Regional Management Corp.

Thank you for standing by. This is the conference operator. Welcome to Regional Management's third quarter 2022 earnings 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, 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 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 the future operating results and financial condition of regional management court. Also, our discussion today may include references to certain non-GAAP measures. for 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 third quarter 2022 earnings call. I'm joined today by Harp Rana, our Chief Financial Officer. Harp and I will take you through our third quarter results, discuss the economic environment, update you on our strategic initiatives, and share our expectations for the fourth quarter. We're pleased with our third quarter results. We produced $10.1 million of net income and $1.06 of diluted EPS. Demand for our loan products remained strong in the quarter. We expanded our operations to California and Louisiana, increased our account base by 16% from the prior year to more than 500,000 accounts, and grew our loan portfolio to an all-time high of $1.6 billion. Quarterly origination volume of $419 million was comparable to the prior year period, despite recent credit tightening actions and the reallocation of labor to collections, both of which impacted origination levels in the quarter. For the sixth straight quarter, we logged double-digit year-over-year growth in our net finance receivables and quarterly revenue, which were up 22% and 18%, respectively. We continue to demonstrate our ability to grow our account base and portfolio in a controlled and profitable manner, while also maintaining a tightened credit box. Regarding the economic environment, as we've discussed on prior calls, we continue to take a cautious approach as we monitor the health of the consumer. The strong demand for labor and low unemployment levels have continued to benefit moderate and low-income consumers, and our customers tend to be remarkably resilient in difficult economic conditions. However, as the benefits of government stimulus declined and inflation accelerated earlier this year, the pressure on consumers' personal finances increased, particularly for those consumers in higher-risk credit segments. As a result, the delinquency rates for many non-prime lenders reverted to pre-pandemic levels during the second quarter. And in the third quarter, the delinquency rates of our own loan portfolio also normalized to pre-pandemic levels. As of the end of the quarter, our 30-plus-day delinquency rate was 7.2%, and our annualized net credit loss rate during the third quarter was 9.1%. The sequential increase in delinquency was due to normal seasonal patterns, the continuing impact of certain segments that we eliminated earlier this year, and the lag effect of inflation, particularly high gas and food prices. The lag effect was most apparent in the month of July, but in August and September, we observed a slowdown in the rate of increase in delinquencies to what we would ordinarily expect from normal seasonal trends. Encouragingly, As a quarter end, our one to 29-day delinquency bucket was performing 120 basis points better than September 30th, 2019 pre-pandemic levels. We attribute the strong performance in the early stage bucket to our credit tightening action and our focus collection efforts, both of which are benefiting our more recent 2022 vintages. The late stage buckets are performing worse compared to 2019, largely due to weak performance in our 2021 vintages. As of September 30th, 32% of our portfolio was originated in 2021, and we expect that number to decline to roughly 25% by year end and 10% by the end of 2023. As we previously discussed, we began tightening credit in the fourth quarter of last year, principally focused on certain higher-risk, higher-rate customer segments that had been most adversely impacted by inflation. On our last call, we noted that we had eliminated one higher-risk, higher-rate digital affiliate and two higher-risk, higher-rate segments within our direct mail program. Loans originated through the eliminated affiliate and direct mail segments contributed 30 basis points to our 30-plus-day delinquency rates as of September 30th and 60 basis points to our net credit loss rate in the third quarter, despite only representing 1.9% or $31 million of our total portfolio as of quarter end. We expect that this stress portion of our portfolio will run off by the middle of next year. Our remaining portfolio continues to perform well considering the current environment, with delinquency and net credit loss rates just above pre-pandemic levels. While our credit tightening action slowed our year-over-year receivables growth to 22% in the third quarter, we believe that the trade-off between credit and growth is appropriate. New borrowers represented 31% of our 2022 originations, compared to 23% in 2019 originations. New borrowers naturally perform worse on average than our incumbent present borrowers who remain in our portfolio following a loan refinancing. The higher credit losses on our new borrower portfolio reflect a component of our investment in growth. By tightening credit over the past year, we believe we continue to strike the right balance between growth investment and credit quality. And as I'll discuss later, it's worth highlighting that we're achieving our growth principally through geographic expansion, not from credit box expansion. Given the uncertainty presented by persistently high inflation and rising interest rates, we prudently increased our allowance for credit losses to 11.2% of net finance receivables at the end of the quarter, including $19 million of macro-related reserves. We feel very comfortable with our current credit posture and are well positioned for an economic downturn. As a reminder, we design our loan products to remain profitable under stressed economic scenarios. We believe that our investments in improved credit models and collection capabilities, years long shift to large and sub 36% loans, and recent credit tightening actions have contributed to an overall higher quality portfolio compared to pre-pandemic levels. Average FICO scores on originations in the third quarter were 15 points higher than the average third quarter of 2019. And in the third quarter, 83% of new originations had a FICA score at or above 600, compared to 72% in the third quarter of 2019. In the third quarter, 96% of our new borrowers had a FICA score at or above 600. In light of the evolving economic environment, our primary focus remains on maintaining the credit quality of our loan portfolio, supporting our customers, and controlling expenses. In August, we began rolling out our next-generation custom credit scorecard, and we remain on track to complete the rollout by the end of the year. The new advanced model evaluates more than 5,000 attributes, including alternative data, and has more complex segmentations that will allow us to further fine-tune our underwriting strategies, swap in incremental loans at the margin, increase origination volume, and drive higher revenues, all while keeping losses stable. We also continue to increase the size of our centralized collection staff, incentivize branch labor towards collection activities, and improve our collection tools and training. Last quarter, we began leveraging a third-party collector to augment our in-house collection efforts. For customers who fall behind on their payments, we offer borrow assistance programs that enable them to manage their debt obligations, cure their accounts, resume repayment, and maintain their credit worthiness. These borrower assistance programs have been a part of our business for decades, and act as an important bridge for our customers while requiring them to remain engaged and active in repaying their accounts. We know from past experience that these programs reduce credit losses for those customers who utilize the programs. In the third quarter, we began offering new digital solutions to ease access to these programs for our customers. We'll continue to monitor economic conditions in all segments of our portfolio closely. For example, we are carefully tracking the performance of renters and have tightened in this segment this year. Rents have remained elevated over the past year, but it appears that rents nationally may have hit an inflection point in September as the U.S. median rental price declined sequentially in the month. There are also segments of our portfolio that could experience benefits in the coming year. For example, roughly 21% of our portfolio is outstanding to fixed-income borrowers, who will be receiving an 8.7% increase in benefits in 2023, providing much-needed relief to this segment. Similarly, we estimate that roughly 18% of our portfolio is outstanding to borrowers who also carry student loan debt. As the federal student loan forgiveness plan begins to move forward, we believe that it could wipe away as much as $780 million in student debt for the borrowers in our portfolio. Lastly, we'll continue to monitor labor market trends. There remain millions of job openings for our lower and moderate income customers in their respective industries, along with strong wage growth, including 7.3% annual wage growth in the lowest quartile wage earners in the third quarter. The strong labor market and robust wage growth may help protect the lower income segment as the economy slows. And some will remain conservative on credit even as we continue to grow our business. and we'll adapt our underwriting models quickly whenever we observe either risk or opportunities in the market. In recent months, we've also taken additional steps to strengthen our balance sheet and liquidity, protect ourselves against rising rates, lower our expense base, and focus our operations on our core product offerings. In September, we made the decision to discontinue our retail loan product offering, effective in November. As of the end of the third quarter, the retail portfolio stood at only $11 million, or less than 1% of our total portfolio. We concluded that our capital was better invested in our core loan portfolio, which continues to experience strong growth and profitability. Along with the retail portfolio discontinuation, we completed a small reduction in force in our corporate offices, and we moved to new office space in the Dallas area, necessitating an acceleration of expense on the prior lease. These actions resulted in GMA expenses of $600,000 in the third quarter. The retail product discontinuation will generate approximately $1.1 million in annual GNR expenses moving forward, which will be used to fund our growth initiatives, including our geographic expansion that I'll touch upon in a moment. In October, we closed a $200 million asset-backed securitization. The transaction has a two-year revolving period, and the Class A notes received AAA ratings from both S&P and DBRS. Following the transaction, nearly 100% of our debt was fixed, with a weighted average coupon of 3.6% and a weighted average revolving duration of 2.3 years. Despite a challenging market environment, we experienced solid investor interest in the transaction, and as a regular issue in the ABS market with an established investor base, we feel very comfortable in our continued ability to access funding to fuel our growth. We also continue to optimize pricing across all segments of our loan portfolios. In several of our states, we have substantial pricing opportunities, in part because we do not self-impose a 36% rate cap. We believe that we have opportunities to increase our revenue yield and improve our margins to offset some of the inflationary pressure and increase in funding costs. Despite the economic uncertainty, we continue to invest in our growth initiatives and execute on our long-term strategic plans. In the third quarter, we entered California and Louisiana, and within the next three to four months, we plan to enter another two new states. Since the outset of the pandemic, we have entered six new states and increased our total addressable market by nearly 75%. Our geographic expansion provides us with new market opportunities to create growth without necessitating an expansion of our credit box. We also continue to experience success in deploying our lighter footprint model in new states. Through October, these branches on average exceeded $3 million in receivables within six months and exceeded $5 million within 12 months. Looking ahead, we'll continue to utilize a lighter footprint model in our newer states and further optimize our footprint in our legacy states. There remains substantial opportunity to continue growing in states that we've entered since 2020 and in new states. On the digital front, we continue to gain experience with our new end-to-end lending pilot, which is underway in one of our states. Meanwhile, our pre-qualification channel continues to produce strong, high-quality volume. We originated a record 56 million of digitally sourced loans in the third quarter, up 17% from the prior year period. New digital volumes represented 32% of our total new borrower volume in the quarter. As a reminder, other than the loans originated through our end-to-end digital panel pilot, digitally sourced loans are fully underwritten by our branch personnel. In conclusion, I'm proud of our team's execution in the third quarter. We've continued to protect our portfolio and company as we move through a difficult macroeconomic environment. At the same time, we've maintained our execution on our long-term strategic plans of controlled, disciplined growth. I'll now turn the call over to Harp to provide additional color on our financial results.