Regional Management Corp.

Thank you for standing by. This is the conference operator. This call is going to begin in a few moments. Please stand by. Thank you for watching. Thank you. Thank you for standing by. This is the conference operator. Welcome to the original management second quarter 2023 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 0. I would now like to turn the conference over to Garrett Edison, 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 I 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 if they 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. A 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 second quarter 2023 earnings call. I'm joined today by Harp Rana, our Chief Financial Officer. Harp and I will take you through our second quarter results, discuss the credit performance of our portfolio, provide an update on some of our strategic initiatives, and share our expectations for the second half of the year. We're pleased with our second quarter results. We exceeded our expectations on both the top and bottom lines. We produced $6 million of net income and 63 cents of diluted EPS. Loan demand remained strong in the quarter, allowing us to generate high-quality portfolio growth and near-record quarterly revenue while simultaneously maintaining a conservative credit posture. We also continue to closely manage our G&A expenses while investing in our business, driving our annualized operating expense ratio down to 13.6% in the quarter. Our focus on portfolio quality, expense management, and strong execution of our core business has enabled us to deliver consistent, predictable, and superior results quarter after quarter, even in a stressed macroeconomic environment. We've been encouraged by recent economic data indicating a strong labor market, moderating inflation, and real wage growth. But we continue to be cautious and selective in making loans within our Titan credit box. We grew our portfolio by 13 million in the quarter, slightly higher than expectations. However, we slowed our year-over-year portfolio growth rate to 11% compared to 16% last quarter and 29% in the second quarter of last year. We continue to be comfortable prioritizing higher quality credit over more rapid portfolio growth. But we're prepared to lean back into growth when justified by the economic conditions and the overall performance of our portfolio. Our conservative underwriting, combined with a strong loan demand, has allowed us to continue to originate a greater proportion of loans to our best qualified customers. Similar to last quarter, originations to our top two risk ranks represented 60% of volumes in the second quarter, up from 54% in the prior year period, and from 45% in the second quarter of 2019. The average income of our customers has increased by 19% since 2019, and the share of new borrower originations continue to fall in the second quarter, as we've emphasized present and former borrower lending. New borrowers represent only 22% of second quarter originations, down from 27% in the prior year period. As we've highlighted on prior calls, New borrowers initially perform worse on average than our seasoned, present, and former borrowers, with whom we have extensive on-us credit experience. We also continue to grow our auto-secured business, which is now 8% of our portfolio, up from 5% a year ago. The auto-secured portfolio has a very attractive 30-plus day delinquency rate of only 2.1% as of the end of the second quarter. Our second half 2022 vintages continue to outperform our first half 2022 vintages. and our 2023 vintages are some of the strongest in our portfolio. As of June 30th, 70% of our portfolio consisted of second half 2022 and 2023 vintages, a number that we expect to increase to roughly 85% by year end. Our portfolio's early stage delinquencies continue to benefit from several quarters of tight underwriting criteria, but later stage delinquencies have remained elevated, a trend that we observed across the industry. Overall, We ended the quarter with a 30-plus day delinquency rate of 6.9%, a sequential improvement of 30 basis points from the first quarter, but 50 basis points above the second quarter 2019 levels. It's important to note, however, that our second quarter delinquency rate was adversely impacted by the effect of slower portfolio growth in 2023 compared to 2019. Sequentially, our portfolio grew by less than 1% in the second quarter of 2023, compared to 7% growth in the second quarter of 2019. If we were to normalize for the effect of slower growth this year, our 30 plus day delinquency rate would only be 30 basis points higher than second quarter 2019 levels, driven by elevated delinquencies in our late stage buckets. Consistent with last quarter, our second quarter early stage delinquency outperformed 2019 results. Our 1 to 29 day and 30 to 89 day delinquency rates were 250 basis points and 20 basis points better than the second quarter of 2019, respectively. In addition, our May first payment default rate was more than 200 basis points better than the rate in May 2019. Our back book remains stressed due to macroeconomic conditions as older, pre-tightening vintages roll through our later stage delinquency buckets. We continue to manage these buckets closely, and we expect that moderating inflation and credit tightening will benefit the roll rates in these buckets in the coming months. Looking ahead, we'll maintain a tight credit box and focus on originating loans only where we can achieve our return hurdles under an assumption of additional credit stress and higher future funding costs. By expanding to eight new states and increasing our addressable market by more than 80% over the past three years, we have ample opportunity to take advantage of high levels of consumer demand to drive stronger second half portfolio growth while still remaining selective in approving borrowers under our conservative underwriting criteria. We expect full-year 2023 portfolio growth in the mid-single digits compared to 19% in 2022. In addition, in light of our conservative underwriting, the declining inflation rate, and continued strength in the labor market, we believe that our net credit loss rate reached its peak in the second quarter. Better performance in our early delinquency buckets and ongoing credit tightening will improve our net credit loss rate in the second half of the year, barring any further deterioration in the macro environment. We also continue to anticipate that our second half net income will be stronger than our first half net income due to stronger credit performance and higher revenue. In summary, we're pleased with our results and our current position, and we're encouraged by recent economic data. Though we remain cautious on growth at this time, we stand ready to make adjustments to our underwriting and growth strategy based on changes in our credit performance and the macroeconomic environment. With ample liquidity, significant borrowing capacity, and a large addressable market, We have the ability to quickly lean back into growth should we observe improving economic conditions.