Regional Management Corp.

Thank you for standing by. This is the conference operator. Welcome to the regional management fourth quarter 2022 earnings call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. To join the question queue, you may press star then one 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 Corp. Also, our discussion today may include references to certain non-GAAP measures. Reconciliation of these measures to the most comparable GAAP 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 fourth quarter 2022 earnings call. I'm joined today by Harp Rana, our Chief Financial Officer. We closed out 2022 having taken several meaningful steps to prepare us for the new year. Harp and I will take you through our fourth quarter results, discuss our growth and the credit quality of our portfolio, update you on our strategic initiatives, and share our expectations for the first quarter and 2023 more generally. Fourth quarter results came in better than our expectations on an adjusted basis. We earned 2.4 million of net income and 25 cents of diluted EPS, inclusive of a $2.7 million impact to net income from the sale of 27 million of non-performing loans, 17 million of which would have otherwise been written off in early 2023. On an adjusted basis, excluding the impact of this loan sale, we produced $5 million in net income and 54 cents of diluted EPS. The non-performing loan sale allowed us to dispose of a distressed portion of our portfolio at an attractive price and enabled us to refocus our personnel on early-stage delinquent accounts as we enter the first quarter tax season, which seasonally is our best quarter for collections. As a result of the sale and the acceleration of the net credit losses on the sold accounts from the first quarter to the fourth quarter, our net income was negatively impacted by $2.7 million in the fourth quarter. The net income will be positively impacted by a similar amount in the first quarter. While the timing issue created some noise in our fourth quarter financial results, the sale provided operational value and allowed us to put a portion of the stress segments of our 2021 and early 2022 vintages behind us. The sold loans were funded by our senior revolver and warehouse facilities and excluded any loans in our securitization transactions. As a result, the sold portfolio contained a greater proportion of higher rate, higher risk loans than our total portfolio, including $1.9 million of loans from the eliminated direct mail segments and digital affiliate that we've highlighted on prior calls. Roughly 38% of the sold portfolio balances had APRs greater than 36%, compared to 14% of total portfolio balances. And they had an average FICO of 613 compared to 640 for our total portfolio average. As a reminder, we began tightening credit in late 2021 and continued our tightening actions throughout 2022. Our second half 2022 vintages are some of the strongest in our portfolio and are currently performing in line with expectations. At year end, Our 2021 vintages represent just 22% of the portfolio, and we expect that number to decline to around 7% by the end of 2023. We ended 2022 with a 30 plus day delinquency rate of 7.1%, only 10 basis points higher than 2019 pre-pandemic levels. In our early 1 to 29 day and 30 to 59 day delinquency buckets, monthly roll rates improved sequentially from the third quarter to the fourth quarter by 80 basis points and 120 basis points, respectively. Delinquency rates in those early buckets were also 50 basis points and 10 basis points better, respectively, than fourth quarter 2019 levels. Our first payment default rates were also strong in the fourth quarter, improving to 7.1 percent in December, which was 240 basis points better than September 2022 and 130 basis points better than December 2019. We attribute these early indicators of credit improvement to tighter underwriting and shifting additional collections resources to early stage accounts. Excluding the impact of the eliminated direct mail segments and digital affiliate, our year-end delinquency rate would have been 10 basis points better than pre-pandemic levels. The portfolio associated with the eliminated direct mail segments and digital affiliate was down to $22 million at the end of the fourth quarter and $31 million at the end of the third quarter, and we expect it to be off our books in the second half of the year. Demand for our loan products remained strong in the fourth quarter, as it was throughout 2022. We grew our receivables by $92 million to $1.7 billion in the quarter, slightly above our guidance. Continued strong demand has allowed us to be picky about the borrowers to whom we make loans, particularly as we've intentionally slowed our growth rate over the past few quarters, given the economic environment. We grew our receivables by 19% year over year in the fourth quarter. down from year-over-year growth rates of 31%, 29%, and 22%, respectively, in the first three quarters of the year. Our full-year receivable growth was disproportionately impacted by growth in the first and second quarters, as fourth-quarter originations were up only 8% year-over-year. We continued to tighten credit in the fourth quarter, most significantly to new borrowers. While our credit tightening actions slowed our year-over-year receivables growth in the fourth quarter, We believe that the tradeoff between credit and growth is appropriate in this environment. New borrowers represented 29% of our 2022 origination compared to 22% of 2019 originations, with the increase in 2022 principally attributable to our geographic expansion since 2020. New borrowers naturally perform worse on average than our seasoned present borrowers who remain in our portfolio following loan refinancing. 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 and credit quality. We offset some of the loss volume from our new borrower credit tightening actions by increasing our former borrower direct mail programs. Similar to our present borrower portfolio, our former borrower portfolio performs better than our new borrower populations. as we're able to use past honest credit performance in determining which former borrowers to include in mailings. Throughout 2022, we increasingly targeted former borrowers in our mail campaigns. In the fourth quarter, 45% of our direct mail volume was to former borrowers, compared to 29% in the first quarter, and 72% of all originations in the fourth quarter were to present and former borrowers. The increased former borrow production, coupled with present borrower renewal activity in the branches, drove much of our growth in the fourth quarter as we continue to focus on the highest quality originations. With our credit actions, our top two risk ranks made up 63% of our originations in the quarter, up from 46% in the fourth quarter of 2019 and 54% from a year ago. More than 80% of our third and fourth quarter originations had FICO scores of 600 or above, compared to 71% in the fourth quarter of 2019. And nearly all of our new bar originations in the fourth quarter had FICO scores of 600 or above. Our auto secured portfolio has topped 100 million for the first time as of year end. The credit performance on the growing auto secured portfolio has been strong to date with a 30 plus day delinquency rate of only 2.2% as of the end of the year. It's worth a reminder that for every dollar of growth in any given quarter, we lose money on the growth in that quarter as we book the credit reserve upfront to cover lifetime losses. In the fourth quarter alone, we reserve $9 million pre-tax on our $92 million of receivables growth. Our fourth quarter receivables growth, however, provided us with a higher jump-off point for the new year and will generate nearly $30 million of incremental revenue in 2023. In addition to the fourth quarter credit tightening, we also completed several key risk and pricing initiatives to support our portfolio going into 2023. First, we completed the rollout of our second generation custom underwriting scorecard to all of our states. The new advanced model evaluates more than 5,000 attributes, including alternative data, and has more complex segmentation that will allow us to further fine tune our underwriting strategies, make better credit decisions at the margin, and improve our credit loss experience while holding loan volume stable, which should benefit net credit losses as we slow our growth in the near term. Second, we expanded our relationship with our external collector, improved their capabilities, and increased our internal and external collector capacity by 50% in the second half of 2022. These moves allow our grants team members to focus more of their efforts on early stage collections, renewal activity, and loan production. Third, we began rolling out our new customer online portal, which significantly enhances the customer experience and includes improved payment functionality. Finally, as a result of the rising rate environment and normalizing credit, we began to reprice parts of our portfolio in the second half of 2022. Most of the pricing actions were put in place late in the fourth quarter, with additional repricing occurring in the first quarter. Our revenue yields fell in 2022 largely due to the mixed shift to larger loans below 36% APR, increased credit tightening on our higher-risk, higher-rate segments, and the impact of the worsening credit environment. The credit environment has caused a larger portion of our loans to reach non-accrual status as they enter later-stage delinquency and an increase in the reversal of accrued interest when these loans are written off. We expect that our recent pricing actions will help to stabilize revenue yields over the longer term. And while we anticipate continued yield pressure in the near term as a result of recent credit tightening and higher rate, higher risk segments, we expect yields will improve in the future as the macro impact on credit reverses back to more normalized levels. As we look ahead to the new year, we believe that the actions we took in 2022 position us to address potential further deterioration in the macro environment. In the coming year, we will continue to place our focus on our highest confidence originations, emphasizing quality over quantity. We will originate loans only where we can achieve our return hurdles under an assumption of additional credit stress beyond today's levels, as well as higher future funding costs. A greater percentage of our originations will be to present and former borrowers, with new borrower lending disproportionately skewed to our newer states. As a result, we expect receivables growth to slow to the mid to high single digits in 2023, compared to 19% in 2022. As we begin to benefit from the more meaningful impact of second half 2022 credit tightening, we anticipate that delinquencies will begin to improve in the first half of 2023, which will support improvement at our net credit loss rate in the second half of 2023. By the end of 2023, we expect our second half 2022 and 2023 vintages will account for more than 80% of our total portfolio. While we expect an economic downturn in 2023, most signs indicate that our customer base will fare better than average. We're encouraged by the recent trends in inflation and the continued strength of the labor market, including low unemployment, high number of open jobs, and strong wage growth in our customers' industry and income bands. However, if conditions worsen, our tightened underwriting provides a powerful mitigate to further economic deterioration. As a result of expected stronger credit performance and higher revenues in the second half of 2023, we anticipate that our net income will be strongest in the third and fourth quarters of the year. As always, we'll monitor our credit performance and the macroeconomic environment closely, and we'll make further adjustments to underwriting as dictated by the circumstances. Most critically, we'll monitor the inflation rate and how it compares to wage growth for lower income segments. Should we observe an improving macroeconomic environment, we have the ability to quickly lean back into growth. From an investment standpoint, we'll seek to capitalize on the opportunities available to us in the seven new states that we've entered over the past couple of years, which have increased our addressable market by nearly 80%. We'll tightly manage our expenses, lower our pace of new state entry significantly, and open only five to seven new branches in 2023. In the first quarter, we plan to enter one new state that carried over from 2022, and we may enter a second new state in the second half of the year, if justified by the economic conditions. Our expense growth in 2023 will be driven primarily by the carryover impact of our 2022 investments as we look to grow and capitalize on prior year investments. Our efforts will include the completion of several important technology, digital and data and analytics projects as we continue to modernize and evolve our omnichannel business strategy. I want to thank all of our team members for their tireless effort this past year. Together, we made major strides in growing and transforming our business. And these efforts, including the actions taken in the fourth quarter, put us in a strong position going into 2023. While the economic environment remains uncertain, I'm confident that the actions we took in 2022 position us well for 2023 and beyond. I'll now turn the call over to HARP to provide additional color on our financial results.