Thank you for standing by. This is the conference operator. Welcome to the Regional Management Fourth Quarter 2023 Earnings Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. [Operator Instructions]. I would now like to turn the conference over to Garrett Edson with 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. 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 2023 earnings call. I'm joined today by Harp Rana, our Chief Financial Officer. In the fourth quarter, we took a series of actions to place the business back on a more normalized earnings trajectory, including putting the higher losses in our back book portfolio behind us. On this call, we'll cover our core operating results, provide details on the actions taken in the Q4 and preview our expectations for the first quarter and full-year 2024. Fourth quarter results came in better than our outlook when excluding the impact of three discrete items that we took in the quarter. While we had a net loss of $7.6 million or $0.80 per share, our aftertax earnings were reduced by $12.6 million or $1.34 per share due to these three actions. However, these actions strengthen our balance sheet and realign the business with further cost reductions, both of which position us for future growth with improved operating leverage and stronger earnings in 2024 and beyond. I'll provide an overview of these actions now before covering our fourth quarter results and 2024 expectations in more detail. First, we booked a $2 million pretax restructuring charge in the fourth quarter related to brands consolidations and severance costs from the elimination of roughly 10% of our corporate positions. These restructuring actions will result in about $6 million of operating cost savings in 2024, which will utilize to self-fund our continued investment in growth, technology, data and analytics and expansion with our newer states of operation. As a result of these actions, we expect to hold our 2024 G&A expenses roughly flat to our fourth quarter run rate. Second, as we did in the fourth quarter of 2022, we undertook a sale of certain non-performing loans prior to their…

Thank you, Rob, and hello, everyone. I'll now take you through our fourth quarter results in more detail, including the impact of the three actions that Rob covered. I'll also provide you with the line item guidance for the first quarter. On Page 3 of the supplemental presentation, we provide our fourth quarter financial highlights. As Rob noted, we had solid core operating results despite a net loss of $7.6 million or $0.80 per share. The restructuring loan sale and reserve actions described by Rob impacted net income by $12.6 million or $1.34 per share. On a normalized basis, we had strong revenue growth and we continue to carefully manage our G&A and interest expense. We also exited the year in a strong reserve position with an improved delinquency posture. Turning to Page 4, demand remains strong in the quarter, and we continue to take a cautious approach to underwriting with an emphasis on higher margin segments. Total originations declined 13% year-over-year. By channel, direct mail, digital, and branch origination fell by 22%, 16%, and 8%, respectively. As we've consistently noted, we've deliberately reduced originations in recent quarters as we appropriately balance growth with credit quality and higher returns. Page 5 displays our portfolio growth and product mix through the fourth quarter. We closed the quarter with net finance receivables of just over $1.77 billion up $20 million from September 30th. Our fourth quarter portfolio growth was impacted by the fourth quarter loan sales, which accelerated a total of $16 million of loan charge offs and interest accrual reversals from the first quarter 2024 to fourth quarter 2023. Excluding the impact of the fourth quarter loan sales, we exceeded our fourth quarter receivables growth outlook of $35 million by roughly $1 million. As of the end of the fourth quarter,…

Thanks, Harp. As always, I want to thank the entire Regional team for their hard work and commitment. The team continues to execute well against our strategy, which has positioned us to lean into growth as economic conditions continue to normalize. Our business has proven to be very resilient during a period of high inflation not seen in the last 40 years. As we kick off 2024, I'm optimistic about our prospects and future results for several reasons. First, the economic outlook is improving. Inflation continues to fall. Real wages are growing for our customers. Unemployment is below 4% and there is an increasing likelihood of lower funding cost in the near future. Second, we put the incremental stress on the back-book behind us and our front book is performing in line with our expectations And third, we positioned the business to further increase receivable growth as the economic environment improves. The actions we took in the fourth quarter position us for more normalized earnings in 2024 and set us up for a strong 2025 and beyond. 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. [Operator Instructions]. The first question comes from John Hecht with Jefferies. Please go ahead.

Good afternoon, guys. Thanks very much. I guess the first question just because it feels like credit spend a little bit of a moving field goal kind of post the last several quarters. I'm just wondering, what did you like maybe you could talk about the 2023 vintage or the 2022 vintage, like your confidence level and how much better that will perform, what kind of underwriting changes you've made and what kind of are the early signals that that will come to fruition?

We'll do John and thanks for joining the call. What I'd tell you is when we did the analysis of the front book versus back-book, the back-book is stressed about 40% more than the front book. And so as we see the new vintages coming on, they're performing back at historical levels. Now there's always a difference in mix and various vintages, but the tightening is having an impact and that we wanted to have and we're very pleased with the performance of the new vintages. In terms of the credit losses in the profile, I mean for us, the MCLs peaked in 2023. And so we have a back-book now that's 22% of the portfolio and as you can see, it's got fairly high delinquencies, but we're fully reserved against that with a 14.8% of reserve rate and as that portfolio burns through, we'll release the reserves associated with it. And by year end, we expect to have the back-book down to about 8%. So this quarter where we took the actions to put the back-book behind us, that's partially through the loan sale as well, really just puts us on a more normalized trajectory and allows us to focus on the path forward. Certainly, we got to still collect the assets as best we can in the back-book, but we feel good about having positioned the business for the future now.

And then like just the branches, you've optimized the branch locations, is there more to go there? And then maybe kind of on the same branch topic, you guys expanded into Illinois a couple of years ago, maybe give us an update on how that's going?

Yes. So we ended up closing four branches. I would say that's fairly typical in every given year that we close three or four branches, we included in all the restructuring actions that we took in the quarter, which was largely looking for efficiency saves and how we manage the business, some belt tightening, we thought that was the right thing to do and give us some dry powder for when we want to lean back into growth. In terms of going forward for this year, I would say in terms of new markets, just to be transparent, we've entered so many new states. There's plenty of headroom and growth opportunity in every one of those states. We'll add a handful of branches in those newer states where we know we can get really nice receivables per branch, which on our newer states are averaging $5 million to $6 million per branch. And so and we'll continue to optimize around the network like any good retailer would do when leases come due and if there's opportunities to consolidate. In terms of Illinois and the new states, I mean, we're very happy with the growth that we've seen. Illinois has got $54 million of E&R across eight branches and we're averaging $6.7 million per branch. So that profile is the same, if not higher in some of our other new states, which is just a proof point that our leaner footprint model creates a lot of leverage in these new markets.

Great. Thanks guys very much.

Thanks, John.

The next question comes from Zachary Oster with JMP Securities. Please go ahead.

Hi, this is Zach on for David. So just back to the topic of the branch optimization. So we just wanted to kind of dig in there a little bit more and see if there is if it was concentrated in any specific state or region. Additionally, does this kind of impact any future footprint extension kind of strategy longer term?

No, it really is when you look at any kind of retail business, your leases come up over a period of time and then you look at well, based on our kind of the larger footprint strategy, do we have an opportunity to consolidate in one larger location. And so we take those opportunities as they come up, which is what was the case with these four branches that we closed and consolidated to a nearby location. And effectively, we've been doing this for a while. We effectively do that and that helps self-fund additional branches in newer locations and new states. So it's just a normal part of running the business and optimizing your retail storefront.

And Zach, the only thing that I would add to that is as we talked about the restructuring, much of the restructuring in the severance costs were due to the elimination of approximately 10% of our corporate positions. So I just want to point that out in terms of the restructuring. And just as a reminder, that's going to result in about $6 million of operating cost savings in 2024.

Got it. Thank you.

Great. Thanks, Zach.

[Operator Instructions]. The next question comes from Bill Dezellem with Tieton Capital. Please go ahead.

Thank you. You just mentioned the 10% headcount at corporate. Would you please walk through kind of what functions you found that you were getting a bit heavy and needed to trim down?

Hey, Bill, how are you doing? Thanks for joining. Really, it was us optimizing across the head office. So I wouldn't say it was heavy in any particular area. But as you think ahead and how we plan to run the business going forward, particularly, operational elements and certain business lines, including digital business that we're growing. There was just the ability to combine functions and then by doing that, basically have a more efficient organization, be able to reduce some folks. And I will tell you, always a hard decision to reduce talented people and this had nothing to do with the individuals themselves. It had to do with where we could run more effectively and frankly create some synergies and backups where functions could be put together. So not any one targeted area.

That's helpful. And then what was the size of the portfolio that you sold in the fourth quarter, please?

Yes. So Harp, you got that.

Yes. So we sold about $24 million of the loans, and that had a December E&R impact of $16 million.

Great. Thank you. And couple more, if I may, please.

Sure.

Have you begun leaning into portfolio growth as of today?

So I would say in this way. We -- our models where we look at our returns on a DCM basis, a direct contribution margin basis. Like others, we look at every aspect of our portfolio. We look at what the returns are. We pick those parts of the portfolio where we have the highest confidence. We also apply stress against those underwriting decisions, particularly where there are higher stressed or higher risk areas, and I'll give you an example. So our small loan book, we added about $30 million of receivables in the third quarter, another $19 million in the fourth quarter. And I think we're now at a record high in terms of our small loan portfolio. Now typically, we have been reducing the amount of loans that are greater than 36%, and we actually, I think we're up about 2 percentage points versus prior year. Now I would say that that is done with confidence, because while this is higher rate, higher risk business, it's got very attractive margins. So to kind of give you a sense of what this means for the businesses, so we've talked about repricing our portfolio for all of last year, and we continue to do it where we see opportunities. We're leaning into some of the small loan growth. And so if you look at our originations in the fourth quarter, the average APR was right at 37%. Our fourth quarter 2022 APRs on our originations, so a year ago was 34.6%, give or take. So we've added 233 basis points of higher APR to our business model over the last year through repricing our base business as well as starting to lean into some of that smaller loan activity, which as I said is higher rate, higher return, but also has somewhat higher losses, which is why we kind of guided up the NCL rate for next year. So again, it's all about putting on our highest confidence assets with the best returns and that's how we run the business.

That's interesting. Let me jump in a little further on that, if I may. So historically, we have thought about the small loan portfolio as being a feeder for the large loan portfolio. And those loans tend to be to newer or have tended to be to new or newer clients, and then that leads to large loan growth. Is there something different going on now? Or is that exactly what we're seeing and it explains and somehow leads to there being a pullback in the large loan originations that you've experienced?

No, I would say that the market and the competition around that small owned space is not as great right now for lots of reasons than other competitors. And so we're able to be pretty selective in those loans we put on. And it creates that feeder system that we've always had to be able to take those best customers who perform on us, and then migrate them up to larger loans. So, this isn't about deemphasizing large loans. This is about finding where there's opportunities really strong returns with the small loan portfolio. And we probably have discussed this in the past, but we have a barbell strategy where we have some higher rate, higher risk loans, small loans on one end. We have a large loan book in the middle and we're increasing the size of our auto secured business on the other end of the barbell, which is obviously, it has much lower credit losses and equally strong returns. And so this is just the strategy of continuing to maximize the bottom line returns across those three elements of our business.

Great. Thank you both for taking my questions.

Great. Thanks, Bill.

The next question comes from John Rowan with Janney. Please go ahead.

Good evening. I just have one really quick question. So the net charge off rate guidance that you gave for fiscal 2024, that obviously benefits from the loan sale in the fourth quarter, correct?

Actually, it does benefit from the loan sale in the fourth quarter. The Harp, do you have that?

So in the fourth quarter, it had a 320 basis point impact. And I'll go back to last year's loan sale, which had a 320 basis point impact in the fourth quarter of 2022, but then had a 280 basis point positive impact in first quarter of 2023. So we would expect a similar pattern with the fourth quarter '23 loan sale.

Okay. All right. Thank you.

Thank you.

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Beck for any closing remarks. Please go ahead.

Thanks, operator, and thanks everyone for joining this evening. Let me close by saying that I'm optimistic about our future. As I said, the economic outlook is improving. Inflation is falling, real wage growth, unemployment below 4%. There's still 9 million open jobs out there, and the rate cuts, as I said, are seemingly on the horizon. I think most importantly though, we put the back -- the higher losses on our back book behind us. And as we said, our front book continues to perform in line with our expectations. Our back book is 22% of E&R now, and by year end, it's going to be 8%. Given our proactive tightening, our MCLs did peak in 2023. And while the back book is still leading to elevated losses in 2024, we are fully reserved for those losses at a reserve rate of 14.8%. And lastly, our year end 30 plus day delinquencies were better than prior year by 20 basis points. Overall, our model is proven to be very resilient through a period of high inflation that's not been seen in 40 years. And during this period, we continue to invest in the business, so we could lean into growth as the macro environment improves. We have a strong balance sheet with liquidity to fund our growth. And when you factor in the fourth quarter actions, we still generated $26 million of capital this year, of which $12 million was paid out in dividends, and we ended the year with $322 million of book value or $33 per share. So given all these actions, we are positioned to improve earnings this year, and we're seeing a strong 2025 and beyond. So again, thank you all for joining and have a good night.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.