Greetings and welcome to the Regional Management's First Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Garrett Edson. 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 first quarter 2024 earnings call. I'm joined today by Harp Rana, our Chief Financial Officer. On this call, we'll cover our first quarter financial and operating results, touch the credit performance of our portfolio, and share our expectations for the second quarter and the balance of the year. We had a very strong start to 2024 as we outperformed our outlook on both the top and bottom lines. For the quarter, we generated net income of $15.2 million, and diluted earnings per share of $1.56. Our portfolio liquidated by $27 million in the quarter, in line with our expectations and consistent with normal seasonal trends. The increased pricing that we've implemented over the past several quarters and the growth in our higher-margin, small loan portfolio drove total revenue yield to 32.8%, which was 80 basis points better than prior year and contributed to record quarterly revenue of $144 million. We've also continued to aggressively manage our expense base while still investing in our growth and strategic initiatives, resulting in a sequential improvement in our operating expense ratio of 110 basis points. In sum, we're very pleased with our first quarter results, and I continue to be very proud of the way that our team members are navigating through the current environment. We remain cautiously optimistic about the direction of the economy and the credit performance of our portfolio. We continue to maintain tighter underwriting guidelines and thoughtfully grow our high-margin, small loan portfolio, which has grown by nearly $50 million, or 10%, since the middle of last year. We expect to continue to grow our small loan book in a measured way as the returns are very strong and more than make up for the higher loss rates on this portfolio. Overall, we're seeing…

Thank you, Rob, and hello, everyone. I'll now take you through our first quarter results in more detail and provide you with an updated outlook for the second quarter. On Page 4 of the supplemental presentation, we provide our first quarter financial highlights. As Rob noted, we generated strong net income of $15.2 million, or diluted earnings per share of $1.56, driven by solid revenue growth and continued expense discipline. We also exited the quarter with a strong balance sheet, healthy loan loss reserves, and an improved credit profile. Turning to Page 5. Demand remained strong in the quarter, and we maintained a cautious approach to underwriting, with an emphasis on higher-margin segments. Total originations increased 8% year-over-year. By channel, branch and direct mail originations increased by 2% and 30%, respectively, while digital originations were 9% lower year-over-year. As we've consistently noted, we've deliberately decelerated origination since 2022 as we appropriately balanced growth with credit quality and higher returns. Page 6 displays our portfolio growth and our product mix through the first quarter. We closed the quarter with net finance receivables of roughly $1.74 billion, down $27 million from year-end due to the normal seasonal liquidation expected in the quarter. As of the end of the first quarter, our large loan book comprised 72% of our total portfolio. In addition, slightly under 84% of our portfolio carried an APR at or below 36%, compared to just over 86% of our portfolio a year ago. As Rob previously noted, we've purposefully leaned into growth of higher-margin small loans in recent quarters as they will support future revenue yield offsetting increasing funding costs and exceed our return hurdles despite higher expected net credit losses on these particular segments. Looking ahead, we expect our ending net receivables in the second quarter to increase…

Thanks, Harp. Before we get into Q&A, I'd like to take a moment to thank the Regional team for the hard work, commitment to our hard-working customers, and delivery of outstanding results in the first quarter. We had an excellent start to the new year, and we look forward to continuing the momentum in the second quarter and beyond. While we remain conservative on our underwriting at this time, we're cautiously optimistic about the direction of the economy, and we're well positioned to continue our growth and increase our market share when the conditions are right. In the meantime, we'll continue to provide best-in-class service to our customers, advance our capabilities and strategic initiatives, and deliver sustainable returns and long-term value 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] First question comes from John Hecht with Jefferies.

I know you guys, you mentioned a revenue yield about 50 basis points below Q2 from Q1, which I think is normal from a seasonal perspective, and I think that's suppressed because of delinquencies. But how do we think about core yields throughout the year, given pricing increases? And how should that influence the yields in the second half?

John, it's Harp. So, I think you're referring to second quarter guidance where we said that we would be lower by 50 basis points, and that very much is seasonal. Our NCLs are going to go up in the second quarter. So, that's very much due to that. In terms of yields for the full year, we did provide guidance, and we said that they were going to be 40 to 50 basis points up year-over-year. And that is inclusive of the pricing that we've spoken about previously.

Okay.

Yes. And John, I would just add that yields are up 80 basis points versus prior year and 50 basis points versus prior quarter. And if you look at Page 9 of the release, you'll see that it's all on the small loan side. So, small loans are up 280 basis points versus prior year and 150 basis points versus prior quarter. And that's important because we put on about $50 million of small loans since middle of last year. That's part of that higher risk but higher return business that we've been talking about. It's fantastic business. We're obviously putting it on in a very measured way, but it's having a meaningful impact on yields. And I would tell you that from a delinquency standpoint, that business probably cost us 10 basis points of delinquencies in the quarter, but 80 basis points of improved yield. So, we've got a dial that we can turn on. We're being measured in terms of how we do it and when we do it, because we're watching, obviously, the inflationary environment and seeing that hopefully continue to come down. But it's a big lever for us if we choose to pursue it more aggressively. And quite frankly, I think it's one of the biggest strategic advantages that we have versus others that cap themselves at 36%. Having this pricing power is something that sets us apart should we choose to lean in more aggressively at some point in time.

Okay. And then just on expenses, real quick, you beat your specific guidance by $5 million in the quarter. You referred to some of it was timing difference, but your Q2 guide is less than that. So, I guess the question is where are you getting some good leverage in the expenses, and how does that impact the expense rate past the next quarter?

So, John, it's Harp again. So, in terms of our beat this quarter, we really were focused on managing all lines, but we very much managed our personnel line. Part of what we said in the prepared remarks is there was going to be timing between first quarter and second quarter that's a little bit under $1 million that you'll see shift from first quarter into second quarter, which is part of that increase that you see in the second quarter guidance. The other increase that you see in the second quarter guidance is really marketing and volume-related expenses as our volumes pick up in the second quarter. But our beat versus first quarter was again due to that timing item, but also very much due to us managing our line items quite meticulously, specifically personnel.

And John, look, and that was a conscious decision. I think our people costs are actually down almost $800,000 versus prior year despite the growth in the business and obviously down versus fourth quarter, as you noted. And so, our view was, let's manage the business very tightly. It gives us dry powder to lean back into growth more aggressively later in the year. And so, we feel good about, quite frankly, how we executed on every line item. But you want to run the business in a relatively conservative way as you wait for the macro conditions to further unfold. And I think that we did a great job keeping a tight control of expenses.

[Operator Instructions] Next question comes from Matt Dhane with Tieton Capital Management.

That's Tieton Capital. I did want to delve a little bit more into, I guess, the conditions you're looking for before you do lean into growth, what more can you share with that around that? Because although the economy has been slowing, it still has decent GDP growth. And so I was looking to get a little bit more guidance on what you're looking for before you start growing the loan book again.

Yes. Matt, no, great question. Look, I think I've heard -- well, I haven't tracked what a lot of people are saying about the state of the customer, and I think that's really what is the driver of how aggressively you lean into growth. So, the metrics that we're looking at is consumers have had real wage growth last year. As you said, the economy's growing. There's still 8.5 million open jobs out there. Most of them or a large portion of them are for lower income folks. And that's all the positives that we see. Obviously, inflation is still higher than expected. We're not seeing, obviously, the number of rate cuts that we would have anticipated early in the year. Maybe we'll see 1. And so, where I look at it is the customer is still recovering from the inflation hangover, right? So, since 2020 to April of 2024, inflation's up about 21%. But wage growth for the, call it, the 20% or 40% segment of the population has been a little over 5%. And so, while the stimulus money helped people stay on top and meet their family obligations, they're still working their way through that inflationary period. And so, from our standpoint, we're able to be very selective in where we put on growth. We're able to be very selective where we put on some of the higher-risk, higher-return growth. And so, I think what we're really looking for is inflation to continue to fall. I will tell you that demand, in my opinion, has started to pick up here in the month of April. That's encouraging, but it has to be the right demand, obviously. You want to make sure customers with our underwriting that can pay their bills. So, that's where we're at. I feel…

That's helpful, Rob. I appreciate the color there. One other dynamic I did want to ask about is you folks have entered a couple of new states here over the last several years. Just wanted to get some insights into how those have been developing relative to your expectations. And, yes, just what more can you tell us around those newer states?

Yes. Look, and, I think, it's in the appendix of the supplement. But you can see that the ENR per branch for branches open less than 1 year is now about $3.7 million, up from $2.3 million a year ago. And same thing for branches open from 1 to 3 years. Now, with the environment we in, we haven't added a ton of branches. So, that addressable market opportunity that we talked about from the new states, which is increased by 80%, in my mind is still largely untapped. And so, my expectation is we will add a few more branches this year. We've got some expense dollars, which may allow us to add more branches, and we'll see whether that's the appropriate thing to do. And then we'll be looking in 2025, of course, to continue to go after that untapped market and maybe even look at additional markets. But overall, we're pleased with the new states.

There are no further questions. I would like to turn the floor over to Rob Beck for closing remarks.

Great. Thank you, operator. Look, in conclusion, I'd just say we're very pleased with the outcome of the quarter. As I said, I think, we've executed on all lines across the P&L. And that's hard to do in any environment. So, we're really pleased with the effort, and I'm extremely pleased with the team and how they're executing. I talked about credit, I talked about pricing, continued expense discipline, that's at the heart of what we do. And as I said, I do believe that having this small loan business that can price above 36% is a real competitive advantage. And in a couple ways, not only the pricing power, but it also gives you the customer flow in that allows you to, which is part of our core strategy, to graduate those customers to a lower rate loan and a higher dollar loan. The customer is extremely satisfied by that. It improves their credit profile, and it's core to the business that we've been building over the last 7 or 8 years in growing our large loan book. I would also say that the $50 million of small loans that we put on, which are higher risk and higher returns, a very key part of our strategy is also to balance that out with a more low-risk product, which is our auto-secured business. And our auto-secured business, we put on about $30 million over that same time frame as the small loans. And that auto-secured business is very low delinquencies and losses. So, we're balancing out this business, a barbell strategy between taking on a little bit more risk on one end, which gives you good returns and strong revenue yields, even though it's slightly elevated losses and delinquencies. And we're balancing that out with that auto-secured book. So, everything we put in place and the hard work we did in the fourth quarter and the actions we took, we feel like they paid off for us in the first quarter. So, with that, I would just say, thanks, everybody, for joining the call and appreciate the call and have a good evening.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.