Regional Management Corp (RM) 2023 Q2 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Regional Management Second Quarter 2023 Earnings Call. (Operator Instructions) The conference is being recorded. (Operator Instructions) 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 2 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 condition.

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 $0.63 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 tightened 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, our originations to our top 2 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 representing only 22% of second quarter originations, down from 27% in the prior year period. As we've highlighted on prior calls, new borrowers initially performed worse on average than our seasoned, present and former borrowers, with whom we have extensive honest 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 30, 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 tightened 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 the 8 new states and increasing our addressable market by more than 80% over the past 3 years, we have ample opportunity to take advantage of higher levels of consumer demand to drive stronger second half portfolio growth, while still remaining selective in improving 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 3 of the supplemental presentation, we provide our second quarter financial highlights. We generated net income of $6 million and diluted earnings per share of $0.63. 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 headwind caused by macroeconomic conditions.

Turning to pages 4 and 5. While demand remains strong, our tighter underwriting standards and collection 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 31 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 7, our lighter branch footprint strategy and 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 high, coming in at $4.9 million at the end of the quarter. We believe considerable growth opportunity remains in our existing branch footprint under this more efficient model, particularly in newer branches and more states.

Turning to Page 8. Total revenue grew 9% to $133 million in the second quarter. Our total revenue yield and interest and 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 in 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 9, our 30-plus day delinquency rates as of 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 continued to perform as expected, particularly in our front book and 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 CECL 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 31. 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 spend 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 and 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 pretax 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 30, 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 rate. 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 facility. 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 million and $700 million, demonstrating our ability to protect ourselves against short-term disruptions in the credit market.

Our second quarter funded debt-to-equity ratio remained a conservative 4.2:1. 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 impact of equity compensation.

We also continue to return capital to our shareholders. Our Board of Directors declared a dividend of $0.30 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 hard-working 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 vintages 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, improved 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?

(Operator Instructions) The first question comes from Sanjay Sakhrani from KBW.

This is Steven Kwok filling in for Sanjay. The first one I have was just around the benefit from the repricing. How should we think about that going forward? If you could help us break out how we should expect the yield to move going forward?

Yes, Steven, thanks for joining. Great question. As Harp mentioned in her portion of the presentation that we expect 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, it's going to be of a similar amount, but the time frame 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? Like what -- how should we think about it like small versus large and then versus retail?

Yes. So 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 a higher -- 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, depending on what kind of originations we put on as the macro environment improves.

(Operator Instructions) The next question comes from Bill Dezellem from Tieton Capital.

A couple of 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.

Yes. So we've entered 8 new states. We had, I think, 4 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 those new states. But all those new states have performed very well. I mean, it's an addressable market. There's a lot of demand out there. And so we're just being smart about the rate of growth relative to what might be the macro risks that are out there.

And relative to 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?

Yes. So I think it's the macro environment which starts with inflation, which is, as you know, cooling; a stable employment environment, which we're seeing; continuation of real wage growth, which for our customer set over last year has grown about 2%. And so 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 I think the macro elements seem to be falling into place. I think the other side of that is looking at the performance of our portfolio and the vintages we put on since middle of last year, but even the most recent ones, and make sure they're performing as expected within the current environment.

Customers are still stressed. There's still high inflation. Gas prices ticked up a little bit. But I think once we see that 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 we'll be much more comfortable really leaning back into growth more aggressively. Now I will tell you that we grew the receivables by $13 million this quarter, and I think we originally guided at $5 million.

For the third quarter, we are now saying $50 million of receivable growth. Now I think last year, third quarter, we were probably $70 million or $75 million, 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. And so 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. So 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?

Yes. 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 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 the 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 roughly 10% to 15% of our customers would probably start to make payments in October versus the 19%. Hard to be too precise on that number. And then in our underwriting, we've always considered student loan payments in our underwriting, and we'll be looking to see if there's any further tightening we might do here as we see additional data as payments start to begin. So it's a long on ramp from the government standpoint. I think we're positioned as well as anybody in the industry, and we'll continue to monitor.

The next question comes from Alexander Villalobos from Jefferies.

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 yes, I just wanted to confirm the mid-single, is it more like -- is it the high single digits kind of? Just want to make sure we have that kind of like forecasted correctly.

Yes. Yes, I understand the nuance. Look, from a business standpoint, we always have a fairly strong July and August, back-to-school, particularly in the South, right, 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 -- it 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.

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. I'm very happy with the quarter. We're really executing well. We're delivering on the credit front. As we talked about, seeing improved credit from our tightening, the recent vintages are performing very well, as you see in the FPDs and the early buckets. I talked about in response to Bill's question, the macro fund, and the increasing optimism about our softer landing. So we'll leave it at that.

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.