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.

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 second quarter results in more detail. On page three of the supplemental presentation, we provide our second quarter financial highlights. We generated net income of $6 million and diluted earnings per share of 63 cents. Our results were driven once again by high-quality portfolio and revenue growth and careful management of expenses, partially offset by increased funding costs and the net credit loss headwinds caused by macroeconomic conditions. Turning to pages four and five, while demand remains strong, our tighter underwriting standards and collections focus led to a 6% decline in total originations from the prior year. By channel, digital and branch originations were down by 19% and 7% respectively, and direct mail originations were up by 2%. As we've consistently noted, we've deliberately reduced originations in recent quarters as we appropriately balance growth with further enhancing the credit quality of our portfolio. Page 6 displays our portfolio growth and product mix Through the second quarter, we closed the quarter with net finance receivables of just under $1.7 billion, up $13 million from March 31st and slightly ahead of our guidance. As of the end of the second quarter, our large loan book comprised 73% of our total portfolio and 86% of our portfolio carried an APR at or below 36%. Looking ahead, we expect our ending net receivables in the third quarter to grow by approximately $50 million as we continue to monitor the economic environment and maintain our current underwriting standards. We remain focused on smart, controlled growth, particularly given the continued uncertainty around consumer financial health. As circumstances dictate, we're prepared to further tighten our underwriting or lean back into growth, either of which could impact net receivables in the third quarter. As shown on page seven, our lighter branch footprint strategy in new states and branch consolidation actions in legacy states contributed to another solid same-store year-over-year growth rate of 7% in the second quarter. Our receivables per branch remain right near all-time highs, coming in at 4.9 million at the end of the quarter. We believe considerable growth opportunities remain in our existing branch footprint under this more efficient model, particularly in more branches in more states. Turning to page eight, total revenue grew 9% to $133 million in the second quarter. Our total revenue yield and interest in fee yield were 31.9% and 28.2% respectively. The year-over-year decline in yield is attributable primarily to our continued mix shift towards larger, higher quality loans and revenue reversals from the credit impact of macroeconomic conditions. In the third quarter, we expect total revenue yield and interest and fee yield to be up by 40 basis points compared to the second quarter due to improvement in the credit performance and the impact of pricing increases on newer loans. We also anticipate that an improving credit environment and increased pricing will drive further benefits for yields in future quarters. particularly as our recent pricing actions roll through the portfolio over time. Moving to page nine, our 30 plus day delinquency rates as a quarter end was 6.9%, and our net credit loss rate in the second quarter was 13.1%. Our tightened underwriting contributed to our gradually improved delinquency profile from the prior quarter, while net credit losses peaked in the second quarter as expected. In the third quarter, we expect our delinquency rate to increase only slightly compared to the second quarter, as the typical third quarter seasonal increase in delinquencies is largely mitigated by improving credit performance. In addition, we anticipate that net credit losses will be approximately 46.5 million in the third quarter, as the net credit loss rate comes off its second quarter high. We're pleased that the portfolio and credit continue to perform as expected. particularly in our front book, some credit tightening. Turning to page 10, our allowance for credit losses declined slightly in the second quarter. We released reserves of $2.4 million after incorporating a slightly more optimistic view of the macro environment into our CFO reserve modeling, including a higher likelihood of a soft landing with a lower year-end unemployment rate of 5.5%, and a lower peak unemployment rate of 6.4% in the second quarter of next year. As of quarter end, the allowance was $181 million, or 10.7% of net finance receivables, down from 11% of net finance receivables as of March 31st. The allowance continues to compare favorably to our 30-plus-day contractual delinquency of $116 million. We expect to end the third quarter with a reserve rate between 10.5% and 10.6%, subject to macroeconomic conditions. Assuming credit continues to improve, we would expect our reserve rate to decline further by year-end. Over the long term, under a normal economic environment, we continue to expect that our net credit loss rate will be in the range of 8.5% to 9%, based on our current product mix and underwriting. and we believe that our reserve rate could drop to as low as 10% with the improvement attributable to our shift to higher quality loans. As we've always done, however, we'll manage the business in a way that maximizes direct contribution margin and bottom line results. Flipping to page 11, we continue to closely manage our spending while still investing in our capabilities and strategic initiatives. G&A expenses for the second quarter were better than our prior guidance. coming in at $57 million. Our annualized operating expense ratio was 13.6% in the second quarter, a 110 basis point improvement from the prior year period. We'll continue to manage our spending closely moving forward. In the third quarter, we expect G&A expenses to be approximately $63.5 million to support receivables growth and to continue to invest in several important technology, digital, and data and analytics projects that are critical to the modernization and evolution of our omnichannel business. Over the long term, we believe that these investments will drive additional sustainable growth, improved credit performance, and greater operating leverage. Turning to pages 12 and 13, our interest expense for the second quarter was $16 million, or 3.8% of average net receivables on an annualized basis. As a reminder, in the second quarter of last year, we experienced a $3 million mark-to-market benefit to interest expense and pre-tax income from our interest rate cap. In the third quarter of 2023, we expect interest expense to be approximately $17 million, or 4% of average net receivables, with the increase in expense primarily attributable to our expected portfolio growth. We continue to aggressively manage our exposure to rising interest rates, as 88% of our debt is fixed rate as of June 30th, with a weighted average coupon of 3.6% and a weighted average revolving duration of 1.6 years. As a result, despite the sharp increase in benchmark rates over the last 18 months, we've experienced a comparatively modest increase in interest expense as a percentage of average net receivables, a benefit of our interest rate management strategies that we expect to continue to enjoy throughout the balance of the year. We also continue to maintain a very strong balance sheet with low leverage, healthy reserves, ample liquidity to fund our growth, and substantial protection against rising interest rates. As of the end of the second quarter, we had 641 million of unused capacity on our credit facilities and 147 million of available liquidity consisting of unrestricted cash on hand and immediate availability to draw down on our revolving credit facilities. Our debt has staggered revolving duration stretching out to 2026 And since 2020, we've maintained a quarter-end unused borrowing capacity of between roughly $400 and $700 million, demonstrating our ability to protect ourselves against short-term disruptions in the credit market. Our second quarter's funded debt-to-equity ratio remained a conservative 4.2 to 1. We have ample capacity to fund our business, even if further access to the securitization market were to become restricted. We incurred an effective tax rate of 23% for the second quarter. For the third quarter, we expect an effective tax rate of approximately 24% prior to discrete items, such as any tax impacts of equity compensation. We also continue to return capital to our shareholders. Our board of directors declared a dividend of 30 cents per common share for the third quarter. The dividend will be paid on September 14, 2023 to shareholders of record as of the close of business on August 23, 2023. We're pleased with our second quarter results, our strong balance sheet, and our near and long-term prospects for controlled, sustainable growth. That concludes my remarks. I'll now turn the call back over to Rob.

Thanks, Harp. Before I turn the call over to questions, I'd like to thank our hardworking team members for their outstanding customer service and the excellent results they delivered in the second quarter. As we've said in the past, in this challenging economic environment, we remain focused on consistent execution of our core business, including originating high-quality loans within our tightened credit box, closely managing expenses, and maintaining a strong balance sheet. We're pleased to see that our credit tightening actions over the last several quarters have driven strong performance in our more recent loan ventures, with early delinquency and first payment defaults continuing to outperform 2019 levels. Thanks in part to our geographic expansion over the past few years, we're well-positioned to take advantage of robust consumer demand in the third quarter, by growing within our conservative credit box. We'll also keep a tight grip on expenses moving forward while making key investments in technology, digital initiatives, and data and analytics that will further our strategic objectives and create additional sustainable growth, improve credit performance, and greater operating leverage over the long term. And of course, when the economic conditions are right in the future, we'll leverage our substantial balance sheet strength, liquidity, and borrowing capacity to reopen our credit box and lean further into growth. Thank you again for your time and interest. I'll now open up the call to questions. Operator, could you please open the line?

Certainly. We'll now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You hear tone and knowledge in your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press Start and 2. We'll pause for a moment as callers join the queue. The first question comes from Sanjay Sakini from KBW. Please go ahead.

Hi, this is Steven Kwok filling in for Sanjay. Thanks for taking my questions. The first one I had was just around the benefit from the root pricing. How should we think about that going forward, if you can help us break out how we should expect the yield to move going forward? Thanks.

Yes, Stephen, thanks. Thanks for joining. Great question. You know, as Harp mentioned in her portion of the presentation, that we expect, you know, yields go up about 40 basis points in the third quarter. That's a mixture of both the credit normalizing as well as the repricing actions we have taken. It takes a while to reprice your book, and so you really don't see the full benefits of our repricing until next year. But what I would say to you is, and we have stated this before, normalization of credit is worth about 100 basis points in terms of repricing. You know, it's going to be, you know, of a similar amount, but the timeframe by which that comes through is a little bit longer.

Got it. And then my follow-up question is around the 8.5% to 9% loss rate over the longer term. Can you help us break it out by product? How should we think about it, like small versus large and then versus retail? Thanks.

Yeah, well, retail is just winding down. So the 8.5% to 9% range, and I just want to be clear about that, was based on the current credit box as we have it today, as tightened it is today. You would expect that as we lean back into growth and loosen up credit and you get some higher risk assets and some higher returning APRs, you would expect that that range will increase. So that guidance we gave was just based on the credit box today. We would update that guidance depending on how our mix shifts going forward in the future, you know, depending on, you know, what kind of originations we put on as the macro environment improves.

Got it. Thanks for taking my question. Thanks.

Once again, if you have a question, please press star, then 1.

The next question comes from Bill Desland from Tietan Capital. Please go ahead.

Thank you. A couple questions. First of all, relative to your entry into additional new states, would you walk us through how you're thinking about that? And then I do have a follow-up.

Yeah, so we've entered eight new states. We had, I think, four new states since June of last year. Those states are all going very well. We're seeing a lot of the growth we're putting on is coming from those new states where some of the legacy states have been more stable, if you will, particularly as we've tightened credit. I think what you would expect is as we move forward, depending on the macro environment, we'll start to see a rebound in growth in legacy states. and continued growth in, in those new states. But, but all those new states have, um, you know, have performed very well. I mean, it's, you know, it's, it's a, you know, an addressable market. There's a lot of, a lot of demand out there. And so we're just being smart about, you know, the rate of growth relative to, um, what might be the macro risks that are out there.

Thank you. And, and relative to the, uh, the macro environment and your point that you could lean into growth or you could tighten back up, what is it that you are looking for? What are the data points that would lead to an inflection in your mindset?

Yeah, so I think it's the macro environment which starts with inflation, which is, as you know, cooling and You know, a stable employment environment, which we're seeing. You know, continuation of real wage growth, which, you know, for our customer set over the last year has grown about 2%. And so, you know, those are all positives. The economy is growing. And there seems to be increased optimism that we're going to have a soft landing. So, you know, I think the macro elements seem to be falling into place. You know, I think the other side of that is looking at the performance of our portfolio and the vintages we put on, you know, since middle of last year, but even the most recent ones, and make sure they're performing as expected within the current environment. You know customers are still stressed. There's still high inflation, you know gas prices ticked up a little bit But I think once we once we see that, you know the performance of our vintages which look good Continue on that path and we don't see any material change in the economic outlook and we indeed have a softer landing then I think you know will be much more comfortable really leaning back into growth more aggressively and Now, I will tell you that we grew the receivables by 13 million this quarter, and I think originally guided at five. For the third quarter, we are now saying 50 million in receivable growth. Now, I think last year, third quarter, we were probably 70 or 75, somewhere in that range. And so we are putting on more growth, but we're doing it because there's strong customer demand, and we're in a strong competitive position to be very selective on the assets we put on. I think that bodes well for the future and we have guided that we expect mid single digit growth this year versus low to mid single digit growth, which is what we said last quarter. We're hinting at a better outlook in the second half for growth, but we're taking it in a measured way.

Rob, that's helpful, and then one additional question. What percentage of your customer base are college graduates, and the spirit of the question is relative to the student debt repayment, assuming that that does start to happen, the potential impact that that might have on your customer base?

Yeah, I don't want to give, I don't have probably the latest college graduate number in front of me, but I think the number you're looking for is the percentage of our portfolio that have student loans. And that we've shared in the past and I'll provide it now. So 19% of our base, whether it's customers or balances, have student loans. And so, you know, the expectation is repayments are supposed to begin in October. But I think, as you know, there is various government programs and on-ramping of starting payments as long as a year for all customers without penalty. There's also income thresholds where customers below, I think it's 33,000, won't have to make payments. And if you make more than that, You may not have to make payments subject to the size of your family and your other obligations. So we think that, you know, roughly 10 to 15 percent of our customers would probably start to make payments in October versus the 19 percent. Hard to be too precise on that number. And then in our underwriting, you know, we've always, you know, considered student loan payments in our underwriting and, you know, we'll be looking to see if there's any further tightening we might do here you know, as we see additional data as, you know, payments start to begin. So, you know, it's a long on-ramp from the government standpoint. You know, I think we're positioned as well as, you know, anybody in the industry, and, you know, we'll continue to monitor it.

Great.

Rob, thank you very much, and great quarter. Nope, appreciate it. Thanks.

The next question comes from Alexander Villalobos from Jefferies. Please go ahead.

Hey, guys. Thank you for taking my question. My question is really on the originations again. So we're really front-loading a lot of the growth into 3Q, and 4Q is kind of just a lot lighter compared to year over year. But, yeah, just wanted to confirm, you know, the mid-single, is it more like, you know, Is it the high single digits kind of? Just want to make sure we have that kind of like forecasted correctly. Thank you.

Yeah, I understand the nuance. You know, look, from a business standpoint, we always have a fairly strong July and August, you know, back to school, particularly in the south, right, you know, which tends to be as early as next week. And so we usually have a strong July and August, September tails off, as does October, and then we pick up in November and December. So I understand how calendarization can get a little tough. But I think if you look at kind of the growth rate we're doing in the third quarter, the $50 million we provided relative to last year, I think then maybe you can take a look at what we did in fourth quarter of last year of 100 million and make an estimate based on kind of what we did in the third quarter. Hopefully that's helpful.

Yeah, no, super helpful. You guys give really good guidance. Thanks, guys.

No problem.

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

Thanks, Operator, and thanks everyone again for joining this evening. You know, very happy with the quarter. We're really executing well. We're delivering on the credit front. You know, as we talked about, seeing improved credit from our tightening. You know, the recent finishes are performing very well, as you see in the FPDs and the early buckets. You know, I talked about in response to Bill's question, the macro fund and, you know, the increasing optimism about a softer landing. So we'll leave it at that. You know, I do want to reinforce that customer demand is strong, but more importantly, we're in a strong competitive position to be selective on growth. We've got a strong balance sheet and liquidity to put on more growth, and that's a good position to be in at this point in time. We are prepared to lean back into growth, and we're watching the indicators, and I think I was pretty clear about what those indicators are. So we'll follow our growth pattern. We'll follow our comfort around both our portfolio performance and the macro conditions. And then lastly, it's worth noting, we continue to exercise tight expense controls, but we will ramp up investment in the second half of the year, spending on digital and data analytics and other business capabilities to benefit 2024. It's always important to close out your year and put yourself in the best position for the following year, and that's what we're working to do. So with that, again, thanks for everybody's time this evening.

Look forward to talking to you next quarter.

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