RM - NYSE

Thank you for standing by. This is the conference operator. Welcome to the Regional Management Third Quarter 2023 Earnings Conference 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. [Operator Instructions] I would now like to turn the conference over to Garrett Edson with 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 and 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. 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 third quarter 2023 earnings call. I'm joined today by Harp Rana, our Chief Financial Officer. Harp and I will take you through our third quarter results, discuss the current operating environment and loan portfolio performance and share our expectations for the fourth quarter. We continued our focus on portfolio quality, expense management and strong execution of our core business in the third quarter. We generated $8.8 million of net income and $0.91 of diluted EPS. Strong loan demand and our conservative underwriting criteria led to a high-quality portfolio growth of $62 million, record revenue of $141 million and a sequential increase in revenue yields of 80 basis points, all of which exceeded our expectations for the quarter. We also continue to closely manage our G&A expenses, while investing in our business driving a 50 basis point improvement in our operating expense ratio from the prior year. We're pleased with our team's ability to deliver consistent predictable and superior results for our shareholders quarter after quarter. As you would expect, we're keeping a close eye on the economic environment and its impact on our consumer base. Recent data indicates a strong labor market, moderating inflation and real wage growth. However, we continue to observe stress in certain segments of our portfolio caused by inflationary pressures. We also remain mindful that the resumption of student loan repayments will impact many consumers' budgets and we're monitoring whether recent geopolitical events may cause energy prices to increase further. As a result, we remain selective in making loans within our tighten credit box. While we achieved strong high-quality portfolio growth in the third quarter, we slowed our year-over-year growth rate to 9% down from 22% in the third quarter of last year. We're prepared to lean back into growth when the economic conditions are right, but until then we'll maintain a conservative credit posture. Our third quarter originations again reflected our selective underwriting. We originated 60% of our volume to our top two risk ranks. We continue to emphasize present and former borrower lending over new borrower lending and we further grew our auto secured portfolio to 8.3% of our total loan portfolio up from 6% a year ago. We're also seeing the benefit of the machine learning-driven credit and marketing models that we've implemented in recent quarters. And we see additional opportunity for improvement, as we develop our next-generation models. We ended the third quarter with a 30-plus-day delinquency rate of 7.3%, up 40 basis points from the second quarter, but consistent with normal seasonal trends. Our higher quality originations from credit tightening have kept our first payment default and early-stage delinquency rates below 2019 levels. Our July one payment default rate was 50 basis points better than July 2019 rate. And our third quarter one-to-59-day delinquency rate was 110 basis points better than the third quarter of 2019. Notably, we're seeing solid performance in fourth quarter 2022 and 2023 vintages. As of September 30th these vintages represent nearly 70% of our portfolio, a number that we expect to increase to nearly 80% by year-end. Macroeconomic conditions however, have continued to stress mid-and-late-stage delinquencies and loan rates, something that we've observed across our industry particularly for loan vintages originated prior to late-2022. This is causing our delinquency levels and credit losses to be higher than we'd like. We anticipate that this stress will linger into at least the early part of 2024, but we continue to expect that credit tightening actions, strong collections execution and moderating inflation will gradually bring delinquencies and credit losses back down to more normalized levels overtime, subject to the macroeconomic environment. Looking ahead, in the near to midterm, we'll navigate this challenging economic environment in much the same way that we have over the past year. We'll focus on strong execution of our core business, including by maintaining a tight credit box and originating loans only where we can achieve our return hurdles under an assumption of additional credit stress and higher funding costs. As we've discussed in the past, we have a large addressable market that provides us with ample opportunity to take advantage of high-levels of consumer demand to drive strong portfolio growth, while still remaining selective in approving borrowers under our conservative underwriting criteria. Where appropriate, we'll also continue to pursue opportunities to increase pricing and expand our margins, a strategy that has been effective in recent quarters in improving our revenue yield. At the same time, we'll keep a firm handle on expenses while continuing to make key investments in technology, digital initiatives and data and analytics including artificial intelligence. These investments are critical to achieving our strategic objectives and will create additional sustainable growth, improved credit performance and greater operating efficiency and leverage over the long-term. In summary, we're pleased with our results and we're proud of our team's execution. We're well positioned to operate effectively in the current economic cycle and with ample liquidity, significant borrowing capacity, on a large addressable market we stand ready to lean back into growth when justified by the 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 third quarter results in more detail. On page three of the supplemental presentation, we provide our third quarter financial highlights. We generated net income of $8.8 million and diluted earnings per share of $0.91. 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 net credit loss headwinds caused by macroeconomic conditions. Turning to pages four and five, demand remained strong in the quarter but our tighter underwriting standards emphasis on present and former borrower originations and collections focus led us to increase total originations by only 2% on the prior year. By channel, direct mail originations were up 12%, while branch and digital originations were down 1% and 10% respectively. 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 for the quarter. We closed the third quarter with net finance receivables of just over $1.75 billion up $62 million from June 30th and ahead of our guidance. As of the end of the third quarter, our large loan book comprised 73% of our total portfolio and 85% of our portfolio carried an APR at or below 36%. Notably, we grew our small loan portfolio by $30 million or 7% in the third quarter. These higher margin loans will support future revenue yield, offsetting increasing funding costs and meet our return hurdles, despite higher expected net credit losses on these somewhat riskier segments. Looking ahead, we expect our ending net receivables in the fourth quarter to grow by approximately $35 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 going back into growth, either of which would impact ending net receivables. As shown on Page 7, our lighter branch footprint strategy in new states and branch consolidation actions in legacy states continue to drive our receivables per branch to all-time highs coming in at $5 million at the end of the quarter. We believe considerable growth opportunities remain within our existing branch footprint under this more efficient model, particularly in newer branches and newer states. Turning to Page 8, total revenue grew 7% to $141 million in the third quarter. Our total revenue yield and interest and fee yield were 32.7% and 29% respectively. The year-over-year decline in yield is primarily attributable to our continued mix shift towards larger, higher quality loans and the impact of the macroeconomic environment, but we're pleased to see yields move up 80 basis points sequentially, in part from the impact of pricing increases on newer loans and improved credit performance. In the fourth quarter, we expect sequential declines in interest and fee yield and total revenue yield of 20 basis points and 50 basis points respectively due to seasonally higher net credit losses and interest reversals, offset in part by the impact of pricing increases. We continue to anticipate that our increased pricing will drive further benefits for yields in future quarters as these actions roll through the portfolio over time. Moving to Page 9, our 30-plus-day delinquency rate as of quarter end was 7.3% and our net credit loss rate in the third quarter was 11%. The our tightened underwriting helped to ensure that the increase in our delinquency rates stay in line with seasonal patterns, while net credit losses came off of their second quarter highs as expected. In the fourth quarter, we expect our delinquency rate to increase slightly compared to the third quarter based on normal seasonality. In addition, we anticipate that our net credit losses will be approximately $52 million in the fourth quarter with the sequential increase also being due to normal seasonality. Turning to Page 10, our allowance for credit losses increased slightly in the third quarter as we built reserves to support receivables growth that decreased our reserve rate by 10 basis points to 10.6%. As of quarter end, the allowance was $185 million, which continues to compare favorably to our 30-plus-day contractual delinquency of $128 million. We expect to end the year with a reserve rate between 10.4% and 10.6%, subject to macroeconomic conditions. 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, over time that our reserve rate could drop to as low as 10% and 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 investing in our capabilities and strategic initiatives. G&A expenses for the third quarter were better than our prior guidance coming in at $62.1 million. Our annualized operating expense ratio was 14.4%, in the third quarter, 50 basis points better than the prior year period and our revenue growth outpaced our expense growth by a factor of 2.4 times. We'll continue to manage our spending closely moving forward. In the fourth quarter, we expect G&A expenses to be approximately $64 million to $65 million to support receivables growth and continued targeted investments in our operations. Turning to Pages 12 and 13. Our interest expense for the third quarter was $16.9 million or 4% of average net receivables on an annualized basis. Despite the sharp increase in benchmark rates since early 2022, we've experienced a comparatively modest increase in interest expense as a percentage of average net receivables thanks for fixed rate debt issued, through our asset-backed securitization program. As of September 30, 87% of our debt is fixed rate with a weighted average coupon of 3.6% and a weighted average revolving duration of 1.3 years. In the fourth quarter of 2023, we expect interest expense to be approximately $18 million or 4.1% of average net receivables, with the increase in expense primarily attributable to our expected portfolio growth. As our fixed rate funding matures and we continue to grow using variable rate debt, our interest expense will continue to increase as a percentage of average net receivables. We also continue to maintain a very strong balance sheet, with low leverage healthy reserves and ample liquidity to fund our growth. As of the end of the third quarter, we had $613 million of unused capacity on our credit facility and $179 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 [ph] 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 third quarter funded debt-to-equity ratio, remains a conservative 4.2:1. We have ample capacity to fund our business, even if access to the securitization market were to become restricted. We incurred an effective tax rate of 19% for the third quarter, lower than guidance due to tax benefits from reestablished deferred tax assets, for certain state net operating losses. For the fourth quarter, we expect an effective tax rate of approximately 24% prior to discrete items such as any tax impacts of equity compensation. We also continued to return capital to our shareholders. Our Board of Directors declared a dividend of $0.30 per common share, for the fourth quarter. The dividend will be paid on December 13 2023, to shareholders of record, as of the close of business on November 22 2023. We're pleased with our third 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. And as always, I'd like to recognize our team for the outstanding results that it's delivered throughout this economic cycle. Looking ahead, we'll remain focused on consistent execution of our core business, including originating high-quality loans within our tighten credit box, closely managing expenses and maintaining a strong balance sheet. Our geographic expansion over the past few years have greatly increased our addressable market, positioning us well to take advantage of consumer demand, while maintaining our conservative credit posture. We're pleased that our early delinquency and first payment default rates continue to outperform 2019 levels thanks in large part to our credit tightening actions over the last several quarters and the strong performance of our more recent loan vintages. We also remain sharply focused on limiting our G&A expenses, while still furthering our key technology, digital and data analytics initiatives that will create additional growth, improved credit performance and greater operating leverage in the future. And, of course, we'll continue to monitor the economic environment, so that when the conditions are right we will need to immediately 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 for questions. Operator would you please open the line?

Certainly. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from John Hecht with Jefferies. Please go ahead.

Good afternoon guys. Thanks for taking my questions. First question is I think you guys said $52 million of losses charge-offs in the fourth quarter. I'm just wondering the roll rates you're seeing behind that are they relatively consistent with recent quarters or anything that you're assuming in terms of the migration of roll rates?

Hey, John, how are you? Thanks for the question. Yeah, we're assuming consistent roll rates from prior quarter with the normal seasonal lift that we would see albeit off of elevated levels still.

Okay. And then I think you guys referred a couple of times in the presentation a little bit of focus on recurring customers rather than new customers part of the tightening. I mean, what [Technical Difficulty] of a recurring customer, but a new customer as just to get a sense for what that specific focus might do to the loss mix?

Yeah. You broke up there John right in the middle of your question. Can I ask you to repeat it because I think we missed the gist of it?

I apologize. I'm wondering what the kind of loss experience is between new and recurring customers to get a sense of what that focus might do to losses over the next few quarters?

Yeah. And so look new borrowers and we've never disclosed the difference between a new borrower and an existing borrower in terms of higher losses. But new borrowers do perform worse until they're seasoned. Now, obviously, we've been shifting the mix of our book to present borrowers and former borrowers from new borrowers over a period of time. But when you're in new geographies and the new states we are, we're still going to have a reasonably high percentage of new borrowers and that will naturally take time to season through. But I will tell you though that our underwriting models adjust for the new borrower effect and assume additional stress on those customers and we underwrite, obviously, with the assumption not only of that stress but the incremental cost of funds that we incur today as well as fully loaded expenses to make sure that we achieve our hurdle. So it's factored into our models. But Harp, anything to add to that?

Yes. I would just say that our originations continue to be concentrated on programs for present and former borrowers and we know that they performed better than new borrowers just because of the on-us data that we have on them. And then the other thing that I would probably add to that, in terms of the new borrowers Rob touched on this, but they fit within our risk box. So when we're making loans to new borrowers, we're making sure that they are meeting those internal hurdles that we have.

Yes. And John, over 70% of our customers are former and present borrowers this quarter, which has been pretty steady I guess since last year, a little bit up from last year but pretty steady. And again, that's related to the new states we're in new states. We're going to have some of that new borrowers.

Yes. Okay.

Yes. And just also important to note though the vintages fourth quarter 2022 and more recent are all performing very well. Now, they're just now getting to the earliest vintage fourth quarter 2022 is just now getting to 12 months on book. So we're starting to see what the peak losses are and the other ones are still working through. But right now performance is good and that's reflective of that mix of new borrowers and present and former borrowers. So that's -- we feel good about where things are given the current macro environment for those vintages.

That's a very good context. Thank you. And my last question is, I think you guys mentioned and what we've heard is the kind of loss experienced somewhat were tied to income ranges. I'm wondering are you seeing anything like any dispersion or I guess of credit metrics on a geographical basis? Or is there anything else to discern? Or is it -- in your mind is it largely income driven?

Well, it's not just one factor. I mean look, we -- naturally when we tightened, we reduced the lower FICO and increase the percentage to higher income bands. I think that's just a natural effect of when you're tightening. So, it's kind of all built into the mix. But obviously employment is a factor. Industry, states perform differently. We have all these cuts in our underwriting models. In fact, hundreds and hundreds of cells where we look at what the returns are and whether that's small loan, large loan, check, digital loan, homeowner, renter by state, we have all those cuts. And we've talked about tightening since the fourth quarter of 2022 where we really tightened. But we've been tightening throughout 2022 but inflation shot up to 9%. But ever since fourth quarter 2022 and every quarter that goes by, we're constantly turning the dials in reaction to what we see in all those individual segments and cuts that we have. And so we feel good that we're making the right decisions and putting on the assets that will hit a hurdle even under stress -- additional stressed environment, and we're putting on in the end the highest confidence assets each and every quarter.

Great. Thank you very much.

The next question is from Vincent Caintic from [indiscernible]. Your line is open.

Hi. Thanks for taking my question. Good afternoon. Thanks for all the detailed guidance that you're giving in the fourth quarter and lay out in the slides is really very helpful. And first, just wondering the trends that we're seeing in the fourth quarter, just if that's a good jumping off point when we think about 2024 going forward. I know, it's a little bit ways away. But when you think about the revenues the credit performance and your expense controls just wondering, if that's a good jumping off point in the fourth quarter? Thank you.

Yes. I mean, naturally you've got to look at fourth quarter and project out from there. And we're not giving specific guidance at this point in time for next year. Naturally, we're still in the middle of our budget process. But I think most importantly is, those vintages that we said originated at fourth quarter 2022 and sooner is going to be about 80% of the book by the end of this year. A couple more months of seeing how those vintages perform is going to help give us better guidance for all of you as to what we might expect next year. What we do know is the 20% of the book that is pre fourth quarter 2022 that those vintages and some have called it a back book, those vintages are going to create stress in the early part of next year. By the very nature, they've been matured renewed where they could be renewed paid off and there's still a lot of good customers in there, but there's also customers in there probably disproportionately that are under some form of borrower assistance program, which for us is important for them to stay active and engaged particularly leading up to tax season. So if we sit here right now and say, what is the credit profile look like for next year, I don't think anybody can predict precisely particularly given some of the macro events. But what I think we can say is, there will be some stress from those earlier vintages that the more recent vintages are performing well and we haven't seen anything there that is causing concern, and I think the things that will make a difference for next year will be what's the tax refund season look like. I think that's always a big help and a lever very beginning of the year, and we will ring-fence those assets and make sure we put everything against collecting against them. And then of course, if there's any other macro stresses that might be out there, probably the one that we're all kind of looking at is, is there any results or contagion from the Middle East that ends up hitting oil prices. So that would be the one thing we would be looking at as we get close here to the end of the year and figuring out what next year looks like.

Okay. Great. And then I guess the other -- maybe those other lines like expenses you've been pretty able to hold those expenses controls pretty well about the expense ratio. Just wondering, if there's more kind of room to hold it if the expenses can you hold it kind of relatively fixed for a while?

What I would tell you is, that we are laser-like focused that every dollar we spend, helps drive the business forward. And we've been strongly profitable in this environment and yet still investing in the business. And we will adjust the spending pattern as we need to continue to grow the business where growth is needed or to continue to drive operating leverage that we need to do overtime as well. So I can't really give you any more guidance than that right now.

Okay. Perfect. And last one for me. So the product mix has shifted. You've talked about high-quality loans doing more, auto-secured. And just wondering if that's a trend that we should expect to continue? And if there's any way -- are there may be certain products you want to lean into more? Thank you.

Well, look, I think auto-secured is definitely one that we'll continue to lean into and grow. And I kind of view that and we've said this before, kind of the one end of the barbell. We have our large loan products that are the bulk of our business now and that are performing well. And then we have the small loan business. And the small loan business is very attractive on a return basis. And you would have seen that we actually grew that this quarter sequentially, same as we did last year sequentially at this time. And part of that is, we -- it was part of our tightening where we said, you know what, we have the opportunity instead of making a larger loan to some group of customers. We can give them a smaller loan, but charge them a little bit more because we perceive the risk to be higher. So we risk based priced it and put on some more small loans. And effectively we think created a pretty good return on that growth that we did in the small loan book. So, there's always that opportunity for us to lean in, where it's attractive on small loans. We haven't limited ourselves to a rate cap at 36%. So having the ability particularly in a rising rate environment or hopefully a flat rate environment, we'll see how that turns out. Having that ability to lean back into those segments when it's appropriate, is something that I think helps us stand out versus competitors.

Great. Very helpful. Thank you.

Great. Appreciate it.

[Operator Instructions] The next question is from Bill Dezellem with Tieton Capital. Please go ahead.

Thank you. I like to kind of circle back to the comments that you just made here. You had some pretty significant small loan origination growth this quarter. What is that actually signaling to us, or what were you doing there? I think you started to allude to that in your last answer.

Yeah. I think Bill as we look to put on high confidence growth, high confidence growth doesn't just mean you put on larger loans with the highest risk ranks. You've got to look at it from a bottom-line return on a risk-based basis as well. And so when we were looking -- and I give you an example, when you're looking at whether it's digital or a check or even a branch loan renewal on a branch, as we look at that and we've been staying focused on where we might reprice and we have this 1,500 line on small loans instead of giving somebody $2,000 or $2,500 below a 36% rate, we're looking at the credit quality and say on the margin you know what, let's give the person a $1,500 loan and maybe charge them a 43% rate because we believe that they're a good credit on a relative basis and now we've got the pricing to make sure that we've got plenty of room and buffer built into the stresses on the model to be able to achieve our return hurdles. So we -- when we say a highest confidence asset, we're looking at the highest confident asset on a marginal basis bottom line return. It's not just necessarily putting on the highest FICO customer.

And Rob taking that one step further said another way that's the highest ROE customer? Or are you seeing -- saying something slightly different than that?

I'm not going to say it's the necessarily the highest ROE or ROA customer. I think what I -- because it varies. What I'm saying is when you look at the best assets you can put on there is a portion of the portfolio those small loan customers that have equal and maybe better returns than other parts of the portfolio that you're putting on and it's attractive business.

All right. And then taking that a step further I believe that you have given guidance for a 50 basis point sequential decline in your revenue yield in Q4 versus Q3. Would you relate that expectation to what you had just highlighted for us? They seem in contrast. That's why I posed the question.

Yes. And the decline in revenue yield that you see in the fourth quarter is really because of the seasonal increase in NCLs and delinquencies which will lead to higher reversals. So that's going to be what's driving that impact on a sequential basis. But I think if you were to back out that guidance from the fourth quarter guidance still the resulting revenue yields would be higher than what they were in second quarter. So, the repricing power is in there. It obviously takes time to build as the portfolio turns over and we're not done repricing. We are always looking for opportunities to reprice, but it gets masked quarter-to-quarter sometimes by the seasonality of the NCLs.

That's very helpful. Thank you. And then, I certainly see the many uncertainties out in the broad environment. But that having been said, are you seeing anything that leads you to think about being more aggressive with originations?

I'm surprised I got that question in this environment. Look, we're constantly asking ourselves as I think you would expect us to do is, are we seeing things that indicate we should lean into growth or are we seeing things that would say hey let's pull back, right? It's a weekly discussion if you will. And we're able to turn those dials on the underwriting side weekly to the greatest extent possible. And so I think that inflation coming down is key. I think we want to see as I mentioned earlier, how our recent vintages continue to mature here over the next three months or so, because look, that's the best indication is where you tightened or you're seeing the performance that you expected. And then I think it really comes down to just seeing, if there's any other macro headwinds that are out there. I mean we like the fact there's lots of jobs out there. Unemployment is low. The economy seems to be robust and maybe heading for a soft landing even with some pullback in consumer spending. But we're mindful of the fact that there are other effects that could hit us particularly, if oil prices spike for some reason. And so we're just taking that all into consideration. I think it's partly why we're guiding to kind of a more modest growth in the fourth quarter versus third quarter because we're making these judgments real-time.

Great. Thank you for the time.

Sounds great. Appreciate

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 for joining the call. Look, as we close out this year and approach 2024, as I said, we're going to continue to monitor the changing macro conditions and the overall health of the consumer. And let me just say again, and I know we had it in our prepared remarks, but we're focused on the fundamentals, strong underwriting. We're adjusting our underwriting as needed. We're focused on disciplined growth and growth as appropriate, as we put on our highest confidence assets. We're always focused on tight expense management and investing in those initiatives that drive growth and improve our operating leverage and of course, maintaining a strong balance sheet and liquidity. And those are the mantra in which we manage the business and we'll continue to do so. And I think like everybody, we're hoping for a brighter 2024 and we're prepared to – we're positioned well for 2024, regardless of the environment but we're hoping for a very strong environment.