Regional Management Corp.

Thank you for standing by. This is the conference operator. Welcome to the Regional Management First Quarter 2023 Earnings Call. As a reminder, all participants are in lesson-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 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 our future operating results and financial conditions. Also, our discussion today may include references to certain non-GAAP measures. 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 2023 earnings call. I'm joined today by Harp Rana, our Chief Financial Officer. Harp and I will take you through our first quarter results, discuss the actions we're taking to maintain the credit quality of our portfolio, and share our expectations for the second quarter and beyond, including our plans for continued quality growth. We had a strong start to 2023 as our team ably navigated a challenging economic environment. We earned $8.7 million in net income and 90 cents of diluted EPS in the first quarter by maintaining our focus on portfolio quality, expense management, and strong execution of our core business. We continue to be highly selective in making loans within our tightened credit box, and we further tightened our new borrowers in the first quarter. As a result, and in part due to first quarter seasonality, we liquidated our portfolio by $23 million in the quarter. We intentionally slowed our year-over-year portfolio growth rate to 16%, down from year-over-year growth rates of 19% in the fourth quarter and 31% in the first quarter of 2022. In light of the uncertain macroeconomic environment, We continue to be comfortable trading loan growth for credit quality, but we're well positioned to lean back into growth when warranted by the economic conditions and overall performance of our portfolio. Our credit tightening actions over the past several quarters have improved our credit profile and benefited early stage delinquencies and roll rates. The percentage of originations in our top two risk ranks has steadily increased in recent years, up to 61% in the first quarter of 2023, from 43% in the first quarter of 2019 and 53% from a year ago. Our auto secured portfolio has also continued to grow as a percentage of our overall portfolio. And the credit performance of those loans has been very strong with a 30 plus day delinquency rate of only 2.2% as of the end of the first quarter. We've also continued to moderate new borrower acquisition while sharpening our focus on originations to present and former borrowers. New borrower originations declined to 26% of all first quarter originations, down from 31% in the third quarter and 28% in the fourth quarter of 2022. As we've highlighted on prior calls, new borrowers initially perform worse on average than our season-present borrowers who remain in our portfolio following loan refinancing and our former borrowers with whom we have extensive on-us credit experience. The higher credit losses on our new borrow portfolio reflect a component of our investment growth, but by tightening credit on new borrowers over the past year, we believe we're striking the right balance between growth and credit quality. We'll remain conservative on our new borrow lending until the conditions are appropriate to reaccelerate our growth. As more time has passed since the execution of our credit tightening actions, a greater percentage of our portfolio has benefited from those actions. Our second half 2022 and 2023 vintages are some of the strongest in our portfolio and are currently performing in line with our expectations. As of the end of the first quarter, roughly 60% of our portfolio consisted of second half 2022 and 2023 vintages, a number that we expect to increase to roughly 85% by year end. Only 17% of our portfolio as of the end of the quarter was originated in 2021, And we expect that number to decline to under 10% over the next six months. A healthier credit profile and our heightened collections focus have led to continued early indications of improved credit performance. Our 30 plus day delinquency rate at the end of the first quarter was 7.2%, up 10 basis points from 7.1 at the end of the year. However, when adjusting for the non-performing loan sale that we executed in the fourth quarter, our 30-plus day delinquency rate was 80 basis points better compared to year-end, improving from 8% to 7.2%. In addition, our first quarter 30-plus day delinquency rate was only 30 basis points or 4% higher than the first quarter of 2019. We also continue to see significant improvements in first payment default rates in the first quarter compared to 2019. Our first payment default rate in February was 6.8%, or 170 basis points better than February 2019. In addition, our early delinquency performance compares favorably to 2019 levels, a byproduct of the strong first payment fault rates that we observed at the end of last year. The delinquency rate of accounts one to 59 days past due was 8.6% at the end of the first quarter, a 230 basis point improvement from the fourth quarter of 2022 and 270 basis points better than the first quarter of 2019. Our 60 to 89 day delinquency rate improved by 30 basis points from the fourth quarter to the first quarter and is now flat to 2019 levels. Our 90 plus day delinquency rate is 70 basis points higher than 2019 levels. These late stage buckets remain sticky as our older vintages continue to flow through, a process which we expect to occur throughout the balance of the year. Monthly row rates across all delinquency buckets improved sequentially within the first quarter. And in all but the latest stage buckets, they improved at a faster rate than we experienced in the first quarter of 2019. While our late stage delinquencies continue to be elevated, we're encouraged by the green sheets that we're observing in early delinquency buckets and the performance of our more recent loan ventures. Looking ahead, we're optimistic that our conservative underwriting, a declining inflation rate, and continued strength in the labor market particularly for our customer base, will drive credit improvement in our portfolio. We're expecting that our net credit loss rate will peak in the second quarter as late-stage delinquent accounts roll through to loss. Improvement in our early delinquency buckets and ongoing credit tightening will drive improvement in our net credit loss rate in the second half of the year, barring any further deterioration in the macro environment. In terms of growth, we'll continue to place our focus on our highest confidence originations, those where we can achieve our return hurdles under an assumption of additional credit stress and higher future funding costs. We'll continue to emphasize present and former borrower originations with new borrower lending disproportionately skewed to our newer states, including Arizona, where we commenced operations in the first quarter. We continue to expect receivable growth in the mid-single digits in 2023 compared to 19% in 2022. Our current credit box is the tightest in our company's history, but as macro conditions warrant, we will lean into growth where appropriate, guided by the underlying performance of our portfolio. We also clearly recognize the need to closely manage expenses, something we've always done, while still investing in our capabilities and strategic initiatives, including geographic expansions. As we discussed on the last call, we'll largely limit expense growth in 2023 to the carryover impact of 2022 investments as we seek to complete several important technology, digital, and data analytics projects that are critical to the modernization and evolution of our omnichannel business to drive further productivity and efficiency. In addition, having entered eight new states with the addition of Arizona and increased our addressable market by over 80% since 2020, will slow our pace of new state entry in 2023 while capitalizing on the infrastructure investments from prior years. We currently expect to open five to seven new branches in 2023 and perhaps one additional state late in the year if justified by the economic conditions. Based on current expectations and macro conditions, we continue to anticipate that our net income will be the strongest in the second half of the year due to stronger credit performance and higher revenues beginning in the third quarter. The second quarter will be the low point in profitability for the year, as our revenue will decline sequentially due to first quarter portfolio liquidation, and our net credit loss rate will reach its peak as late-stage delinquencies roll to loss. As we've done in the past, we'll make adjustments to our underwriting and growth strategy based on changes in our credit performance and the macroeconomic environment. With ample borrowing capacity and a large addressable market, we have the ability to quickly lean back into growth should we observe improving economic conditions. In summary, we continue to operate based on a few important guiding principles. First, we're committed to our core business of small and large loan installment lending, and we have a long runway of controlled profitable growth with these products. This is where our focus remained for the foreseeable future as we seek to improve the customer experience and optimize results for our shareholders. Second, we'll continue to originate loans where we have a high degree of confidence in meeting our return hurdles in a stressed macroeconomic environment. Third, we'll continue to tightly manage expenses while also investing in our core business in a way that improves our operating efficiency over time and ensures long-term success and profitability. And fourth, we'll maintain a strong balance sheet, ample liquidity and borrowing capacity, diversified and staggered funding sources, and a sensible interest rate management strategy. We'll continue to stay focused on making sound business decisions in line with these principles, which will allow us to drive attractive results over the long term for our customers, team members, communities, and shareholders. I'll now turn the call over to Harp to provide additional color on our financial results.