Good afternoon, and welcome to the Regional Management Third Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] 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 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. 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 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, our 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, health care 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 storms impact. For our impacted customers, we've offered special borrower assistance 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 assistance program that provides short-term aid to team members who are experiencing a financial…

Thank you, Rob, and hello, everyone. I'll now take you through our third quarter results in more detail and provide you with an updated outlook for the fourth quarter of 2024. On Page 4 of the supplemental presentation, we provide our third quarter financial highlights. As Rob noted, we posted net income of $7.7 million and diluted earnings per share of $0.76. Third quarter 2024 net income included $4.3 million of impact from Hurricanes Beryl and Helene. Excluding the impact from the hurricanes, our results exceeded our expectations in our third quarter 2023 results, a testament to our solid revenue growth, healthy credit profile, expense discipline and strong balance sheet. Turning to Page 5. We continue to grow our portfolio in a controlled manner with originations focused on our higher-margin segments. Total originations were up slightly year-over-year. Branch originations were up 5.3% and digital originations were roughly flat compared to the prior year period, while direct mail originations were down 9.1% as we deemphasized large loan convenience check offers to new borrowers as a part of our credit tightening. We continue to be comfortable prioritizing credit quality and margin over more aggressive loan growth. As a result, we remain selective in originating loans within our tight credit box. Page 6 displays our portfolio growth and product mix through the third quarter. We closed the quarter with net finance receivables of $1.82 billion, up $46 million from the prior quarter end. Our small loan portfolio increased 11% year-over-year. And at the end of the quarter, nearly 18% of our portfolio carried an APR greater than 36%, up from 15% a year ago. As Rob has noted, we purposefully leaned into growth of our higher-margin small loans in recent quarters, and we expect to continue growing our small loan book in a…

Thanks, Harp. In summary, we're very pleased with our third quarter results and our team's execution, particularly in reaction to the third quarter hurricane events. Our portfolio credit quality and performance have continued to improve even as we've leaned into growth of our higher-margin small loan book. We've begun to accelerate our portfolio growth and our yields and revenues are increasing. Our team is also doing an excellent job of prudently managing our G&A expenses as we continue to grow. We're very optimistic about our recent P&L and credit trends as well as the momentum that the business is carrying forward to the fourth quarter and 2025. We're well positioned to continue our improvement in our bottom line results and to deliver attractive returns to our shareholders. Thank you again for your time and interest. I'll now open up the call for questions. Operator, could you please open the line?

[Operator Instructions] Our first question will come from John Hecht with Jefferies.

First one is, I guess, just related to the quarter. How do we think of -- you have the provision tied to the hurricane activities. How much of that is really kind of a one-off tied to increased losses from the hurricane? And how much of that maybe could be just a pull forward of losses that would have occurred in later quarters?

John, it's Harp. I'll answer that question. So the $2.1 million incremental reserve that we took in this quarter is very much due to the hurricane activity. So that -- those losses would be coming in over the next several months. So what we did is -- and we don't exactly know the timing of those depending upon who's impacted and where they are in terms of being impacted. So that $2.1 million was specifically due to the hurricane activity reserves.

Yes. In the personal property insurance, John, the $3.8 million there -- sorry, $3.5 million pretax there, $1 million of that already has gone through that was Hurricane Beryl that hit the Texas area. Those claims have been paid. The rest of that reserve, the $2.5 million is anticipated with over half in the Asheville area, Western North Carolina, and that's our best estimate based on what we saw with Beryl and going through various actuarial work. Now interesting enough, those insurance claims write-off the balance of the loan and any excess value of the insurance goes to the consumer. So from a consumer standpoint, it helps the consumer kind of get back on track and maybe borrow more money to get back on their feet. But it also pays off the outstanding balance, some of which is delinquent and some of which may go to losses. But at this point in time, that's kind of hard to predict which of those loans are going to be covered by insurance.

Okay. That's good color. And then I know you gave some near-term kind of discussions for pricing. And generally speaking, the pricing has gone up. I think a little bit of mix shift, but also at the product level. I'm wondering kind of to what extent can you -- will you -- can you keep taking pricing up? And how does lower kind of benchmark rates impact the opportunity -- or I guess, competitive factors impact that opportunity?

Yes. I think that we put through pricing changes over the last year. I think what you're seeing going forward really is that mix shift to the higher rate business. That greater than 36% business went up from what was it 15% of the portfolio last year to 18%. And so when you look at our interest and fee yields for small loans, it's up 120 basis points year-on-year. I think if you looked at that on a year-to-date basis in the press release, I think it's up 230 basis points, Harp? So that's the benefit of the mix shift where, look, there's not a lot of competitors in that space. We're able to be pretty selective which customers we want to put on. And of course, we balance that out with the growth in our auto-secured book, our barbell strategy so that we kind of improve yields across the overall portfolio, but manage the risk side of it because we're putting on more of the lower-risk auto-secured loans.

All right. And then the last question is what's -- is there a long-term kind of target mix between large and small loans that we should be thinking about? And I guess, and maybe some of the auto-backed loans as well?

Look, I think that really gets to when we give guidance for 2025. I mean, based on what we're seeing now in terms of the success of our barbell strategy, which maybe I'll just cover it now rather than at the end, I think we're going to continue to lean into the small loan higher rate business. We're going to lean into the auto-secured business. So let me give you an example of why we feel it's working very well. Our small loans are up, I guess, in the quarter versus last year by $51 million or 11%. Our auto-secured volumes actually increased by the exact same amount, $51 million versus prior year or 35% -- and so -- but with that, what I think is telling is our interest and fee revenues are up 90 basis points in total with the higher rate small loans up 120 basis points. And at the same time, NCLs are down 40 basis points versus last year, and that's inclusive of a 30 basis point drag, if you will, from the higher rate small loan growth. So the benefit of the barbell strategy is we get a higher yield based on the mix, and we get a mitigate on the NCL side because of the auto-secured business, which sure it has some lower pricing on it, but the credit performance is very good. That strategy is the path going forward unless we see some reason why we want to tighten up from a risk standpoint on any parts of the portfolio. To the degree we shift that mix around, I think, is very much driven by what we see is happening with the customer inflation and all the other things we're looking at. But at this point in time, given where our funding model is, the expectation of rates still continuing to drop and who knows the exact path of that. But in that environment with our funding structure, it's -- these assets are producing very attractive margins and returns.

Our next question will come from Vincent Caintic with BTIG.

First one, following up on the hurricanes. Just wondering if there are any other impacts that we should be expecting, if there's anything else in terms of fourth quarter impacts with that? And if there's anything timing from the third quarter that I don't know if it gets reversed or anything in later quarters? Just wanted to understand that.

No, I think the only thing on the reserves, if there were to be less losses, obviously, that could have an impact. I mean we're establishing those reserves based on the best information we have at the time and based on our historical experience, not just -- only with Hurricane Beryl, but Harvey several years ago. So I would say it really depends on how it all plays out. And of course, there's the timing aspect, as Harp said, where the timing of those losses will come in over the next several months and bleed into early next year. And so the reserves associated with those losses get released when that happens. But nothing that you should expect in the fourth quarter that more than what we've disclosed here.

Okay. And then a broader question, but -- so you outlined all the different kind of mix shift and the success you're having with small dollar loans. I'm just wondering if you can maybe expand on once we sort of reach a level set for the mix of small dollars that you're planning to grow to, what sort of the credit reserve rates, maybe the net interest margin or the asset yields that we should be expecting once we reach that normal state?

Yes. I think I'm going to punt on that one because that kind of starts to get into guidance next year. But -- and we're also thinking through whether maybe some future disclosures may be required or not required, may be helpful on the greater than 36% business. But what I can tell you is we're getting very attractive risk-adjusted returns on that higher rate business. And our -- we're in the middle of budget season now and thinking through what our mix is going to look like next year. As I said to John's question, we're going to continue to leverage this strategy because it's a very powerful strategy to drive the top line and also manage the NCL rate associated with putting on the higher rate loans, which have higher risk, but mitigating that through our auto-secured business.

And Vincent, you should see that same impact on the reserve that Rob just talked about in terms of credit. So those higher rate small loans because they have higher NCLs will require a higher reserve. However, that will be balanced out by the lower credit losses on the auto and on large loans, which will also be reflected in the reserve. So really, the barbell strategy, it works on yields, it will work on losses, and it will also work on the reserves.

Okay. And then last one from me. Just the competitive environment and in particular, just some of the fintech companies that we cover this earnings season so far have talked about growth because of private credit funds that have been investing in them. I'm just wondering if you're seeing anything in terms of the competitive environment and the players in your space there are being rational.

We're not really seeing that. I mean our constraint on growth is really self-constrained in terms of how much we're willing to invest in the near term and looking at the macro environment and not really seeing that kind of competitiveness coming through the fintechs. Look, they obviously are getting some higher rate money to fund them and maybe they're going to take on more risk. Look, we've been doing the small loan business for decades, and I think we feel really good about our ability to add those assets on the books at attractive returns. And there is a lot of, I should say, opportunity out there. So a little bit more competition coming in there. I don't think it is, at this point in time, something we're seeing as a threat.

Our next question will come from Bill Dezellem with Tieton Capital.

Would you please circle back to the small loan yield being up 120 basis points. I don't think that either I heard your explanation or that I understand why that yield grew like it did.

Yes, Bill. No, so what we've been putting on our growth over the last year in that small loan business, which I said was up $51 million or 11%. We've been putting on higher rate small loan business. And so when you look at the mix of that, so I'm just going to give you a number. Let's say you're at 38% and you go up and you start putting on 40% business, right? And that's just an example. I think our average small loan is around 44% or so, but Harp can confirm that with me. And the point is as you go up that higher rate, higher risk part of the lending side, you're increasing your yields. And so the 120 basis points versus last year third quarter and the 230 basis points year-to-date in aggregate, besides some repricing of existing book is driven by putting on those higher rate, higher risk small loans, which from a margin standpoint are very attractive parts of our portfolio.

Okay. To make sure I'm fully clear here, within the small loan bucket, you are identifying lower credit quality consumers and therefore, the higher rate. Now you ultimately expect to get a higher return on those because of the higher rate, even though charge-offs may be a bit higher. And so that's what's happening as opposed to just raising rates. Is that correct? Or a bit of both?

Yes. Yes. Well, look, I think what you're seeing here is that mix shift. Now we have -- like others in the industry, and we've talked about this in prior quarters, we have repriced our large loans and parts of our small loans portfolio selectively in states. But the driver here that we're talking about and calling out is that mix shift. And look, you can see it in the supplement on Page 6, kind of what the ENR below 36% or conversely above 36%. I mean, we've now kind of reversed the course. We were growing large loans sub 36%, particularly in a credit environment that wasn't necessarily that attractive at the time. We're very familiar with doing this business. We used to have an even much larger small loan business as a percentage of the portfolio. We started off as a small loan company. So what we're doing right now is just optimizing our P&L and our bottom line to drive greater profitability by leaning back into that smaller loan business a little bit more, while also balancing that off of the barbell strategy on the auto-secured business. And remember, the small loan business is what's fueled our large loan growth. We take those customers. We -- based on how they perform on us, we're able to then graduate them to a larger loan and on average, drop their APR by around 12%. So this is a really important part of our growth story is that graduation strategy, that feeder business of the small loan business. So going back a little bit more aggressively in the small loan business, as you said, the higher rate and higher risk business, that gives us further opportunity in the future to take those best customers and move them into larger loans.

And Bill, just to add some more stats around that, our small loan mix in third quarter of 2024 was roughly 29%. In third quarter of 2022, we were at roughly 30%, was our mix. So in terms of leaning into the small loans, I mean, we've been at this mix before. Rob talked about moving up in the continuum of the higher rate loans. So that's taken our yields from 36.6% up to the 37.8%. But I also want to point out on small loans where delinquencies have come down from the 9.6% to the 9.4% on a reported basis. So we're managing all of the things in terms of the delinquency, the mix and the rate when it comes to the small loans.

Great. That's very helpful. And I think, Rob, you actually mentioned this in your response that the small loans have historically been the feeder, if you will, to the large loan category and -- because they graduate. Because you are adding a bit lower credit quality in the small loans, does that imply less chance of these loans or those consumers in this slightly higher credit band or slightly higher risk credit band not graduating to the large loans? Or have you -- do you have enough data to know yet?

No. Yes, look, we have very granular data by state. And you got to remember, some states are capped at 36% and some aren't. So a large part of the greater than 36% small loan shift in mix is in those states that are uncapped. But what it means when you go to a graduation strategy is you're graduating -- again, those that are paying and onus behavior is such that they warrant an increased loan. We have the option to give them a larger small loan at a lower rate or we have the option to put them into a larger loan at a lower rate, and we can price according to the risk, which is what I think you would expect us to do.

Right. No, that's very reasonable. And then one additional question, please. So as -- if there is a point you choose to lean into growth and start ticking your originations up just on a more consistent basis, make sure we understand the provisioning correctly, that would be an immediate penalty to earnings if and when you choose to do that as when the rate of -- when the total level of originations increases versus the comparable. Is that correct?

Yes. It's not the originations, it will be the ending net receivables. So for example, this quarter, we grew the portfolio by $46 million. So with a CECL rate of 10.5%, that basically translated to $4.8 million --

4.6 million

Or $4.6 million of pretax CECL reserves we had to put on the books, right? Next quarter, and we are ramping up our growth. So next quarter, we're giving guidance of $65 million to $70 million. And look, some of that is seasonal, but if your reserve rate is at that 10.5% rate, if you will, which it will be because we're still hanging on to some hurricane reserves, that's going to translate depending on where you are in that, call it, $6.5 million to $7 million of pretax provisions for the growth. Now the revenue associated with that comes in the future. So from a capital standpoint, you're generating significant capital, but that's just the growth effect of the CECL reserving policy.

Great. Thank you for walking through the math and the correction on originations versus any receivables.

This concludes our question-and-answer session. I would like to turn the conference back over to Rob Beck for any closing remarks.

Yes. Thank you, everyone, for joining today. Look, I'd just like to thank the regional team again. Their response to the hurricane was truly impressive. And the things we've done for our customers, I will tell you, goes a long way with them and creates a lot of customer loyalty. And so you got to be there in difficult times, and that helps them get through those difficult times and be long-term customers with us. So really an exceptional job by the team. We exceeded our earnings expectations by a wide margin before the impact of the hurricane. So we're very happy about that, and we are well positioned for growth going into 2025. I think it's evident. Credit continues to improve. We're maintaining a tight control of expenses. And as I indicated earlier, we'll see higher growth in the fourth quarter than we did in the third quarter as we get more comfortable leaning back into growth. And then just to recap that barbell strategy, I mean, it's working exceedingly well for us that we're able to grow the higher rate, higher-yielding business with strong margins on one end, the auto-secured with somewhat lower yields but much better credit on the other end and produce out of that an overall business where the yields have been improving and the NCLs are -- kept coming down. So we feel really good about how the business is positioned, and we're just continuing to execute on it. So thanks again for joining.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.