidance. But we wanted to provide you with this overview of how we think strategically about growth and how we will manage the business this year and beyond. As always, I'd like to thank the regional team for its hard work and dedication. The team skillfully managed through a difficult economic environment in 2023 and 2024, providing valuable financial products and service to our customers while anticipating, preparing for, and reacting to conditions that have been particularly challenging for our consumer base. The team's talent, commitment, and superior execution have positioned us well to return to faster growth in 2025, something we're very much looking forward to. I'll now turn the call over to HARP, who will provide more detail on our fourth quarter results and guidance for the first quarter.