Regional Management Corp. Q2 FY2025 earnings call

• Strong second-quarter results: Net income of $10.1 million and diluted earnings per share of $1.03, an improvement of 20% year-over-year. Quarterly revenue reached a record $157 million, and total originations were at a record high.
• Portfolio growth: Net receivables grew by $70 million sequentially in Q2 on $510 million of originations, ending net receivables up 10.5% year-over-year. 30-day delinquency rate was 6.6%, improving 50 basis points sequentially and 30 basis points year-over-year. Net credit loss rate was 11.9%, in line with expectations.
• Branch activity: Opened 2 branches in Q2, with 17 de novo branches in the past 12 months contributing 24% to year-over-year growth. Expect to open 5-10 more branches in the next 6 months. Plan to consolidate 8-10 branches this year into nearby branches, with G&A expense from consolidation used for new branch openings.
• Expense management: Completed corporate office restructuring with a restructuring charge in Q3, but G&A expense savings will more than offset the charge. Expect annualized G&A expense savings of ~$2.3 million from repositioning. Developed new front-end branch origination platform and customer lifetime value analytic framework for direct mail marketing.
• Capital allocation: Board declared $0.30 per common share dividend for Q3. Repurchased ~165,000 shares in Q2 at a weighted average price of $30.36 per share.

In the second quarter, Regional Management achieved record quarterly revenue of $157 million. Total originations were at a record high of $510 million. The auto secured loan portfolio grew by $66 million year-over-year, reaching 13% of the total portfolio, with a 30-day delinquency rate of 1.9%. The portfolio of loans with APRs above 36% grew by $50 million year-over-year, increasing to 18% of the total portfolio. Net receivables grew by $70 million sequentially in the second quarter, ending up 10.5% year-over-year, in line with the expectation to grow the portfolio by at least 10% in 2025.

• Full-year 2025 net income forecast: $42 million to $45 million. Potential for faster growth in second half depending on portfolio growth, credit metrics, and macroeconomic conditions.
• Q3 2025 expectations: Ending net receivables expected to increase ~$55 million to $60 million sequentially. Total revenue yield expected to be 32.8% in Q3, a 10 basis point sequential decrease due to portfolio mix. Net credit losses expected to be approximately $51 million, net credit loss rate of ~10.3%. G&A expenses expected to be roughly $65 million to $66 million. Interest expense expected to be approximately $22 million in Q3.
• Q4 2025 expectations: Further decline in revenue yield due to seasonality. Cost of funds rate expected to increase further to 4.5%.

• Macroeconomic uncertainties: Factors like wage growth, number of open jobs, unemployment rate, and inflation can impact customer health and portfolio performance.
• Tariffs: Uncertainty around tariffs could have a one-time shock to inflation and potentially affect customer ability to repay loans.
• Credit risk: While credit tightening actions are yielding positive results, changes in credit metrics or macro conditions could impact net credit loss rates and allowance for credit losses.

Q: 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?

A: 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 rates is 1.9%. So attractive low-risk business. The 17 new branches that we opened since September contributed $45 million of growth, which is about 25% of the overall growth. And then if you just look at new states, that was $97 million growth, or roughly 52% of the growth. And most of that growth was at rates below 36%. So the takeaway is we are achieving this growth without loosening our credit standards, okay? In fact, even our high-margin business, greater than 36% only increased marginally from 17% of the portfolio to 18% of the portfolio. So as we look ahead, we're in a great position to be able to have all these levers to pull. And of course, with our advanced analytical tools, we can pull those levers to lean into growth where we think we're going to optimize returns depending on what the market environment is like. And so I think it's a great place to be. And in terms of where we expect to go for the rest of the year, look, it really depends on what we see as the health of the customer, which at this point, we're seeing credit performance, which is spot on with what we expected from the very beginning of the year. And so we have an opportunity to grow faster, I think, if we choose to in the second half of the year. But we're going to let the credit performance and any macro developments kind of guide where we end the growth for the full year.

Q: 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?

A: So Alex, 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%.

Q: 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?

A: 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?

Q: 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?

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.