Greetings and welcome to the Regional Management Fourth Quarter 2024 Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Garrett Edson with ICR. Please go ahead, Garrett.

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 two 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 2024 earnings call. I'm joined today by Harp Rana, our Chief Financial and Administrative Officer. On this call, we'll cover our fourth quarter financial and operating results, provide an update on our portfolio credit performance and growth, and share our expectations for 2025. We're very pleased with how our team and company performed in the fourth quarter. We generated strong bottom-line results of $9.9 million of net income and $0.98 of diluted earnings per share. These results were better than our guidance and a sharp improvement from the prior year period net loss of $7.6 million. As a reminder, in the fourth quarter of 2023, we incurred restructuring expenses and closed a special delinquent loan sale that had the effect of pulling forward net credit losses and revenue reversals from the first quarter of 2024 to the fourth quarter of 2023. We didn't experience similar events in the fourth quarter of 2024, so there will be noise in some of our year-over-year comparisons, which we'll highlight for you. Loan demand remained strong in the fourth quarter. We began to ramp up our portfolio growth and increased our investment spend in the quarter, including by opening four new branches. We'll also open another eight new branches in the first quarter to drive future growth. We grew our portfolio by $73 million sequentially in the fourth quarter to nearly $1.9 billion, an all-time high for our company. The portfolio generated record quarterly revenue of $155 million, up 9.3% from the fourth quarter of 2023, or 7.8% when adjusted for the impact of the prior year's loan sale. Our fourth quarter total revenue yield was 33.4%, up 110 basis points from the prior year period, or 80 basis points after adjusting for the 2023 loan…

Thank you, Rob, and hello, everyone. I'll now take you through our fourth quarter results in more detail and provide you with an outlook for the first quarter of 2025. On page 5 of the supplemental presentation, we provide our fourth quarter financial highlights. As Rob noted, we posted net income of $9.9 million and diluted earnings per share of $0.98, once again exceeding our expectations and our fourth quarter 2023 results. These results were supported by our solid portfolio and revenue growth, healthy credit profile, expense discipline, and a strong balance sheet. Turning to Page 6, we continue to grow our portfolio during the quarter, with origination focused on our higher margin auto secured segments. From a risk standpoint, we continue to originate roughly 60% of our loans to applicants in our top two risk ranks. Total originations reached record levels and were up 17% year-over-year. Branch, digital, and direct mail originations were up 15%, 35%, and 15% respectively from the prior year period. As we move through 2025, we'll be accelerating our pace of growth due to our confidence in our credit performance, improving consumer health, and a stronger macro environment. Page 7 displays our portfolio growth and product mix through the fourth quarter. We closed the quarter with record net finance receivables of $1.9 billion, up $73 million sequentially. Our auto secured portfolio grew 34% in 2024 and now represents 10.9% of our total portfolio, up from 8.7% at the end of 2023. Our small loan portfolio increased 12% year-over-year, and at the end of the quarter, approximately 19% of our portfolio carried an APR greater than 36%, up from 16% a year ago, reflecting a 26% balance increase in 2024. As Rob has consistently noted, we've purposefully leaned into growth of higher margin small loans in…

Thanks, Harp. Once again, I'd like to thank the Regional team for its excellent work in 2024. We're proud of how we performed and of the results we delivered for our shareholders. In the fourth quarter, we generated strong portfolio and revenue growth, continued to improve our yields, operating efficiency, and portfolio credit performance, and posted solid bottom line results. The quarter capped an impressive year in 2024, where we materially improved our operating and financial metrics on nearly all lines. Looking ahead to 2025, we're excited that our portfolio credit quality and strengthening macroeconomic conditions are conducive to a return towards more normalized growth. We'll pursue a minimum of 10% portfolio growth in 2025 while continuing to invest in our strategic initiatives. These efforts will enable us to improve our net income and returns in the near and 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?

Certainly. We'll now be conducting a question-and-answer session. [Operator Instructions]. Our first question is coming from John Hecht from Jefferies. Your line is now live.

Your product mix between the large and smaller installment loans has been pretty consistent for a while. As we go into 2025, is there anything we should think about in terms of mix-shift in products, including the auto-secured product?

Hey, John. Thanks for the question. We're going to continue to lean into the auto-secured business. Our barbell strategy is working very well. That growth in the auto-secured business is balancing out the growth in the higher rate small loan business, which, as you know, is kind of the fuel for our business to graduate those customers into large loans. So our strategy going into 2025 is going to be consistent with what we did in 2024.

Okay. And then, I know the front book is getting better relative to the back book, but maybe any, I guess, details you can share with us on maybe the '24 vintage versus the '23 vintage? Is there any early looks to the relative performance of that?

Yes. I mean, I would tell you that, you know, the newer originations that we're putting on are performing, right in line with our expectations, which is good. And I think you can kind of see that, again, on the front book-back book split that we provide in the supplement. I mean, the delinquencies on the front book, and again, delinquencies are still seizing on the front book at 7.2%, and on the back book it's 11.9%. And even the reserve levels is indicative, we're at 10.2% on the front book and 14.1% on the back book. And, of course, we reserve for lifetime losses, so that's kind of indicative of how the portfolio is performing. So, yes, we're happy about the progress and tightening of the book and how that's flowing through the numbers. I mean, naturally, when we move up into the higher rate business, that is putting additional pressure, on the small loans, delinquencies, and losses, but we're getting paid for it because of the higher yield.

Okay. And then any comments on, how interest rate -- if we get one versus more than one rate cut this year, what that would -- how that might impact you guys on a marginal perspective?

So, we've obviously calculated that, John. It's not something that we're going to disclose, but we've looked at 25 basis points, plus or minus, on both our variable and our fixed rate debt if we were to enter the market for new fixed rate debt in 2025, which we plan on doing.

Thank you. [Operator Instructions]. Our next question is coming from David Scharf from Citizens JMP. Your line is now live.

Hey, Rob, wondering if you could just get a little clarification on or really specifics on what indicators you're seeing out there that, give you conviction about consumer health improving. And I primarily ask because we've had a number of lenders in the last week or so, still express some caution and I think in the words of one of them, a big competitor of yours, they said, we're not necessarily seeing an improving consumer. We just have better consumers on our books after two years of credit tightening. And I think they were very clear to draw a distinction between those two. But you seem to be expressing a fair amount of confidence that it's more than just your credit tightening that, credit quality on the ground is improving. Are there any green flags you can highlight for us, like what specifically you're seeing in the consumer? Is it either savings rates, payment rates, anything to help us out?

So, David, great question. I think it's both, right? And it's a little hard to determine, how much of one versus the other is coming through your portfolio. But certainly tightening means that we put better credit on. And so that's consistent with whatever the other competitor said. I think when we look out going forward and we kind of look at, kind of the progression of what's happened this year, I mean, if you look at unemployment still low, you look at real wage growth, I think the open jobs have come down a little bit to the $6 million or $7 million range. But again, for our customer set, it's over indexed that way. I've heard a thesis out there and look, I'm not going to put a lot of weight on this one. But, if immigration is slowed and there's less workers coming in for lower paying jobs, that's going to put more pressure on upward on wages for our customer set. So I think that there's a lot of things in the backdrop. We're being balanced in our growth, with a 10% growth, I think, given the environment and the macro environment is pretty good. But of course, we're very mindful of other things that could happen, whether impacts of tariffs and other things. And we have the ability to adjust very quickly if we see anything kind of start to cause pressure on our portfolio. So by and large, I think that the customer is healing. They certainly haven't completely gotten through the hangover effects of the high inflationary period. And there's still pockets of inflation. As you know, inflation is not back down to the 2%. So we're watching it all. But I think from where we're at, we're feeling good about putting on a minimum of 10% in our growth. But we have the ability to grow much faster. But I think we temper that with all the things I just said.

Got it. Got it. Now, it all sounds very constructive. And maybe follow up on the competitive front. We've obviously seen a lot more private credit funds invest in the personal loan space in the last sort of 18 months. I'm curious, in your small loan category, that higher yielding paper, are you seeing any additional sources of funding come into that kind of asset class? Or is that a more benign area to be competing in right now?

Well, it's hard for us to, I mean, on the funding side, what funding is coming in to support competitors. But when we look at what's happening competitively in that space, I mean a lot of the folks in the installment loan space cap themselves at 36%. Obviously, there's players that are triple digits. But in the space that we play out, which is, I would call it marginally above the 36% rate, which we believe is appropriate for our customers to give them access to credit and help them improve their credit profile and graduate them to a lower rate loan. I don't, we're not really seeing any change in the competitive dynamics there in terms of pressure. I think we could grow that space as fast as we wanted to. But we're being smart about it.

Got it. Got it. And maybe just one last one, sort of following up on that thought, that this is not meant to be a loaded question, but you did a good job of highlighting the tradeoff between growing faster and some of the accounting realities around CECL provisioning. But if you kind of set aside the accounting, what are some of the -- ignoring the accounting and volatility, what are some of the factors that sort of drive your decision about maybe not striking while the iron is hot as much as you could? I'm trying to get a sense.

I get it. I mean, look, obviously there is the optics of the timing from an accounting standpoint, which I'm not convinced the market has ever really looked through and expanded, the PEs and the installment loan space for the CECL effect. I think it's -- you're naturally a higher risk business in subprime or near subprime, but you're reserving everything day one. And I don't think PE expansion has gone along with the accounting chain. But putting that aside, I mean, look, it's always a question of having capital to grow, which we do. And Harp's talked about the ample room on the balance sheet to grow the business. So we're not constrained there, which is good. And then it's really about, execution in terms of how much investment dollars we put to work relative to the timing of the return back on those investment dollars. And I think we do a good job of balancing that out. But we also know that we can flex up when we feel the time is right to flex up. I mean, I'll give you a perfect example. In the fourth quarter, we flexed up and added more branches, put that in, additional branches into the first quarter. And those branches on average, in a couple of years are going to be worth -- have $7 million in balances. So, we're just being smart about how we invest and make sure we get the returns in a timely way for those investments. And I think it bodes well for the future.

Thank you. Next question today is coming from John Rowan from Janney. Your line is now live.

Just to be clear, you are guiding for net income to be above $41 million that you reported in 2024. Is that correct?

We've only guided to first quarter income, John, and we've given a specific number on that this quarter, which we've not done previously. The only thing I can say right now is that we are committed that net income, if all of the factors that are currently at play currently work out the way that we think they are, that we would be higher in net income meaningfully, as we said in the prepared remarks.

Yes. I mean, I think we said, John, look, we could grow the net income up to [30%] [ph], but we're being mindful of the growth effect on that as well. And so that's why we kind of laid it out the way we did.

I thought you said that we were going to grow net income in 2025. I didn't hear that correctly.

Yes.

No, we did. We said we would --.

We would grow. But we also said that, this business could grow as much as 30%, but we pointed out the growth effect from CECL on that, so.

No, no, I get it. You had $41 million of net income in 2024, and if you're growing, that means you would have to be somewhere north of that for 2025.

Correct.

That is correct.

That's what I wanted to clarify. Okay. And then, as far as G&A expenses, I mean, is $65 million, give or take a little bit, is that kind of the right run rate to use going forward?

Yes. $65 million to $65.5 million is the guidance that we just gave.

For first quarter.

For first quarter, correct.

Okay. And then, is there any -- one of your peers guided to kind of just a natural drift down in the cost of funds, even if rates stay the same as, some of the prior, fixed cost stuff rolls off? Is that, is there any type of benefit that you guys have from a funding profile, just static, if forget the differences in funding one product versus the other, just static if rates stay the same?

So, I think what we have to think about for us is our securitizations that we have put on in the past that would be maturing, and those would reset, John, at a higher rate than what we put them on. If you look at our cost of funds, we've done a really good job of keeping them around 4% for several quarters. We are now doing new securitizations, and we had a really good print on our last securitization, but as old securitizations that are around 3% mature, you will be putting them on at a higher rate. However, the other thing to remember is, variable rates should come down depending upon how many rate cuts you believe are going to happen in 2025. So, you will see our fixed, our securitizations at the fixed rates resetting at higher rates than what they've been at historically, but you should see variable rate debt come down if the interest rate curves, reflect any cuts.

Yes. And John, the other thing I'd say is, we've done such a good job of holding our cost of funds and locking in funding early that we never went up like some competitors. And so the coming down is not in our book because we're fixed at a low rate. So, there'll be a natural creep up in cost of funds, of course, mitigated depending on what the Fed does over the course of the year.

Thank you. Next question is coming from Vincent Caintic from BTIG. Your line is now live.

Going back to credit, so, I mean, you sound more positive about the new originations that you're getting in all the different categories of your originations. I'm just wondering if you could talk about sort of the credit reserve rate that you're expecting on these new originations, and I'm guessing you should be expecting both credit improvement as well as maybe the credit reserves coming down over the course of 2025. So, just wanted to get your views on that.

Yes. What I would tell you is, I mean, we guided in the first quarter, I think, to stay flat to the fourth quarter. What I would tell you is this. This first quarter is the most impactful quarter for the industry because of tax season. And, I think that that plus, obviously, just getting another quarter's worth of understanding what's happening from a macro standpoint as well as what's happening from a policy standpoint in D.C. I think will help us give you kind of better guidance on that. Now, I think if you look at the reserve levels that we have on the front book at 10-2, you kind of see, and that's a lifetime, reserve, you can kind of see that's kind of where you start evolving to once the back book comes off. So, that's kind of what I would say to you.

Okay. Great. Thank you. And then, I guess, relatedly, so you provided the commentary that the first half, or I should say the second half net income is higher than the first half net income, part of the seasonality. I guess, should we be thinking that the growth rate on your originations, you would hit the, I guess, the expected level of growth rate, so that's where we're seeing that level of, I guess, net income starting to come in where the reserves aren't overpowering it yet at that point?

Well, I guess where I would put it is, so the first quarter, we got into some runoff in the portfolio, which is a lot less runoff in prior years. And part of that is because of the new branches we built and building up the portfolio. And so, I think you got a few things, going through the dynamics of the profitability. One is, just the portfolio growth that -- or the lower runoff that we have in the first quarter, but then when you, on top of that, the rest of the growth will be in the last three quarters of the year. But, if you look from a credit standpoint, as the back, as the seasonal increase in the first quarter for NCLs moves back down post-tax season, and you see back book continue to run off, you're going to see the benefit on the bottom line in the second half of the year from the portfolio, as well as the better credit performance.

Okay, perfect. That makes sense. And the last one for me, since you mentioned a couple of times about the impact of the tax refunds in the first quarter, if we could get what your views are for this year, if there's anything unusual or anything incremental from that. Thank you.

Really too early to tell. I would say we're only just starting to hear on some of our calls about tax refunds. So, we're a few weeks away from starting to get any kind of indication on that. So stay tuned on that.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

Yes. Thank you, operator, and thanks, everyone, for joining. I think the takeaway here is from my perspective, our perspective, fourth quarter results is very much indicative of where we are as a business going in 2025. We had solid bottom line growth in 2024. We increased our book value by 8% to $35.70, paid out $1.20 dividend per share, announced the $30 million buyback, and purchased about $3.5 million of that in the fourth quarter. We had record E&R and revenues. As I said, we expect a minimum 10% E&R growth this coming year. And, of course, we talked about the growth effect of CECL. Our credit front book is performing as expected. Our barbell strategy is working well because we balance out the low-risk auto-secured with the higher-rate small loan business to drive returns. Continued expense discipline while investing in growth. And, look, being down, we're down in expenses versus prior year. And even without the restructuring, we held expenses pretty modest growth year-on-year. And then, of course, strong balance sheet management. And as Harp said, cost of funds have been hovering around 4% for a lot of quarters. It's actually down 10 basis points versus third quarter and only up 20 basis points versus last year. So all those drivers are putting us in a great position. And we're well placed, I think, to continue our momentum into 2025. So thanks again for joining and have a good evening.

Thank you. That does conclude today's teleconference and webcast. Let me disconnect to line up this time and have a wonderful day. We thank you for your participation today.