Regional Management Corp.

Thank you for standing by. This is the conference operator. Welcome to the Regional Management Corp First Quarter 2022 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Garrett Edson of 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 of 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 the future operating results and financial condition of regional management corporates. Also, our discussion today may include references to certain non-GAAP measures. A reconciliation of these measures to the most comparable gap measure 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 2022 earnings call. I'm joined today by Harb Rana, our Chief Financial Officer. We produced another set of outstanding financial and operating results in the first quarter, including strong and controlled growth. We posted top and bottom line quarterly records of $121 million of revenue, $26.8 million of net income, and $2.67 of diluted EPS. And we continue to deliver robust returns of 7.3% ROA and 36.7% ROE. For the fourth straight quarter, we logged double-digit year-over-year growth in our net finance receivables and quarterly revenue, which were up 31% and 24% respectively. We also increased our number of active accounts by 18% compared to the prior year, demonstrating our ability to capture new customers in new and existing markets, while at the same time satisfying the evolving needs of our existing customers by graduating them to larger loans. Notably, we overcame the seasonal portfolio liquidation that typically is the hallmark of the first quarter. Thanks to the success of our strategic growth initiatives, we generated record first quarter originations of $326 million, up 39% from the prior year period. And we grew our net finance receivables to an all-time high of $1.45 billion. Historically, our portfolio has experienced a normal seasonal runoff in the first quarter due to reduced demand and higher loan payments associated with tax refunds. Most notably, in the first quarters of both 2021 and 2020, our portfolio contracted by approximately $31 million. This quarter is the first time in over a decade that we've grown our loan portfolio organically in the first quarter of the year. That success is primarily attributable to strong loan demand across all channels. The investments we made in our growth initiatives during the pandemic, the expansion of our auto-secured loan product and the continuing mixed shift to large loans, which are less sensitive to seasonal payoffs. We expect the strong portfolio growth to continue in the second quarter, which will in turn drive strong sequential quarterly revenue growth throughout the second half of the year. Over the last several years, we've also de-risked our business by investing heavily in our custom underwriting models and shifting 84% of our portfolio to higher quality loans at or below 36% APR. These efforts have enabled us to maintain a stable credit profile as we grow. In the first quarter, delinquencies continue to normalize in line with our expectations, primarily in higher risk segments. However, the credit quality of our portfolio remains stronger than prior to the pandemic. We ended the quarter with a 30-plus day delinquency rate of 5.7%, a 30 basis point improvement from year end, and 120 basis points better than the first quarter of 2019 pre-pandemic levels. Likewise, our net credit loss rate during the quarter was 8.7%, which was 200 basis points better than the first quarter of 2019, and 50 basis points better than our guidance of 9.2%. While we continue to keep a close eye on inflation and other macroeconomic trends, we believe that our typical customer remains in strong financial health. Unemployment is near historically low levels, And it's our experience that the credit quality of our portfolio aligns more closely with employment than inflation. In addition, wage increases have been strongest in lower income brackets, outpacing inflation and creating real wage growth, which has left our customers' ability to pay largely intact. Finally, the net worth of the least wealthy 50% of consumers increased sharply during the pandemic, and the balance sheet of these consumers remains healthy. with cash balances for the lowest income consumer quartile still 60% above pre-COVID levels as of the first quarter. At this time, inflation has not materially impacted the credit quality of our portfolio. An inflationary environment, however, typically has a positive impact on loan demand. Consumer spending and demand for our products were both strong in the quarter. Additional evidence of the financial health and positive economic settlement of our customers. Our strategic investments in geographic expansion, digital initiatives, and product and channel development, along with our proven multi-channel marketing engine, enabled us to capitalize once again on the increased demand for credit and expand our market share, as our growth has continued to outpace the broader industry. In February, we expanded our geographic footprint to Mississippi, our 14th state. After less than three months of operations, our three branches in Mississippi already average $1.8 million in receivables per branch as of the end of April. Later this year, we plan to continue our national expansion by entering an additional four to five new states, including California. Our entry into California will increase our addressable market size by around 33%, representing a very attractive opportunity for us. As we previously discussed, We plan to leverage our digital investments and support from our centralized sales and service team to operate with a lighter branch footprint in new states, with each branch maintaining a broader geographic reach. As a result, we expect to have higher receivables per branch and better operating efficiencies in new states. For example, in 2021, we entered Illinois with six branches. As of the end of April, the Illinois branches have been open for an average of nine months and have 4.6 million in average receivables per branch, already in excess of the company average of 4.2 million per branch. Likewise, we continue to assess our legacy branch network for opportunities to optimize our branch footprint and improve our operating leverage. To that end, in the second quarter, we expect to close approximately 20 branches where there are clear opportunities to consolidate operations into a larger branch in close proximity, while still providing our customers with the best-in-class service they've come to expect. These branch optimization actions will generate approximately $1.8 million in annual G&A expense savings, which will nearly allow us to self-fund the more than 20 new branches that we plan to open this year in new and existing states. As Harp will discuss in greater detail later in the call, our lighter branch footprint strategy in new states, our branch optimization strategy in existing states, and our new growth initiatives have already combined to drive substantial same-store portfolio growth. We also continue to innovate and evolve our business through our investment in digital initiatives. We originated $40 million of digitally sourced loans in the first quarter, up 150% from the prior year period. New digital volumes represented 28% of our total new borrower volume in the quarter. In addition, in late March, we began piloting end-to-end digital lending in one state. Having booked our first fully digital loans, we expect to expand the pilot to additional states in the second half of 2022. We're excited to introduce this new lending channel, which allows us to offer our small loan and large loan products on an entirely digital basis without the need for intervention by our team, from the point of application through loan proceed distribution. We intend to limit our risk exposure to end-to-end digital lending until we're comfortable that we fine-tune the customer experience and gain sufficient data to validate the efficacy of our credit models. Later this year, we also plan to complete the enhancement of our customer portal and development of a mobile app. The new portal and mobile app will allow our customers better access to payment functionality and greatly improve the customer mobile experience. Ultimately, we believe that our investments in an improved pre-qualification experience, new end-to-end digital lending, an enhanced customer portal, and a new mobile app will enable us to deliver a digital user experience on par with any FinTech lender. At the same time, we're able to differentiate ourselves from the competition by offering our customers the benefit of a branch-based, omni-channel operating model, affording our customers multiple avenues to interact with us. This model will further enhance our best-in-class customer experience and allow us to maintain our high-touch, relationship-based lending model, which positively impacts our credit performance and customer loyalty. In conclusion, we delivered another quarter of consistent, predictable, and superior results, and we continue to be well-situated to execute on our long-term strategies, including our ambitious growth plans throughout this year and beyond. I'll now turn the call over to HARP to provide additional color on our financial results.

Thank you, Rob, and hello, everyone. I'll now take you through our first quarter results in more detail. On page three of the supplemental presentation, we provide our first quarter financial highlights. We generated net income of $26.8 million and diluted earnings per share of $2.67, both records, with diluted EPS up 16% from the prior year period. Our strong results were driven once again by significant year-over-year portfolio and revenue growth, a healthy credit profile, disciplined expense management, and proactive management of interest rate cap. The business produced strong returns of 7.3% ROA and 36.7% ROE in the quarter. We continue to demonstrate our ability to drive revenue to our bottom line and generate robust returns. Turning to page four, branch, digital, mail, and total originations were all at record levels for a first quarter. We originated $199 million of branch loans, 20% higher than the prior year period. Meanwhile, direct mail and digital originations of $127 million were 83% above first quarter 2021 levels. Our total originations were $326 million, up 39% year over year. On page 5, we show our digitally sourced originations. which are underwritten in our branches by our custom credit scorecards and serviced by our branches. In the first quarter, digitally sourced originations were up 150% from the prior year period and represented 28% of new borrower volume in the quarter. As a reminder, in 2021, we invested in building an enhanced digital prequalification experience, the benefits of which are evident in these results. We continue to meet the needs of our customers through our multi-channel marketing strategy, and as Rob noted, we're excited about our latest pilot of end-to-end digital origination functionality. Page six displays our portfolio growth and product mix through the first quarter of 2022. Despite the typical seasonal trends, we grew our portfolio sequentially in the first quarter for the first time in many years, a testament to the success of our strategic growth initiatives and to the strong demand that we continue to see in the marketplace. We closed the quarter with net finance receivables of $1.45 billion, up $20 million from the prior quarter and up $340 million year-over-year. On a product basis, our large loan book grew by $27 million sequentially in the first quarter. As of March 31st, 69% of our portfolio was comprised of large loans and 84% of our portfolio had an APR at or below 36%. Our small loan portfolio liquidated by $7 million in the quarter, so the rate of liquidation in the small loan book was lower than in prior years. As a reminder, customers tend to use tax refunds in the first quarter to pay off their higher rate debt, causing our small loan portfolio to be more sensitive to seasonal liquidation. In addition, in the quarter, we tightened the credit box in certain digitally sourced small loan segments where booking rates and credit quality were less favorable. Doing so enabled us to shift resources to meet the substantial demand we observed for our higher quality large loan product. The credit tightening actions in our small loan portfolio will negatively impact small loan growth and total portfolio yield in the short term. However, the actions provide immediate benefits to large loan portfolio growth and will allow us to continue to optimize net credit margins and operating efficiencies in the long term. In the second quarter, in light of the continued strong demand in the market, we expect that our growth will accelerate, driving our finance receivable portfolio to around $1.525 billion by the end of the quarter and creating healthy sequential revenue growth in the third and fourth quarters. As shown on page seven, our growth initiatives, lighter branch footprint strategy in new states, and recent branch consolidation actions contributed to a very strong same-store year-over-year growth rate of 27% in the first quarter. Our average receivables per branch were at an all-time high of 4.1 million at the end of the first quarter, an increase of 58% from 2.6 million at the end of the first quarter of 2019. We've had success increasing average receivables across all branch cohorts, and we believe that considerable growth opportunities remain within our existing branch footprint. particularly in newer branches. Turning to page 8, total revenue grew 24% to a record $121 million. Total revenue yield and interest and fee yield both declined by 110 basis points year over year, primarily due to ongoing gradual credit normalization and the continued mix shift towards large loans. Sequentially, total revenue yield and interest and fee yield both decreased by 140 basis points. reflecting seasonally higher net credit losses and credit normalization. While yields are down, as I mentioned a moment ago, we believe the actions we've taken to tighten underwriting on higher risk, higher yield segments and shift our portfolio more heavily towards higher quality large loans will improve our net credit margins in the long term. In the second quarter, we expect total revenue yield to be approximately 40 basis points lower than the first quarter and our interest and fee yield to be approximately 30 basis points lower due to the continued mix shift to large loans and credit normalization. Moving to page 9, the credit quality of our portfolio remains strong, thanks to the quality and adaptability of our underwriting criteria, the performance of our custom scorecards, and our mix shift to higher quality large loans. As expected, our 30-plus day delinquencies continue to normalize, with faster normalization in our higher-risk segments. Our 30-plus-day delinquency rate as of quarter end was 5.7%, down 30 basis points sequentially, up 140 basis points from a year ago, but still 120 basis points below pre-pandemic first quarter 2019 levels. Looking ahead, we expect delinquencies to continue to rise gradually towards more normalized levels. Our net credit loss rate in the first quarter came in better than we expected at 8.7%, up 100 basis points from the prior year period, but still 200 basis points better than the first quarter of 2019. We anticipate that second quarter net credit losses will be approximately 4.5 million higher than the first quarter. Though our net credit loss rate typically is highest during the first quarter of the year, We expect for it to reach its peak during the second quarter this year due to ongoing credit normalization altering the historical seasonal trend. The second quarter net credit loss rate should, however, remain 60 basis points below second quarter 2019 pre-pandemic levels. Assuming current macroeconomic trends hold, we continue to anticipate that our full year 2022 net credit loss rate will be approximately 8.5% or 100 basis points better than 2019, demonstrating the controlled manner in which we are growing. Turning to page 10, we ended the fourth quarter with an allowance for credit losses of $159 million, or 11% of net finance receivables. We reduced the allowance by $0.5 million in the quarter, consisting of a macro-related reserve relief of $1.1 million due to improving economic conditions, offset in part by $0.6 million reserve bill to support first quarter portfolio growth. Compared to the first quarter of 2021, when we released $10.4 million in reserves on $31 million of sequential portfolio liquidation, in the first quarter of this year, we released only $0.5 million in reserves on $20 million in sequential portfolio growth. reducing our pre-tax income by $9.9 million year-over-year. Our $159 million allowance continues to compare very favorably to our 30-plus-day contractual delinquency of $82 million and includes a macro-related reserve of $16 million related to potential future macroeconomic impacts on credit losses, including those associated with the COVID-19 pandemic. These macro-related reserves amount to 10% of our total allowance for credit losses, a strong position as we continue to monitor the health of the economy and the consumer in the coming months. As a reminder, as our portfolio grows, we'll build additional reserves to support the growth. As I mentioned earlier, we expect strong portfolio growth in the second quarter of approximately $80 million. And as a result, we expect to record a base reserve build of approximately $8.6 million in the quarter. The second quarter reserve build will cause net income in the second quarter to dip to a low point for 2022, following which we will experience strong sequential net income growth throughout the remainder of the year as the revenue associated with our robust portfolio growth flows through our income statement. We continue to expect that our reserve rate will normalize over the course of 2022. Depending upon the overall macroeconomic environment, we estimate that our reserve rate will decrease to approximately 10.8% at the end of the second quarter. In addition, assuming continued low unemployment and a relatively benign macroeconomic outlook, our reserve rate could conceivably drop to as low as 10% by around the end of the year, which would actually be lower than our day one CECL reserve rate of 10.8%, with the improvement attributable to our shift to higher quality loans. Flipping to page 11, our G&A expense for the first quarter were $55 million, and our operating expense ratio was 15.4%, a 90 basis point improvement from the prior year period. G&A expenses for the first quarter included approximately $0.4 million of expenses associated with the branch optimization actions that Rob discussed earlier. which impacted our operating expense ratio by 20 basis points. As we previously noted, we expect to invest heavily this year in our digital capabilities, geographic expansion, and personnel to drive additional sustainable growth and improved operating leverage. In the second quarter, we expect G&A expenses to be approximately $56.8 million, including approximately $0.7 million of expenses related to branch optimization actions. Turning to page 12, our interest expense for the first quarter ended below zero, a remarkable result. As a reminder, we maintained 550 million in interest rate cap protection in the first quarter. Of the total amount, 450 million of the interest rate caps had a one-month LIBOR strike rate of between 25 and 50 basis points. Due to increased future rate expectations, the market value of our interest rate caps increased by 10.2 million in the first quarter, more than offsetting the $10.1 million in interest expense that we otherwise incurred. Through the end of the first quarter, the aggregate increase in the value of our caps was $12.6 million, all of which has been recorded as a reduction to interest expense. The increase in the value of our interest rate caps in the first quarter was, of course, extraordinary, as the two-year Treasury yield posted its biggest quarterly increase in nearly 40 years. Given the significant increase in rates and the value of our cap, we decided in late April to sell our shorter duration cap. The sold caps had an aggregate notional principal amount of $300 million, one-month LIBOR strike rates between 25 and 175 basis points, and maturity dates in 2023. As a result of the sale, we have recorded an additional $1.1 million of gains in the second quarter and locked in the $5.1 million of gains that we previously recorded on the sold caps through the first quarter, as those gains will no longer be at risk of future mark-to-market adjustments. Following the sale, we continue to maintain $250 million in interest rate cap protection, with one-month LIBOR strike rates between 25 and 50 basis points and maturity dates between February of 2024 and February of 2026. The caps cover $129 million in existing variable rate debt as of the end of the first quarter and create protection for future growth. In the future, we'll continue to mark our remaining interest rate caps to market value, and as a result, we may experience favorable or unfavorable valuation adjustments as interest rates fluctuate. In the second quarter, we expect interest expense to be approximately $10 million, inclusive of the $1.1 million gain recognized on the sold interest rate cap but prior to any further market adjustment on our remaining caps. This amount also represents a sequential increase in interest expense compared to the first quarter. The expected year-over-year increase in interest expense in the second quarter is primarily attributable to the growth in our average net finance receivables, offset partially by the $1.1 million gain on the sold caps. Aside from our purchase of interest rate caps, we have aggressively managed our exposure to rising rates by increasing the level of our fixed rate debt to 89% of total debt as of the end of the first quarter, compared to 74% at the end of the first quarter of 2021 and 53% at the end of the first quarter of 2020. Page 13 is a reminder of our strong funding profile and healthy balance sheet. In February, we closed a $250 million asset-backed securitization, our eighth securitization and largest to date. The transaction has a three-year revolving period and a weighted average coupon of 3.6%. The Class A notes received a AAA rating by DBRS, the first time a senior class of notes in one of our securitizations has received the top rating. Despite a challenging market environment, we experienced strong investor interest in the transaction. with the deal oversubscribed and new investors participating. As a regular issuer in the ABS market with an established investor base, we feel very comfortable in our continued ability to access funding to feel our strong growth. As of the end of the first quarter, we had $671 million of unused capacity on our credit facilities and $215 million of available liquidity consisting of unrestricted cash on hand and immediate availability to draw down on our revolving credit facilities. As I mentioned earlier, our fixed rate debt as a percentage of total debt was 89% at the end of the first quarter, with a weighted average coupon of 2.9% and an average revolving duration of nearly three years. Our first quarter funded debt to equity ratio remained at a conservative 3.8 to one. We continue to maintain a very strong balance sheet with low leverage, ample liquidity to fund our growth, and substantial protection against rising interest rates. Our effective tax rate during the first quarter was 23%, slightly below the prior year period. For the second quarter, we expect an effective tax rate of approximately 24.5% prior to discrete items such as tax impacts associated with equity compensation. During the first quarter, we continued our return of capital to our shareholders. We repurchased approximately 173,000 shares of our common stock at a weighted average price of $48.76 per share under our $20 million stock repurchase program. In addition, our Board of Directors declared a dividend of $0.30 per common share for the second quarter of 2022. The dividend will be paid on June 15, 2022 to shareholders of record as of the close of business on May 25, 2022. We're proud of our continued outstanding performance, and we remain extremely pleased with our strong balance sheet and our near and long-term prospects for growth. That concludes my remarks. I'll now turn the call back over to Rob.

Thanks, Harp. First, I'd like to recognize and thank our hardworking team for another quarter of exceptional results. We continue to take market share and drive our portfolio to new highs, thanks to the investments we made throughout the pandemic in technology, the digital experience, geographic expansion, and other growth strategies. Following a dip in the second quarter caused by provisioning for loan growth, we look forward to strong sequential net income growth in the third and fourth quarters as the revenue associated with our portfolio growth flows to the bottom line. We have many more exciting growth and innovation opportunities ahead of us this year and beyond, including geographic expansion to California and other states, the extension of our end-to-end digital lending capabilities to the rest of our network, the rollout of an enhanced customer portal and new mobile app, and the continued growth of our auto-secured loan product. As we've done in the past, we'll accomplish this growth in a controlled manner, with a focus on credit quality. Our credit profile remains very strong, with delinquencies and net credit loss rates still well below pre-pandemic levels. We continue to monitor the economic environment and the health of the consumer, and we remain well prepared to adjust our underwriting as warranted by changing conditions. We also maintain a healthy allowance for credit losses, including $16 million of macro-related reserves, and a strong balance sheet and liquidity position, including $215 million of available liquidity. In addition, we're protected against rising interest rates, with fixed rate debt representing 89% of our total debt, as well as interest rate caps that have already delivered substantial protection against rising rates. In summary, we remain well-positioned to sustainably grow our business, expand our market share, and generate additional capital for return 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?

Certainly. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. We will pause for a moment as callers join the queue. The first question comes from David Scharf with JMP Securities. Please go ahead.

Good afternoon, and thanks for taking my questions. Rob and Harp, I guess sort of a general question about, you know, how an investor should think about, I guess, really the asset profile of the business looking out maybe 18 months. I know you're not providing 2023 guidance, but whether it's credit quality or yield, so much of the forecasting is dependent on mix, and you've got so many balls in the air, whether it's entering new geographies, new channels, piloting digital end-to-end. And I guess this is a long-winded way of asking, you know, is there an end point to how we should think about what ultimately is a normalized, in your view, total yield and loss profile for the business? Because it seems like, you know, the difference between small and large loans and other initiatives, you know, are still fluid.

Hey, David, how are you? And thanks for the question. So a little bit difficult to obviously give you a precise answer. But what I can tell you, and you've seen this in the past, is, you know, just in the, you know, since the start of the pandemic, you know, we went from 74% of our portfolio in 2019 to being, you know, under 36% to 84% today. You know, the real question is, where does that, you know, kind of level out as? You know, I don't see in our strategic plans us getting out of the greater than 36% business. We feel that's still a very attractive customer set. We have an opportunity to graduate those customers who improve their credit into larger loans at lower rates. And we think it's a good thing for the communities to provide that opportunity access credit to those customers. That being said, When you look at our growth plans, and I'll give you California as an example, that has an addressable market that's 33% greater than what our addressable market is today, and we're going to enter California sub-36%. So I would anticipate that the mix of business will continue to increase percentage-wise to sub-36%. Where exactly we land, I can't really give you a precise figure right now, but I think you'll gradually see that percentage increase. You know, hopefully that's helpful. And, you know, from a yield standpoint, you know, again, I think if you were looking at kind of near-term bias and, you know, we did do some tightening in the quarter on some of our higher risk segment, that's leading to a little bit of yield compression. I think you will see a little bit of compression there. But at the end result, the biggest part of our portfolio is below 36%. So there's not that much more compression risk on yields, even if we increase the mix a little bit more towards sub-36% lows.

Got it. That's helpful. And maybe just a quick follow-up on the entry into California. You know, given the size of the market, as we think about the investment, is this going to be primarily a digital-only, you know, market for you? Or are you going to have to, you know, build out a significant branch presence?

You know, look, we're going to take the same approach that we've done in Illinois and Utah and now Mississippi, you know, as we said in the, you know, in the call. you know, Illinois has been a tremendous success. I mean, we've been open for nine months with six branches and the average receivables per branch is 4.3 million, you know, versus our network average today of 4.1. You know, our network's been overall average has been increasing substantially from, you know, in 2019, the average per branch was only 2.6 million. So as we look to get into California, you know, Our view is we will go through a light footprint strategy enabled by digital capabilities and all the other growth initiatives we've invested in. And then as we seize the opportunity in front of us, we'll figure out what that optimal level of branch network size is. But it would be thinner than what you would expect in kind of a traditional model from several years ago.

And then just to clarify on that one, I think Rob said the average of nine months at the end of April for Illinois was 4.6, and then the average for the company at the end of April was 4.2. Thanks, Rob.

Got it. Great. Thank you very much. Great.

Thanks, David. The next question comes from John Hecht with Jefferies. Please go ahead.

Guys, thanks very much for answering my questions. Good to hear you. I guess dovetailing a little bit on David's last question, you talked about yields maybe compressing because of mix shift, but I'm wondering maybe if you could dial in at the product level any yield changes. I guess maybe even stepping a little forward, I know you're in a really good spot from an interest rate perspective for a variety of reasons, but Does the industry or do you consider passing on interest rate increases to the customers, or is that really a whole different decision-making factor?

No, actually, that's a great question. I mean, you know, when you look at where we sit today with, you know, 89% of our debt fixed, I think we're in a much better position maybe than some of our peers. And so as we, you know, kind of dial in our new digital capabilities and we drive more efficiencies, as we build more scale, you know, I think we do have some pricing power to, you know, maybe attract customers with price if we choose to. So, you know, I think that, you know, everything we've done is just positioning us to have that kind of flexibility in the future. The other thing I would say about, you know, the degree of rate compression as we, you know, maybe continue to shift our mix a little bit more to large loans, one of the things you have to keep in mind is that the volume growth from a large loan strategy, you know, sub-36%, you know, from a revenue standpoint, you're making up the loss yield on a small loan that maybe has a $1,000 balance by putting, you know, at a, you know, call it a 43%, you know, average, you know, APR, and you're putting on, you know, a large loan maybe at 30% that might have a 5, 6, or $7,000 balance. So, While you'll see some maybe yield compression, you're going to make that up and then some because of the volume growth you're going to get on the larger loans. And they're obviously going to be better credit quality. And to that end, you know, we're also really leaning into the auto-secured product now. You know, we're not disclosing the progress at this point. You know, we started it late last year, and we're really leaning into it. But obviously, that product has a lower yield. but a much better credit performance as I think you've seen from competitors that are heavily into auto-secured. So we feel like we're in a really good position, if not great position, and I would say all the investments we've done in our digital capabilities are going to pay off in the future as it allows us to be more efficient and then figure out how we want to use that to drive demand.

And then, John, the only thing that I would add to that is I talked a little bit about how 89% of our total debt is also fixed. So from a cost of funds perspective, in a rising rate scenario, again, that helps us out with the pricing power and allows us to be opportunistic.

Okay. That's super helpful. And then I guess maybe you talked about tightening in the – the higher risk categories, how that itself is going to drive some mix shift and so forth. But I'm wondering, are you seeing, I mean, and this has sort of been a discussion point in the market, that the deeper subprime consumer is getting negatively impacted by inflation and it's a real effect, but other cohorts don't have the effect of getting crowded out by higher gas prices and this and that. Are you seeing that? Is that one of the driving factors for the underwriting changes, or is there just a general focus on going upstream?

Yeah, so a couple of factors here. So, you know, the higher risk segment, you know, certainly is normalized faster than the lower risk segment of our portfolio. And I think that's probably true across the industry. It just naturally will normalize faster. You know, as we said in our prepared remarks, you know, those customers still are experiencing today, you know, real wage growth and their balance sheets are relatively healthy. When we looked at the tightening that we just did, it was less about looking at, you know, kind of that FICO segment income band than it was looking at certain channels where we thought we were getting, you know, maybe, you know, not the same quality customers that we would like. And so we started tightening around the margins, but you know, the net credit margin of those customers was still relatively good, but there was so much demand coming through in the first quarter, we made a decision from a productivity standpoint, probably first, and then a credit standpoint second, that you would rather take somebody's work effort, because remember, take the digital leads we get, they still get booked today in the branch until we, you know, roll out the end-to-end, and then we have that opportunity for customers to avoid a branch. You know, if we have a branch staff member that's working on a small loan that's $1,000 loan, and it may have a, you know, relatively high yield, but it's going to have relatively high delinquencies and have to be collected, you can, you know, reposition that effort, so to speak, to a larger loan, a $5,000 or $6,000 loan. You might give up a and have better credit performance in your portfolio. So, you know, when we undertook this credit tightening, it was really partly credit, but it was also to drive more efficiency for the business. And, you know, look, we run a very nimble organization, and we monitor our various cohorts, and, you know, from a credit standpoint, so we have the ability to dial up and down as we see we need to. But, you know, that's just part of the opportunity we saw and it really paid off in the first quarter because we grew the portfolio rather than liquidate it.

Okay.

And then final question, I just, you get some good information about the loan balances per kind of cohort age of kind of the branches. I'm just wondering, you know, you're going to a few new states this year. You do have a digital strategy alongside of that. Are the branches, the newer physical branches, are they kind of growing and maturing at a similar pace that they did historically? Or is that dependent on, you know, a few different considerations?

Well, in the new states, and we do open up some branches in existing states as well, but in the new states, they're much larger branches. They cover a wider geography. You know, they could have staff members, seven, 10 people in the branches. So they're much larger. They're easier to manage that way because, you know, you don't have issues if people are out in terms of staffing levels. And, you know, the growth has been terrific because we're able to you know, extend the reach of those branches using, you know, our remote loan closing capabilities, obviously our direct mail program, and other marketing efforts to really drive disproportionate volumes than what we used to have in these new branches and a thinner network. But, you know, when you look at existing states where we add branches, I mean, the growth is still strong. but not as strong as you see in a new state where you have fewer branches.

Okay. Very helpful. Thanks very much. Great. Appreciate it, John.

The next question comes from Sanjay Sakrani with KBW. Please go ahead.

Hi, this is actually Steven Kwok filling in for Sanjay. Thanks for taking my questions. The first one I had was just around like how we should think about the efficiency ratio going forward, given that you are entering into new markets, and at the same time, you're also having a branch optimization strategy. If you could just talk us and help us think through that. Thanks.

Yeah, thanks, Steven, and appreciate the question. From an efficiency standpoint, we did improve in the quarter. We are making progress as we get larger in size and more efficient in terms of the tools we have at our disposal to be more efficient as we run the organization. We're still investing heavily in the business, so I can see the efficiency ratio ticking up before, and I'm talking over time, before coming back down and improving as we really become more efficient as we roll out new states with fewer branches and leverage all the digital capabilities that we have developed and are developing.

Got it. Got it. And then any other incremental steps you can do around the capital management side? You guys are generating nice returns on top of the gains that you're getting from the hedges that you have? I'm just curious as to perhaps an acceleration on the capital management front.

You know, look, what I would tell you is in terms of return to shareholders, you know, we talk with the board every quarter about, you know, our capital returns. You know, we've done a terrific job since the beginning of the pandemic, I think since the start of 2019. We bought back on a diluted basis about 17% of our shares. In the last year, I think it's about 9.5% or 9.4% of our shares. So we feel like we're doing a really good job returning capital to shareholders in addition to the, you know, the quarterly dividend of 30 cents, while still generating enough capital to support what is a, you know, very healthy growing business, which, you know, this quarter we grew, you know, 30% on the portfolio or 31% on the portfolio versus prior year. So, you know, I don't think our approach going forward is going to be, you know, any different. We certainly had some outsized gains as Harp described on our interest rate caps. It's basically brought forward all the interest rate protection into the first quarter and You know, it's kind of nice that the two-year rates, I guess, moved more in the last quarter than it has in the last, you know, 38 years. And so, we reap the benefits of that. And, you know, the benefits we picked up on the interest rate caps more than self-funded the buybacks we've done so far on the last 20 million trunks. So, you know, that puts us in a very good position on the capital standpoint and gives us flexibility to fund future growth or other options depending on what we decide to do.

Great. Thanks for taking my questions.

Once again, if you have a question, please press star, then 1. The next question comes from John Rowan with Janie Montgomery Scott. Please go ahead.

Good evening, guys. With the increase in charge-offs that are contemplated with the 2Q guidance, do you have any risks in any of the ABS facilities that you would trigger either an OC or an early arbitration event?

No, not at all. You know, and I know that there was, you know, there was some commentary in the market about, you know, what our, you know, trust had indicated in terms of loss rates. And, You know, look, it's a little bit difficult to look at the securitization trust and form a line. In particular, you know, we did a private ABS deal here in the fourth quarter, which is greater than 36% loans. And that's the first time, you know, we've done an ABS deal greater than 36%. So kind of threw the trends out and, you know, because that wasn't part of the normal base. You know, when we looked at our trust data, we were running in about, you know, an 8.8, maybe an 8.5, sorry, 8.85 or 8.8 loss rate. The trusts don't factor in growth. And so when you factor in the growth, we kind of landed at the 8.7%, which is what we reported. But not even close on any of the triggers in any of the trusts.

So do you have... There are OC triggers. Are there amortization triggers as well? Or is it just, I see, you know, just, you know, some of the trusts do have OC language in the prospectus.

You know, I'd have to get back to you on the specifics. I think one of them may have an OC trigger, but I, you know, off the top of my head, I don't recall which one, but happy to circle back with you on that.

Okay. Thank you very much. That's all for me. All right. Thanks, John.

This concludes the question and answer session. I would now like to turn the conference back over to Rob Beck for any closing remarks.

Thanks operator and thanks everyone for joining today's call. You know, as you heard on the call, we're really happy with the first quarter results. You know, we came in better than the guidance that we provided at the end of the last quarter. you know, predominantly on strong volumes, which led to stronger revenues. We're pleased that, you know, our delinquencies improved versus prior quarter. And, you know, NCLs came in 50 basis points better. And even expenses, X, the branch optimization charges came in better than we anticipated. So, you know, really, really strong performance. You know, I guess the The flip side of that, at least on the bottom line, is, you know, when you grow by $20 million versus contract by $30 million on your portfolio, which we anticipated, you know, it's another $5 million swing in CECL reserves that we had to keep. But all in all, you know, really a great quarter, and, you know, the growth in the portfolio this quarter and the guidance we gave for second quarter growth in the will lead to, you know, strong top line and bottom line growth in the second part of the year. So, really happy about that. You know, I want to emphasize that, you know, we have strong growth, but it's controlled. All of our credit metrics are still below 2019 pre-pandemic levels. You know, I'd also say that, you know, obviously we did tighten a little bit on certain risk segments, but more importantly, the growth we're getting is coming from our initiatives. It's not coming from adding, you know, taking on more risk. In fact, our portfolio is becoming less risky given the increase in sub-36% loans. You know, our growth is coming from new states, you know, new products like auto-secured, and as we add new partners on the digital channel. And then we're getting the new customers, as we mentioned, you know, up 18% versus the prior year. So, you know, our plan is to continue to invest in growing our business and expanding nationally. A lot of really exciting things to come, as I said. You know, new states like California, big opportunity. The end-to-end, you know, digital origination process as we roll that out further once we get comfortable with all the credit aspects. And, of course, improving the customer experience with enhanced customer portal and kind of the mobile app later this year. So we're really excited about the future, but, you know, we are very mindful of the economic environment. We are watching... You know, all of our cohorts in the portfolio laser-like focused on credit performance, and we have a nimble, you know, credit organization allows us to tighten and tighten quickly if we see anything. And so, you know, we think we're well prepared for what the future holds. So, again, thanks for joining today's call. Talk to you soon.

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