Ladies and gentlemen, greetings and welcome to the Regional Management Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, 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 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. 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. 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 second quarter 2024 earnings call. I'm joined today by Harp Rana, our Chief Financial Officer. On this call, we'll cover our second quarter financial and operating results and share our expectations for the balance of the year. We're very pleased with our quarterly and year-to-date results. We delivered $8.4 million of net income in the second quarter, or $0.86 of diluted EPS. We grew our portfolio by $29 million sequentially to $1.8 billion in the quarter, up 5% from the prior year. Our total revenue yield increased 80 basis points year-over-year from a combination of increased pricing, growth of our higher margin small loan portfolio and improved credit performance. Our larger portfolio and stronger revenue yield combined to drive total revenue to $143 million in the second quarter, up 7% from last year. At the same time, we've maintained a tight grip on G&A expense, while still investing in our growth and strategic initiatives. Our second quarter year-over-year revenue growth outpaced our G&A expense growth by 2.9x. Together, these strong line item outcomes drove net income up 40% compared to the second quarter of last year. Along with our strong first half results, we continued to carefully manage our portfolio's credit quality and performance. Recent economic data has been somewhat mixed as inflation appears to be cooling while the labor market is softening somewhat. We're optimistic about the benefits that lower inflation levels will bring to our customers and our credit performance, and we believe that the labor market softening will disproportionately impact higher income workers as job openings appear to remain plentiful for our customers. However, we plan to maintain our conservative underwriting posture and growth trajectory while awaiting additional positive economic data. We expect ending net receivables to grow by roughly 6%…

Thank you, Rob, and hello, everyone. I'll now take you through our second quarter results in more detail and provide you with an updated outlook for third quarter and full year 2024 On Page 4 of the supplemental presentation, we provide our second quarter financial highlights. As Rob noted, we posted strong net income of $8.4 million and diluted earnings per share of $0.86, up 37% from the second quarter of last year. We generated these results for another quarter of solid revenue growth and expense discipline. We also continue to maintain a strong balance sheet as well as a healthy credit profile and robust loan loss reserves. Turning to Page 5, we observed a high level of loan demand in the quarter, though we maintained our cautious approach to underwriting with an emphasis on higher margin segments. Total originations increased 7% year-over-year, contributing to a 7% increase in customer accounts. Originations in all marketing channels were up, with digital, direct mail and branch originations increasing by 17%, 7% and 5%, respectively. At this time, we remain comfortable prioritizing credit quality and margin over more aggressive loan growth. As a result, we expect to remain highly selective in making loans within our tight credit box, at least in the near-term. Page 6 displays our portfolio growth in product mix through the second quarter. We closed the quarter with net finance receivables of $1.8 billion, up $29 million from the prior quarter-end as originations picked up towards the end of the quarter as expected. As of the end of the second quarter, our large loan book comprised 71% of our total portfolio and 83% of our portfolio carried an APR at or below 36%, down from 86% a year ago. As Rob discussed, we purposely leaned into growth of higher margin…

Thanks Harp. We had a very successful first half of 2024, posting strong top and bottom line results. We remain well positioned to operate effectively through the current economic cycle. As we expect credit losses to improve in the second half of the year, we're excited to begin increasing our investment in our strategic initiatives and portfolio growth, including through the opening of new branch locations and continued expansion of our high margin and auto-secured loan portfolios. We look forward to continuing to deliver strong returns to our shareholders, while also investing in the business in a way that will enable us to achieve additional sustainable growth, improved credit performance and greater productivity and operating efficiency over the long-term. Thank you again for your time and interest. I'll now open up the call for questions. Operator, could you please open the line?

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Sanjay Sakhrani with KBW. Please go ahead.

Hi, this is actually Steven Kwok filling in for Sanjay. Thanks for taking my questions. I guess, the first question I have was just if you could drill down on the health of consumer. I’m curious to see what you're seeing around how the consumers are doing at this point? Thanks.

Sure, Steven. Thanks for joining. So, as we said, the labor market is softening a bit. You saw a little tick up in unemployment. The way we look at it, there's still over 8 million open jobs weighted towards lower income roles. There was some recent research I saw from Vanguard where the hiring rate for jobs for wages less than $55,000 is about three times that of jobs that are greater than $55,000 in terms of salary. And so we're optimistic that if the economy does soften that, at least for our customer set, the impact will be pretty muted. The other thing is, particularly the last two months, we've seen a nice jump in real wage growth for our customers segment. I think they're now positive relative to where inflation has been over the last two years. And so, that's a real positive trend, and it means the customer is healing. But the pace of normalization, credit for our customers is also impacted, by the fact that, on average, probably, this customer set probably has 5% mid single-digit increase in debt of where they were previous cycle. So it's going to take a little bit of time for the customers to burn through that and get stable again, right. Things are moving in the right direction and we feel pretty good about how the second year will shape up as we lean into some more growth.

Got it. And then just like as a follow-up, if we think about if the environment were to change either for the better or for the worse, what levers are at your disposal to be able to adapt to that type of environment? Thanks.

Yes, look, great question. Look, the higher rate business is exactly an opportunity that we're looking at because those consumers, as I said, have ample job opportunities. There's plenty of margin built into the risk based pricing for those customers. And as you know, we build in stress assumptions in our underwriting. So, that's attractive. The auto-secured business on the other side of the spectrum, which is kind of the balancing act for the overall portfolio, demand remains good there. It's growing as an increasing part of our portfolio. The delinquencies are 2.5%. So, we have opportunity to continue to lean into that space. And look, when the economy softens, if it does soften, obviously the demand for credit goes up. As long as we're smart about pricing relative to risk, I think we're going to be in real good shape. And frankly, we've learned a lot through the testing of the small loan portfolio re-growth that we put on in the last six to nine months. And that's going to all be helpful in terms of which levers we pull going forward. And of course, we always manage our expense tightly and cost of funds and balance sheet. So, look, we've got a lot of levers to pull and we're optimistic about the future of the business.

Got it. Thanks for taking my question.

Thanks.

Thank you. [Operator Instructions] Our next question comes from the line of Vincent Caintic with BTIG. Please go ahead.

Hey, good afternoon. Thanks for taking my questions. I have two questions. I'll just ask both of them now. So, first question, actually, both questions on the guidance. The first question, so you discussed about your 2024 outlook and that there's the credit losses guidance has increased and you detailed why, and that was very helpful. I noticed though that the full year outlook credit reserves stayed the same. It was still within the old band of, sort of power band, I think was 10.1% to 10.3%. Now it's 10.2 to 10.3%. I was just wondering with that higher losses, if you could maybe talk about how you're thinking about credit reserves, especially since it's relatively unchanged. So that's question one. And then question two was impressive to see that the guidance for G&A expense is lower than the last 2024 outlook, especially because you're talking about higher receivables growth. So you took your guidance up there and then you're talking about having several new stores. So that does speak to maybe a lot of good productivity there. And I was wondering if you could talk about that in more detail, how you're able to have both guidance upside for your revenues – revenue components, as well as having better efficiency on expenses. Thank you.

Hi, Vincent. Thank you for that question. So I'll start on the reserve. So previously, we had guided to 10.1% to 10.3%, and we've narrowed that. So we're actually now guiding to 10.2% to 10.3%. So a little bit higher than where we were on the low end of the range. So we brought that low end of the range up, but we feel confident in terms of the 10.2% and the 10.3%. That, of course, will be very much dependent upon macro variables. It will also be dependent upon how quickly our back book runs off. So right now, our back book is expected to be 8% to 10% of the portfolio at year-end. So those two items could impact where we end for reserves. But right now, 10.2% to 10.3% is our estimate based upon what we're seeing. In terms of the small loans, so those are included in that 10.2% to 10.3%. But as Rob mentioned in his prepared remarks, we're also seeing higher revenue yield on those. So we've taken up our guidance on revenue yields, which were 40 to 50 previously, but we've now taken them up to 60 to 70. So you're seeing 20 basis points of upside on the revenue yield that goes along with those small loans that have had us tighten on where we are on the reserves.

Yes, and let me add on to that. It wasn't specific to your question before I get to the efficiency, one is, the small loan portfolio has grown $61 million, as we said, year-on-year. The balancing of that is the growth in the auto-secured business that grew by $52 million over that same period of time. But what's really important about this business is, and you'll see this in the release is the interest in fields on small loans is up 280 basis points versus prior year. If you look at the small loan delinquencies, it's down 10% versus prior year. And that's inclusive about 30 basis points of impact from the higher rate business. So there's a lot of leverage we're getting on that small loan portfolio. And that's why we are modestly leaning back into that business. It's always been a core part of our operations. It's just the time is now to – and it's attractive to put on some more of that business and balance it out with the auto-secured. Now pivoting to the G&A expense, look, we manage the business tightly. It's important that as we get bigger, we don't grow our head office cost at the same rate. I mean, that's what scale delivers for you. So we manage our expenses tightly. We are getting efficiency benefits both from the things we've done on a technology standpoint, our ability to source customers digitally. The higher rate business is pretty efficient from a marketing standpoint, from higher response rates. And so it's really across the board, the benefits of just managing the business well, operating it tightly, and being very smart about where you deploy that next dollar of expense to make sure you get the maximum amount of revenue in return.

Okay, great. That's very helpful in both answers. Thank you.

Yes, appreciate it.

Thank you. Our next question comes from the line of Alexander Villalobos with Jefferies. Please go ahead.

Congrats on the results and thank you for taking my question. Did want to just revisit a little bit on originations and loan growth, so just kind of confirming that we should see more of an originations push in the fourth quarter in order to get to that guide that you guys gave for the ANR growth? And then as well for revenue, just – usually we kind of see a little bit of an increase in the fourth quarter. So just kind of confirming as well, we kind of see that natural fourth quarter bump versus the third quarter. Thank you.

So I'm going to talk to your first question around the origination. So we've given our ENR guidance for the year of 6%. So when you take a look at where we guided to for ENR for third quarter, we'd be at 48. So from that you can basically figure out that fourth quarter is going to be a little bit higher than third quarter guidance in terms of origination. So Alex, you could probably use that for your model. And. I'm sorry, could you repeat the second part of your question again?

Yes, no, just from like a yield perspective. Yes, basically just confirming it's – the fourth quarter is just going to have to be stronger. But yes, all those numbers you can kind of back into as well. And then maybe if there's anything you guys can kind of like point to maybe towards like 2025, just if expecting just from like at least the ENR growth kind of like similar to prior years, obviously inclusive of rate cuts and everything okay on the macro side.

Yes. So look, obviously we're not in a position to give any guidance for 2025. What I'll tell you this is, we do have a range on the net income guidance for full year this year. That is largely due to the fact that they're naturally, is some ability to ramp up growth or pull it back. And that impacts the CECL reserves at the end of the year. And so I think as we go through the next couple months here and we see how inflation performs, we see what the Fed does, there's a lot of factors. We have the ability to lean into more growth or maybe we taper it back. But at this point in time, we feel pretty good about the 6% ENR growth, but there's always some movement around that depending on whether you see opportunity to grab more volume. And we generally do a pretty good job at the end of the year thinking about the impact of 2025 and what volumes we can put on to help 2025. And in that regard, that's why we're opening up 10 new branches now. They won't be open until the fourth quarter of the year, fourth quarter of this year or the very end of the year but in the new states that we'll be putting those branches in. When I say the new states, it's kind of the eight states we put on in the last couple years, the 30 branches we have in those states have averaged about $6.5 million in receivables. Now, that's after two years of maturity, we're going to put on 10 new branches this year. And I think we feel that if things are improved from a macro standpoint and credit is where we think it should be, then there's opportunities to start expanding more aggressively as we go forward into 2025 in terms of new stores.

Perfect. Thank you and congrats on the results.

Great. Thanks, Alex.

Thanks, Alex.

Thank you. Ladies and gentlemen, as there are no further questions, I’ll now hand the conference over to Rob Beck, President and CEO, for his closing comments.

Great. Thank you, operator and thanks everyone for joining today. Look, if – we're very happy with our second quarter results. Our net income up 40% over last year and our year-to-date progress is also very satisfying with net income up 61% over the similar period last year. As we said, we're well positioned for growth as the front book continues to perform as expected and credit is expected to continue to improve in the second half, we are going to increase our investment as we talked about the 10 new branches. And probably just to add to that comment is we're going to go after the addressable market in those new states. And if you recall, it was about an 80% expansion in our addressable market and we're feeling increasingly comfortable opening up more branches and really leaning into that expanded market and grabbing more share. So we're excited about that in the future. And as I said, we've got a competitive advantage right now with our high rate small business where we can utilize risk based pricing to meet the increasing needs of customers who are losing access to credit or experiencing reduced access to credit, while at the same time balancing that out with the opportunity in our auto-secured business. So we really are happy about both of those levers. And the small loan business, of course, is an attractive feeder for our large core loan business as customers pay on us and perform. And as we said, we see faster receivable growth in the second half and the degree to which we grow will depend on the economic environment, particularly where inflation goes and how customer credit profiles normalize. But overall, we feel pretty good about where we are in the business. We've got lots of levers to pull and we're in a good position being able to really manage the entire lifecycle of the customer from some greater than 36% business to get them into a core loan, to get them into auto-secured business – auto-secured loan later in the lifecycle. So we feel we're very well positioned. So thanks again and have a good evening.

Thank you. The conference of Regional Management has now concluded. Thank you for your participation. You may now disconnect your lines.