Ladies and gentlemen, greetings, and welcome to the Regional Management Second Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Garrett Edson from 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 second quarter 2025 earnings call. I'm joined today by Harp Rana, our Chief Financial and Administrative Officer. On this call, we'll cover our second-quarter results, provide an update on our portfolio credit performance and growth strategies, and share our expectations for the second half of 2025. We delivered very strong financial and operating results in the second quarter. We generated net income of $10.1 million and diluted earnings per share of $1.03, an improvement of 20% year-over-year. Our results across all line items met or beat our guidance, including net income that was $3 million or 42% better than the midpoint of our guidance. Our quarterly revenue reached a record level of $157 million. Total originations were also at a record high, and our annualized operating expense ratio was an all-time best. I continue to be impressed with our team's execution as we focus on driving growth, improving our operating effectiveness, and delivering strong shareholder returns. Consumers in our target segment remain healthy. This has allowed us to responsibly grow our portfolio while also improving our credit performance. We grew our net receivables by $70 million sequentially in the second quarter on $510 million of originations. Our ending net receivables were up 10.5% year-over-year, in line with our expectations to grow the portfolio by at least 10% in 2025. At quarter end, our 30-day delinquency rate was 6.6%, an improvement of 50 basis points sequentially and 30 basis points better year-over-year. Our net credit loss rate of 11.9% was in line with our expectations for the quarter. The NCL rate improved 50 basis points sequentially and was 80 basis points better than the prior year period. Our credit tightening actions continue to yield positive results. We also managed expenses tightly in the quarter. Our…

Thank you, Rob, and hello, everyone. I'll now take you through our second quarter results in more detail and provide you with an outlook for the second half of the year. On Page 4 of the supplemental presentation, we provide our second-quarter financial highlights. Our net income of $10.1 million and diluted EPS of $1.03 were supported by a solid portfolio and revenue growth, a healthy credit profile, expense discipline, and a strong balance sheet. For the third quarter, we're projecting net income of roughly $14.5 million. Turning to Pages 5 and 6. We had record total originations of $510 million in the second quarter, up 20% year-over-year. Loan volume was driven by strong performance from our digital channel, auto secured product, and the 17 de novo branches we've opened over the past 12 months, the latter of which generated 24% of our year-over-year growth. Our total portfolio reached record levels at the end of the second quarter and is expected to cross $2 billion in the third quarter, while our ending net receivables per branch reached $5.6 million on average. We continue to believe that key economic markers, including wage growth, the number of open jobs, the unemployment rate, and the direction of inflation, are favoring our customers and that our customers tend to be resilient and adaptable. These conditions have allowed us to grow our portfolio while maintaining a tight credit box. Looking ahead to the third quarter, we anticipate that our ending net receivables will increase roughly $55 million to $60 million sequentially and that our average net receivables will be up roughly $75 million sequentially. Turning to Page 7. Total revenue grew to a record $157 million in the second quarter, up 10% year-over-year. Our total revenue yield and interest and fee yield each moved up…

Thanks, Harp. Before we wrap up, I want to take a moment to thank the entire Regional team for their dedication and outstanding execution during the second quarter. Your hard work continues to drive our success and positions us for long-term growth. We're extremely proud of our results this quarter: record revenue, strong net income, responsible portfolio growth, disciplined expense management, and improved credit performance. These achievements reflect the strength of our strategy, the quality of our execution, and the resilience of our business model. Looking ahead, we remain focused on accelerating growth, investing in strategic initiatives like branch expansion, advanced analytics, and technology enhancements, and further strengthening our credit performance. These actions will enable us to deliver sustainable, profitable growth and long-term value for our shareholders. Thank you again for your continued support and confidence in Regional Management. We're excited about the opportunities ahead and look forward to updating you on our progress in the quarters to come. I'll now open up the call for questions. Operator, could you please open the line?

[Operator Instructions] The first question comes from the line of David Scharf from Citizens Capital Markets.

Terrific results. And I'm wondering, Rob, you've discussed an awful lot of different initiatives, whether it's geographic expansion, some of the store-based origination, marketing channel technology developments. As we look beyond just kind of the near-term 90-, 180-day guidance, is there kind of a ranking of where you see the most opportunity you can provide us, whether it's geographic, channel related or product-related? Or should we just think of this as always fine-tuning among all the different aspects of growth?

So great, Dan, great question. Thanks for joining. So here's how I would answer that question. And I'll give you the context of what I think we accomplished this quarter in doing so. First and foremost, what I would say is we have a lot of levers for growth, which is reflecting all the investments we've made in the various initiatives over the last several years, including what has been a pretty challenging time during the high inflation period. And so it puts us in a unique position where we can pull those levers based on what we see in the health of the customer and the macro conditions or the macro environment. So the drivers of the growth for us have been a combination of state expansion and the new branches, many of which are in those new states. Our auto secured lending, which we did lean into digital underwriting, which you can see was very strong this quarter, and also the advanced analytics that we've invested in, which helps us to really fine-tune our underwriting and marketing strategies to deliver increased growth if we choose to or to use those models to moderate losses. So we can optimize using those advanced analytics depending on the market conditions. So what I would say to you is -- and this isn't mutually exclusive, but if you look at the $187 million of growth we had in ENR year-on-year, our lower-risk large loans grew $147 million, which was 79% of the growth. And that was almost quadruple the increase in our small loans. The auto secured loans increased by $66 million. And obviously, that's a subset of large loans, but that was 35% of our growth. And it's now 13% of our portfolio. And as I said, delinquency rates, 30-day delinquency…

Got it. No, that's helpful. I mean it's certainly a lot of different levers at play. Maybe just one follow-up on your comments on credit. It looks like pretty much every lender that's reported in our coverage, regional, no exception, seem to have probably exited the first quarter, maybe in an over-reserve position, which was entirely understandable in the wake of the kind of April 2 announcements. Given all of the constructive commentary you provided about the stability of your borrower base, is the allowance -- is the kind of flat allowance rate or reserve rate guidance you're providing, should that be taken as an indication that that's probably a normalized level? Or are there certain other things you're on the lookout for that could potentially lead that reserve rate below 10%?

So David, it's Harp. I'll answer that. So we look at our CECL allowance rate, as you know, it's based upon our portfolio mix and our growth, and we look at product, FICO, and delinquency. So we look at credit and delinquency trends in terms of what we see internally. And then we overlay macro on top of that. So what you saw this quarter in terms of the 10.3% and how that came down from last quarter, we had signaled that we would be releasing the remaining hurricane, which we did. So that's part of that 10.5% to 10.3%. The macro improved, and that's another reason why we're seeing it come down from 10.5% to 10.3%, so we've got the improvement of macro currently in the numbers that are calculated in the allowance for the quarter. Now as you know, every quarter, we'll take a look at revised macros. And if there is an opportunity for the reserve to come down lower based on macro, but also our own trends and our product mix, we take a look at that every quarter. But right now, in terms of -- and you're probably looking at our guidance, we're comfortable in terms of where we're guiding to in third quarter at the 10.3%.

Yes. I was going to add a little bit here just on the health of the customer as we're seeing it. I would say the customers are generally doing pretty well, and they're making smart choices. Our customers tend to do a pretty good job of finding ways to mitigate social times. Unemployment, as everyone knows, is low. It was nice to see the economy grow last quarter. And we're still seeing real wage growth in our customer segment. And there's still 7.5 million open jobs out there, and many of those roles fit our customer profile. I do think immigration may further boost -- the immigration restrictions will further boost wage growth and job prospects for our clients. And then if we look at the O BBB or OBB bill, however you want to say it, look, I think it's likely positive for our customers based on everything we see. A little early to tell, but we generally view that as positive. And look, the uncertainty right now remains tariffs. I think there's a little bit more certainty than there was. And inflation is still a little elevated, but I think the view from most market is any tariffs will be more of a one-time shock to inflation rather than one that per increased inflation continuously. So that's not to say that we're watching the performance of our customers and having to tighten credit where we want. In fact, as I think I've said numerous times, we're always turning the dials tighter here to address where we might see stresses. But at this point in time, I think the consumer is holding up pretty nicely.

The next question comes from the line of Alexander Villalobos from Jefferies.

This is Alex here instead of John Hecht. I wanted to ask you a little bit about how we should think about yields going forward. Potentially, there might be a rate cut later this year, but definitely a year from now, we should be expecting lower rates. So just kind of what is the playbook with yields? Should we expect to kind of maintain higher pricing as interest expense goes down? Just kind of how we should think about that?

So Alex, it's Harp. When you say yields, are you referencing fund's interest expense?

Yields. Interest income, yield.

Yes. So revenue yield. Okay. So revenue yields, Alex. So I think we've guided in terms of where revenue yields will be in the third quarter. In terms of how we price, we price in terms of competition. So you'll always price in terms of the right product or at the right price for the right customer. So that's how we price, and we'll take a look at how our competitive pricing is to make sure that we don't have adverse selection. So we'll continue to monitor that. And if there's opportunity to look at pricing, we will definitely do that.

And then on the interest expense side, in the future, is there any ability to kind of switch to a better cost of fund source of funds versus mezzanine debt?

So Alex, what we do is we manage cost of funds quite effectively. If you look at what we've done over the last several quarters, you can see that we basically maintain cost of funds within the 4% to 4.3% range. So we've done a very good job through the cycle managing cost of funds. Now part of that is because of how much of our book is fixed, 84% of our book is fixed. And so when you're modeling, we're looking at cost of funds in the future, even though interest rates may come down through Fed cuts, what we have to remember is that we have securitization that we have put on books at very, very low rates. Those will come due, and they will reset at market rates. So you will see our cost of funds go up, especially in -- we guided higher cost of funds in the third quarter. We've guided even higher cost of funds at 4.5% in fourth quarter. So that sort of the baseline as we look to model into next year. And then when you look at next year, you should really look at the securitization that we have come into and what the weighted average cost of those securitizations are. And then if you were to just look at the last securitization that we book, that would give you a pretty good indication of how cost of funds is going to change and increase into next year.

The next question comes from the line of Kyle Joseph from Stephens Inc.

Let me echo congratulations on a strong quarter. I just want to talk about the originations mix in the quarter, it looks like small decelerated a little bit, large accelerated. Just wondering, is that a function of demand, a function of competition? Or is it really just one quarter is not enough to really call it a trend?

Yes, I'll take that. Harp, you can jump in. As I said, our large loans grew nicely year-on-year. I think a big part of that is driven by the increase in our secured business. I think in our digital originations, bigger concentration in the larger loans, better quality, and that's done with invention. I think even in the new states that we enter, particularly we're renewing smaller loans and the larger loans, that's a generalized theme that we're growing our larger loan book faster than our small loan book. And I'll say this, and look, I'm not going to give you a definitive view of where the greater than 36% business will be over time. But I do think it's going to decline as a percentage of the portfolio because of the levers I just mentioned, the growth in new states, the digital larger loans, the auto secured, all of which helps improve the quality of our portfolio, and I think are all originated at attractive returns. Harp, did you add anything?

No, I think that's it.

Yes, that's helpful. And then just one follow-up on OpEx. I appreciate the guidance for 3Q. But as we think about that going forward, it sounds like there's some puts and takes in terms of branch consolidation versus new builds, and then some restructuring you did at the corporate level. But how you're thinking about whether it's marketing on its own or expense, and how that compares to kind of your expectations for loan growth overall?

Yes. I mean if we lean into faster growth in the second half of the year, we have guided to minimum ER growth of 10%. Now in the second quarter, we grew at about 10.5%, which was about $15 million higher than our guidance on ENR. And so pretty healthy beat on growth in the second quarter. So as we look at the second half of the year, there is an opportunity potentially to grow faster. Again, we'll have to see what the macro conditions hold and support. But at the end of the day, there could be opportunity and there could be additional expenditure to go along with that. Naturally, we want to take advantage of that. But look, as I think everybody knows, higher growth does impact short-term net income due to CECL, as you take the lifetime losses upfront. And so that's part of the reason, or is the reason for the range of the full year. But faster growth is just going to propel higher earnings for next year. And so I think that we're sitting in a good position where we see the opportunity to grow and potentially take advantage of it if market conditions warrant.

[Operator Instructions] The next question comes from the line of Vincent Caintic from BTIG.

I did want to follow up on the guidance. So I wanted to ask about your philosophy around guidance and how much conservatism is baked into it. When I look at your good second-quarter results versus your guidance, you handily beat it. Loan growth was, what, 22% higher than guidance. Revenue yield was 30 basis points higher than your guidance, and the expenses were lower. So your net income was 40% above your own second-quarter guidance. So I wanted to ask, first, maybe what changed in your performance versus what you were expecting when you gave the guidance? And then when I look at the third quarter, third quarter guidance calls for lower loan growth than what we saw in the second quarter, and the revenue yield declining quarter-over-quarter. So I just wanted to ask how much conservatism is baked into all of that.

No, Vincent, that's a good question. I would tell you that when we were giving guidance for second quarter, we were coming off the first quarter where volume growth wasn't where we had hoped it would be, and that's part because of a strong tax season and some weather. And of course, the biggest backdrop was just all the uncertainty about tariffs and the potential for a hard landing. So I think as we started to see things evolve a little bit and saw customer demand be there for the segments where we get a good return, we were able to lean into the growth faster, and that's what we should do. But as I noted in the document, we also, obviously, having a mind towards the future if things were going to slow down, we took actions on expenses, and we ran the place to be as efficient as possible. We took some restructuring actions. And some of these things, you just can't give guidance on because we're working the numbers and the results each and every month of the quarter. So as we look ahead, in terms of conservatism or not, I don't think there's 100% clarity on where tariffs are going to go. And so part of the reason why we're giving a range on full-year net income is it's very much dependent on how much growth we choose to do.

That's very helpful on how you're thinking about guidance. I really appreciate that. Separate question. I noticed in one of the slides, a very helpful detail on all the slides. One of the slides that you were talking about your store growth. The receivables per store is actually higher for the 1- to 3-year-old stores than for stores older than 3 years. And I thought that was interesting. I was wondering if maybe you can describe like what's driving that and if there's any learnings is on Slide, I think, 6 of the presentation deck. I just thought that was very fascinating that there's so much growth there. So I'm wondering about the opportunities for the rest of the stores.

Yes. Again, great question. The driver of that is most of those stores are in the newer states, which have less range density. And so we're seeing bigger stores on the average than what we have in our legacy states.

The next question comes from the line of John Rowan from Janney Montgomery Scott.

Just a quick question. So the -- you said that there was a restructuring charge in the third quarter, correct? Because you did come in below your G&A guide for the quarter, but that -- whatever the restructuring expense was recognized in the second quarter, correct?

Yes. So there was a restructuring charge in the second quarter, but you will have savings through I'm sorry, in third quarter. And so you will have -- so the prices will be recognized in the third quarter, and you have savings in the second half of the year.

Yes. It's neutral, if not positive in the third quarter.

Okay. And just maybe one simple question. So if I look at guidance and you look at the net income guide and maybe go towards the -- let's just forget the mistake, say you're at the middle of net income guide for the year, that would kind of indicate a slightly down net income third to fourth quarter. It's been a while since we've had kind of a clean back half of the year, given all the loan sales you've had in prior years. Is that -- and obviously, things change as you kind of lean into small loan growth. Is that kind of the typical seasonality that we should expect going forward?

I think your question is, do we normally grow faster in the second half of the year? I think in general, that's true. And I think that the lever here is just simply how we grow in order to -- depending on the environment, and then to benefit next year.

Net income will obviously be the amount that we have to take for the incremental growth.

The next question comes from the line of Bill Dezellem from Tieton Capital Management.

Fantastic quarter. A couple of questions here to start with, the digital originations stepped up meaningfully from the prior quarters. Would you please discuss the dynamics behind that, please?

So in terms of the digital originations, I think we just had -- our affiliates, we had some good loans book through the affiliates. Our branches became more productive in terms of booking those leads. And we were also able to book larger loans through the affiliates, and that's really what you see show up on the page.

And as a result of what you just said, that sounds like that is a repeatable and sustainable going forward as opposed to a one-off phenomenon?

Yes. Look, the digital partners have been driving really nice growth. We obviously review those partners and credit performance regularly. And so there will always be some modulation in terms of the level of digital originations relative to other opportunities because, at the end of the day, as you know, we are trying to maximize the bottom line returns. So there may be quarters where we might slow the digital a little bit and grow other parts of the portfolio faster. Again, we're always looking at what -- as is the right thing to do for -- on a risk-return basis.

Great. And then as you pointed out, your revenues grew 5x faster than expenses. Is that somewhat normal now going forward for a few quarters? Or was there something special that came together to make that happen this quarter?

Well, look, the investment dollars are always a little bit episodic. We have invested a fairly significant amount of money in our technology platform and our advanced analytics, adding additional branches. And so one of the things that could change that dynamic is if we open up a significant number of branches. Now we're guiding to 5 to 10 more branches in the next 6 months, kind of what we did in the second half of last year going into the first quarter. But what I would say is it's all about growth. And we had record originations, $510 million, which was up almost 20% this year. That drove the record ENR in the quarter, which is up $70 million or 10.5%, which drove record revenue of $157 million, up 10%. And so that top line growth is critical to create scale in this business, and so over time, and we've done this now consistently for 5 years, we're looking to continue to drive down our operating expense ratio. Now I will add to that, and we don't have a way to quantify this, but the new front-end platform that we're rolling out in our branches, and we have that now in one state, I mean, that is dramatically improving the decisioning time for each and every loan for customer origination. And that's going to lead to productivity improvements where for the same level of expense we hopefully can generate more volume or more time on collections. And so where that's going to play out over the next 18 months as we roll that out across the network, we'll start to see. But we're very much investing not only for top-line growth, but we're investing to be a more efficient organization.

Excellent. And then one additional question that emanates from me not having enough time to do my homework here. But your guidance for the third quarter equates to assuming 9.8 million shares, $1.45 to $1.50 of earnings, which is meaningfully above what you just reported. So that -- or the primary swing factors that are leading to that meaningful uptick in earnings in Q3 versus Q2?

Well, I'll take a crack at it, and Harp is going to correct me if I'm wrong, but it's the top line growth from the higher volumes in the second quarter and volumes in the third quarter. It's continued expense discipline, and we're expecting further improvements on NCLs and cost of funds, I think, are pretty much in the same ballpark, maybe a slight pickup. And so that's driving strong bottom-line growth. And look, where the volume ends up the full year, we'll see. But like I said, we have lots of levers for growth.

Right. So all of those things. ANR is growing. So that is going to help. NPLs usually come down in third quarter, and we've guided 51. So based off of where we are, you can see that that's contributing. Interest expense is going to take up just very, very slightly, but relatively flat compared to other things. But those are all things that are going to drive 145.

Great. Well, congratulations again on a solid quarter and having things develop as you had forecasted or guided last quarter. Well done.

Ladies and gentlemen, as there are no further questions, I would now hand the conference over to Rob Beck for his closing comments.

Well, thanks again, everyone, for joining today. Look, as we said, we're, I'd say, extremely pleased with our quarterly results, which really were strong across all our key metrics. It's clear to me that the capabilities that we developed over the recent years positions us to continue to deliver strong growth and long-term shareholder value. Look, the -- as I said, I'll reiterate our investments over the recent years in new states and branches, our unsecured business, our digital capabilities, and our advanced credit models and analytics really support our growth while also keeping credit risk in check. Second half, we'll see how the customer health is doing if it stays the way it is, and we'll inform our growth in the second half of the year by our credit metrics and macroeconomic conditions. So again, thanks, everybody, for joining this evening, and enjoy the rest of your time.

Thank you. Ladies and gentlemen, the conference of Regional Management has now concluded. Thank you for your participation, and you may now disconnect your lines.