Earnings Call Transcript - RM Q3 2025

Operator, Operator

Good afternoon, ladies and gentlemen, and welcome to the Regional Management Third Quarter 2025 Earnings Call. Please note that this event is being recorded. I will now hand you over to Garrett Edson of ICR. Please go ahead.

Garrett Edson, IR Representative

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.

Robert Beck, President and CEO

Thanks, Garrett, and welcome to our third quarter 2025 earnings call. I'm joined today by Harp Rana, our Chief Financial and Administrative Officer. On this call, we'll cover our third quarter results, provide an update on our portfolio growth strategies and credit performance and share our expectations for the remainder of the year. As you may have noticed, we also announced my pending retirement today. I'll provide a few words on that towards the end of the call. Building off last quarter's strong numbers and momentum, we again posted excellent financial and operating results in the third quarter. We delivered net income of $14.4 million and diluted earnings per share of $1.42, an improvement of 87% year-over-year. We grew our portfolio by $93 million sequentially, pushing our ending net receivables past $2 billion in the quarter, a new milestone for Regional. Our portfolio generated $165 million of total revenue, a record high, while our operating expense ratio dipped to 12.8%, also an all-time best. The team continues to manage all line items of the income statement and balance sheet very well as we focus on driving growth, improving our operating effectiveness and generating capital that we can reinvest in our expansion and return to our shareholders through dividends and stock repurchases. We continue to monitor economic conditions and believe consumers in our target segment remain healthy. Stable consumer health and expanded geographic presence and our improved data and analytic capabilities have enabled us to responsibly grow our portfolio, while at the same time improving our credit performance. Our total originations in the third quarter reached another record high, up 23% from the prior year period. Year-over-year, our portfolio grew by $233 million or 13%, keeping us on track to meet our targeted portfolio growth rate of at least 10% in 2025. Notably, we exceeded our receivable growth expectations by roughly $35 million in the quarter as we took advantage of strong demand for our auto-secured product and a larger addressable market from new branch growth while maintaining a tight credit box. The additional $35 million of growth required us to recognize incremental provision expense in the quarter of approximately $3.6 million or $2.7 million after tax. Despite the additional provision expense, our net income was roughly in line with our guidance, thanks to effective management of all our other line items. We also continue to experience improvements in our portfolio credit quality and performance, thanks to our credit tightening actions and returns on our data and analytic investments. At quarter end, our 30-plus day delinquency rate was 7%, an increase of 10 basis points year-over-year, but a 30 basis point improvement after adjusting for the impact in the prior year of special borrower assistance programs associated with hurricane activity. Our net credit loss rate of 10.2% improved 170 basis points sequentially and 40 basis points year-over-year due to credit tightening, effective portfolio management and product mix. We're observing particularly strong credit performance in our newer vintages and in our portfolio of loans with an APR of 36% or less, including our auto-secured portfolio. For our portfolio loans with APRs capped at 36%, our 30-plus day delinquency rate was 6.2%, and our NCL rate was 8.9% in the third quarter, a 60 basis points improvement year-over-year and 130 basis points improvement from the third quarter of 2023. We also continue to closely manage expenses in the quarter. Our operating expense ratio of 12.8% improved 110 basis points year-over-year despite continued investment in innovation and growth, including 16 new branches opened since the third quarter of last year. Our year-over-year total revenue growth outpaced our G&A expense growth by 12x. We'll continue to invest in initiatives that will drive long-term returns while practicing sound expense discipline. In the third quarter, we had capital generation of $26 million, bringing total capital generation year-to-date to $53 million. Through the third quarter of this year, we returned an aggregate of $26 million in capital to shareholders via stock repurchases of $17 million and dividends of $9 million. Our book value per share reached $37.94 at quarter end. In sum, we're very pleased with our third quarter results, and I continue to be impressed with our team's execution. We have very positive momentum and a growing healthy portfolio, and we remain well positioned to deliver strong results. Looking ahead, we'll continue to execute on our growth strategies and improving our operating effectiveness. We expect to open 5 new branches before year-end in Louisiana and California and another 5 to 10 new branches in the first half of 2026. We also plan to enter 1 to 2 new states in 2026. Our new branches are performing well, growing rapidly and generating positive monthly net income at around month 14 and positive pre-provision net income at around month 3. We continue to view new branch openings as excellent investments, and we'll continue to open new branches in new and existing markets with the pace of openings dependent on economic conditions. Our barbell strategy of growth in our higher-quality auto-secured and higher-margin small loan portfolios also continues to be very effective. Growth in our auto-secured portfolio, in particular, is outpacing the growth of our broader portfolio. Auto-secured loans grew by $80 million or 41% year-over-year to 13.4% of the portfolio at quarter end. Our auto-secured book has very strong margins and the best credit performance of any segment of our portfolio with a 30-plus day delinquency rate of only 1.8%. Meanwhile, growth of our higher-margin small loan portfolios supports our returns and customer graduation strategy. On the expense front, we remain good stewards of shareholder capital while investing in ways that will improve our operating efficiency and credit performance. We continue to implement improvements in technology and advanced data and analytics, such as our new front-end branch origination platform, customer lifetime value analytic framework for direct mail marketing and machine learning branch underwriting model. Ultimately, these investments will improve our customer experience and team member efficiency, allow us to make better credit and marketing decisions, enhance our ability to monitor results and enable us to optimize profitability. We expect that our team's efforts to grow our portfolio, increase our operational efficiency and improve our credit performance will drive increases in net income and shareholder value over time. For 2025, we're now forecasting full year net income of $43.5 million, the midpoint of our prior guidance of $42 million to $45 million. Where we land will be driven by macroeconomic conditions and our fourth quarter portfolio growth, which directly impacts our provisioning for credit losses and bottom-line results. Ultimately, our portfolio growth rate in the fourth quarter will depend on the health of the consumers informed by our credit metrics and macroeconomic conditions, including the status of the government shutdown. Finally, our Board of Directors approved an increase in our stock repurchase program from $30 million to $60 million, of which $36 million remained available as of the end of October. We have a very healthy balance sheet with significant funding for continued execution of our long-term growth strategy and the return of excess capital to shareholders. The larger authorization will enable us to continue to be opportunistic in repurchasing our common stock as we grow our business. I'll now turn the call over to Harp, who will provide more detail on our results.

Harpreet Rana, Chief Financial and Administrative Officer

Thank you, Rob, and hello, everyone. I'll now take you through our third quarter results in more detail and provide you with an outlook for the fourth quarter. On Page 4 of the supplemental presentation, we provide our third quarter financial highlights, demonstrating significant improvements across key financial metrics. Our net income of $14.4 million and diluted EPS of $1.42 were once again supported by solid portfolio and revenue growth, a healthy credit profile, expense discipline and a strong balance sheet. For the fourth quarter, we're projecting net income of roughly $12 million. Turning to Pages 5 and 6. We had record originations of $522 million in the third quarter, up 23% year-over-year. Loan volume was driven by continued strong performance from our digital channel, auto-secured product and the 16 de novo branches we've opened over the past 12 months. Our total portfolio crossed the $2 billion milestone in the quarter and stood at a record $2.1 billion at the end of the third quarter, while our ending net receivables per branch reached $5.9 million on average. We continue to believe that economic markers remain solid and that our customers tend to be resilient and adaptable. These conditions, along with the increases in our addressable market through geographic expansion, have allowed us to grow our portfolio while maintaining a tight credit box. Looking ahead to the fourth quarter, we anticipate that our ending net receivables will increase by roughly $60 million to $70 million sequentially and that our average net receivables will be up by roughly $80 million sequentially. Turning to Page 7. Total revenue grew to a record $165 million in the third quarter, up 13% year-over-year. Our total revenue yield and interest and fee yield moved up 20 and 30 basis points sequentially to 33.1% and 29.7%, respectively, in line with seasonal patterns. In the fourth quarter, we expect total revenue yield of 32.2%, a 90 basis point sequential decrease due to seasonality and product mix. Moving to Page 8. Our portfolio continues to perform well. Our 30-plus day delinquency rate as of quarter end was 7%, a 30 basis point improvement year-over-year after adjusting for the prior year hurricane impact. Our third quarter net credit loss rate of 10.2% improved 170 basis points sequentially and 40 basis points year-over-year due to credit tightening, effective portfolio management and product mix. In the fourth quarter, we expect our delinquency rate to rise gradually, consistent with seasonal patterns. We anticipate that our net credit losses will be approximately $57 million in the fourth quarter. The NCL rate will be sequentially higher due to seasonality, and it will be roughly in line with the fourth quarter of last year. Turning to Page 9. We increased our allowance for credit losses in the quarter by $9.2 million to support portfolio growth. Consistent with our outlook, our allowance for credit losses rate remained steady at 10.3%. Looking to the fourth quarter, our reserve rate is expected to remain at 10.3%, subject to economic conditions and portfolio performance. Flipping to Page 10. We continue to closely manage our spending while still investing in our growth, capabilities and strategic initiatives. Our annualized operating expense ratio was 12.8% in the third quarter, another all-time best and an improvement of 110 basis points from the prior year period. In the third quarter, our revenue growth outpaced our G&A expense growth by 12x. In the fourth quarter, we expect G&A expenses to be roughly $65 million. Turning to Pages 11 and 12. Our interest expense for the third quarter was $22 million or 4.4% of average net receivables on an annualized basis. Our cost of funds increased year-over-year as lower fixed rate debt has matured and we funded our growth with higher fixed and variable rate debt. Even with the increased cost of funds, we're pleased with the way that we've managed our interest expense over the past few years. As of the end of the third quarter, 76% of our debt was fixed rate with a weighted average coupon of 4.6%. In October, we closed a $253 million asset-backed securitization transaction at a weighted average coupon of 4.8%, a 50 basis point improvement from our deal earlier this year. This transaction once again demonstrates the strength of our ABS platform. Following the closing of the October securitization, fixed rate debt represented 89% of total debt with a weighted average coupon of 4.7% and a weighted average revolving duration of 1.2 years. In the fourth quarter, we expect interest expense to be approximately $23 million or 4.4% of average net receivables. Moving forward, we'll continue to maintain a strong balance sheet with ample liquidity and borrowing capacity, diversified and staggered funding sources and a sensible interest rate management strategy. Aside from investing in our growth and strategic initiatives, we continue to allocate excess capital to our dividend and share repurchase programs. Our Board of Directors declared a dividend of $0.30 per common share for the fourth quarter. And pursuant to our buyback program, we repurchased approximately 154,000 shares of our common stock in the third quarter at a weighted average price of $32.56 per share. Finally, I'll note that we provide a summary of our fourth quarter 2025 guidance on Page 14 of our earnings supplement. That concludes my remarks. I'll now turn the call back over to Rob.

Robert Beck, President and CEO

Thanks, Harp. In summary, we're proud of our third quarter results. Our team executed very well, delivering strong net income, a new milestone in ending net receivables and an all-time best on our originations, revenue and operating expense ratio lines. We continue to grow the company responsibly while increasing shareholder value. Before I close things out, I'll say a few words about my retirement. After careful consideration, I decided now is the right time to retire and spend more time with my family. Following a diligent search, our Board of Directors identified Lakhbir Lamba to succeed me as President and Chief Executive Officer of Regional. Lakhbir brings to Regional nearly 30 years of leadership experience in consumer lending and financial services with extensive expertise in consumer credit, digital and technology platform development, brand sales and service, analytics and product management. We're excited to welcome Lakhbir to Regional as we believe he is the ideal fit to continue our current growth strategy and lead Regional Management forward. It's been my distinct pleasure to lead such an outstanding team over the past 5.5 years. I want to thank everyone at Regional for their unwavering commitment and efforts. I'm proud of what we've accomplished as we've navigated through some of the most challenging environments we've experienced in decades, while nearly doubling our net finance receivables and expanding our footprint across the country to 8 new states. Over the same time period, we invested heavily to transform our technology platforms and data analytic capabilities, positioning the business for future growth. With Regional well positioned for its next stage of expansion and my confidence that Lakhbir will lead the team to even greater success, I look forward to beginning my next chapter. I'll now open up the call for questions. Operator, could you please open the line?

Operator, Operator

Our first question comes from John Hecht of Jefferies.

John Hecht, Analyst

First of all, Rob, congratulations and hope to keep in touch and best of luck in your next journey. And Lakhbir, look forward to working with you as well. So my questions are, you had a pretty good acceleration in same-store sales as your digital volume picks up, too. I'm wondering at the store level, maybe can you tell us like what's going on? Is it increased new customer count? Is it graduating borrowers to larger loans that's driving that? Maybe just a little bit of a breakdown there.

Robert Beck, President and CEO

Thank you, John. I appreciate your kind words. Yes, the same-store sales have seen a significant increase. We evaluate our digital loans through our branches, and we're experiencing strong momentum in digital as well as with our traditional renewal customers and our live check program. We're seeing good demand and can be selective with customers due to our tight credit standards. Overall, we feel positive about our current position.

Harpreet Rana, Chief Financial and Administrative Officer

And just to add to that, John, so we've had exceptional growth in terms of the auto-secured. The branches are really sort of tracking to auto-secured. Digital volumes are also up and as you know, those are booked through the branches. So between those two items, you're seeing strong performance in our branches year-over-year.

John Hecht, Analyst

Okay. As we look ahead to 2026, should we expect a similar product mix next year, or are there factors that might lead to a change?

Harpreet Rana, Chief Financial and Administrative Officer

So John, how I would think about it is in terms of our mix, we're always very, very nimble given the economic environment that we face. We talked about our growth in auto-secured. That is a nascent product for us. So I would expect to see that continue to grow. You can take a look at our mix in terms of our large loans and our small loans, and we will continue to grow the large loans, particularly driven by auto-secured, but we always remain nimble in terms of our state expansion, new borrowers and growing small loans in those new states.

Operator, Operator

Our next question comes from Kyle Joseph of Stephens.

Kyle Joseph, Analyst

I would like to follow up on John's questions. Can you provide some insight into your strong growth in large loans and the slowdown in smaller loans? You mentioned that auto loans are contributing to this trend, but we've noticed that higher-end consumers seem to be performing better than lower-end consumers. Is this reflected in your origination trends?

Harpreet Rana, Chief Financial and Administrative Officer

So we're not seeing anything in our data just yet, Kyle, but we always continue to look at our data and make adjustments around the margins. In terms of our auto growth, we are definitely booking loans that meet our credit box and meet our risk return hurdles. So we're feeling pretty good about the growth that we've seen there. So, so far, we haven't seen anything in our data, but we remain mindful about the uncertainty that folks are feeling. We know that there's still over 7 million jobs open to customers in our segment. We also know that although inflation is high, it is where it was expected to be. And we know that our customers are resilient. So we continue to look at the uncertainty and make sure that we're making decisions based upon that. But right now, we're not seeing anything in our data that we can't control for by just making some changes around the margin.

Kyle Joseph, Analyst

Got it. And then I think you mentioned this, but in terms of the yield decline, just a function of seasonality and loan mix shift. Is that right?

Harpreet Rana, Chief Financial and Administrative Officer

That is correct. Please proceed.

Kyle Joseph, Analyst

Yes, I was going to say for the fourth quarter guidance versus the third quarter number.

Harpreet Rana, Chief Financial and Administrative Officer

For the fourth quarter, you can expect a seasonal decline. It's important to note that last year's third quarter was affected by the hurricane, so that needs to be taken into account. Aside from that, the decline is seasonal, and with the shift towards larger loans, you will see yields decrease. Although the larger loans come with a favorable risk-return margin, they tend to yield less.

Operator, Operator

Our next question comes from Vincent Caintic of BTIG.

Vincent Caintic, Analyst

And Rob, it's been a pleasure working with you all this time. So congratulations, well deserved. My first question is about the level of growth and the outperformance compared to your third quarter guidance. It seems like credit has been stable, so that wasn't the main factor. I'm curious if there was something else at play, such as less competition, because the results were significantly better than expected. I'm interested in what surprised you this quarter that contributed to that outperformance.

Harpreet Rana, Chief Financial and Administrative Officer

So Vincent, it's Harp. So when we give guidance, right, we were looking out at the same uncertainty that we're looking out at going into the fourth quarter. So we guided based upon what we thought we were going to see. What we found was demand continued to be strong. And then we had to match that demand against our risk box. And as we've talked about in the prepared remarks, our risk box continues to be conservative, right, in terms of it's been tight. It hasn’t really loosened. So we were able to actually meet that demand with our current risk box. We always put on good quality loans, and we had an opportunity to do that in the third quarter. So that's what we did. Looking out into fourth quarter in terms of our guidance, again, we're looking at the uncertainty. We want to make sure that we're putting on good loans. And if there is an opportunity to grow faster because we're able to meet demand within our risk box and our return hurdles, we will do so. Keep in mind that if we do grow faster than what we've guided to, that, of course, will have a impact, and it will affect the guidance that we've given for net income in the fourth quarter and therefore, our full year guidance, but that will, of course, impact net income to the positive in 2026, so that if we're able to put on good growth in the fourth quarter, we will take that opportunity to do so.

Robert Beck, President and CEO

Yes. And Vincent, great working with you as well. The only thing I would add to Harp's commentary is, obviously, the government shutdown is still going underway. We've taken steps to reduce our direct mail in geographies that have concentration of government employees. We've also got a tighter risk box around those government employees in terms of verification of income and the like and how much we will renew with them until we get a better lens on when the shutdown might end. And so I think we're being appropriately cautious going into the fourth quarter, given what's happening in D.C.

Vincent Caintic, Analyst

Okay. Great. This actually leads into my next question. Marketing expenses were quite efficient this quarter, even though you exceeded your loan outlook. Marketing expenses decreased by $800,000 compared to the previous quarter. I'm curious if this efficiency in marketing is sustainable. Was there a reduction in direct mail targeting government employees? Could you provide more details on this?

Harpreet Rana, Chief Financial and Administrative Officer

Our new model, which we've discussed before, is very efficient. We can utilize it in various ways. For instance, we could increase our mailing efforts while spending less on marketing, or we could maintain our current marketing budget but achieve higher volumes. Additionally, we can adjust for risk effectively. During this quarter, we strategically allocated our spending based on demand, allowing us to be more efficient while targeting the right customers to fit our risk parameters. This is reflected in our marketing expenditures. With the growth we've seen in the fourth quarter, we anticipate that these models will continue to perform well moving forward, and we believe this efficiency can be sustained.

Robert Beck, President and CEO

Yes. And Vince, we talked about this, the direct mail customer lifetime value gives us the ability to see the profitability curves across all line items projected out for a couple of years for life each mailing. And we can actually turn on and off risk segments, states, whatever to optimize our spend or to optimize revenue or to optimize growth or to optimize losses or to optimize profitability 12 months out. So the power of these models, and they get refreshed for the current environment. The power of these models is something that a lot of investment went into, and it's starting to pay off.

Operator, Operator

Ladies and gentlemen, with no further questions in the question queue, I will now hand back over to Rob Beck for closing remarks.

Robert Beck, President and CEO

Yes. Thanks, operator, and thanks, everyone for joining. I want to first thank our investors who have supported the team and I over the last 5.5 years. We're proud of what we have been able to accomplish in transforming the business during, as I said, a very difficult time with COVID and the period of high inflation. Since I started in my role, we've had total shareholder return of over 230%. We returned $178 million of capital to shareholders in the form of dividends and buybacks, and we increased our tangible book value by more than $13 per share and most importantly, remain profitable through the cycle. Now I have gotten to know Lakhbir, and I am confident that he will continue to build upon our momentum to grow our franchise, and of course, I will be available to assist with the transition through June of next year. I also want to thank the Board for their support over the last 5.5 years. And last but not least, I want to thank the entire Regional team. We've been together from the start of my time at Regional, and they are an incredible group and I think the best in the industry. Everything that has been accomplished is due to their unwavering dedication and hard work in support of our customers, and I will miss them greatly. Access to capital is essential for every person to build a productive life, and Regional provides this to subprime customers that need it the most, something of which we are all very proud of. And lastly, any CEO that has operated since COVID will tell you it has been a demanding journey but also a rewarding one. As my family knows and Harp, I put everything I had in Regional 24/7. And it's now time to focus on my family, my health and the next chapter of my life, and I wish you all the very best.

Operator, Operator

Thank you, sir. Ladies and gentlemen, that concludes this event. Thank you for attending, and you may now disconnect your lines.