RM - NYSE

Greetings and welcome to the Regional Management's First Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Garrett Edson. 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. 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 measures can be found within our earnings announcement or earnings presentation and posted on our website at regionalmanagement.com. I would now like to introduce Rob Beck, President and CEO of Regional Management Corp.

Thanks, Garrett, and welcome to our first quarter 2024 earnings call. I'm joined today by Harp Rana, our Chief Financial Officer. On this call, we'll cover our first quarter financial and operating results, touch the credit performance of our portfolio, and share our expectations for the second quarter and the balance of the year. We had a very strong start to 2024 as we outperformed our outlook on both the top and bottom lines. For the quarter, we generated net income of $15.2 million, and diluted earnings per share of $1.56. Our portfolio liquidated by $27 million in the quarter, in line with our expectations and consistent with normal seasonal trends. The increased pricing that we've implemented over the past several quarters and the growth in our higher-margin, small loan portfolio drove total revenue yield to 32.8%, which was 80 basis points better than prior year and contributed to record quarterly revenue of $144 million. We've also continued to aggressively manage our expense base while still investing in our growth and strategic initiatives, resulting in a sequential improvement in our operating expense ratio of 110 basis points. In sum, we're very pleased with our first quarter results, and I continue to be very proud of the way that our team members are navigating through the current environment. We remain cautiously optimistic about the direction of the economy and the credit performance of our portfolio. We continue to maintain tighter underwriting guidelines and thoughtfully grow our high-margin, small loan portfolio, which has grown by nearly $50 million, or 10%, since the middle of last year. We expect to continue to grow our small loan book in a measured way as the returns are very strong and more than make up for the higher loss rates on this portfolio. Overall, we're seeing the benefits of our prudent underwriting in our credit metrics, despite the growth of those loans with higher risk-adjusted margins. We again originated roughly 60% of our loans through our top 2 risk ranks in the first quarter. We ended the first quarter with a 30-plus day delinquency rate of 7.1%, a 10 basis points improvement from the first quarter of last year. Our auto-secured portfolio has also continued to grow, ending the quarter at 9.2% of our total portfolio, up from 2.1% 3 years ago. The credit performance of these loans has been very strong with a 30-plus day delinquency rate of 2.1% as of the end of the quarter. In addition, our front book continues to perform in line with our expectations despite macroeconomic stress. The front book represented 78% of the portfolio at the end of the first quarter and had a 30-plus day delinquency rate of 6.5%, compared to 9.8% in our back book. The back book accounted for 25% of our 30-plus day delinquent accounts, despite representing only 18% of the portfolio at quarter end. By the end of 2024, we expect the back book to represent only 8% to 10% of the total portfolio. Compared to the back book, the front book continues to season at lower levels of loss, which should benefit our 2025 results. Our net credit losses also came in better than outlook. Despite indicators of improving credit performance within our portfolio, we marginally increased our loan loss reserve rate to 10.7 in the quarter in light of more recent mixed economic indicators, including inflation rates that remain elevated. We believe this approach is appropriate during this time of relative economic uncertainty. While inflation and interest rates remain higher than expected, we are maintaining our full year guidance. The strong start to the year provides us with protection on the bottom line should macro conditions, namely inflation and interest rates, remain elevated for longer. In addition, our outperformance on G&A expenses in the first quarter, part of which is due to timing, gives us flexibility to invest more in marketing in the back half of the year to benefit 2025 results assuming the economic conditions are conducive to faster growth. Against the current economic backdrop, we will continue to operate based on the guiding principles that I've laid out previously. First, we're committed to our core business of small and large loan installment lending. We have a long history and runway of controlled, profitable growth with these products. We'll continue to originate loans where we have a high degree of confidence in meeting our return hurdles. We're always keeping a close eye on economic data and its impact on our consumer base. Recent reports indicate a strong labor market and real wage growth. However, we continue to observe stress in certain segments of our portfolio caused by continued inflationary pressures. Given the economic uncertainty, at this time, we remain comfortable prioritizing credit quality over loan growth. As a result, we expect to remain highly selective in making loans within our tight credit box, at least in the near term. By expanding to 8 new states and increasing our addressable market by more than 80% since 2020, we have ample opportunity to take advantage of high levels of consumer demand to drive quality portfolio growth while remaining selective in approving borrowers under our more conservative underwriting criteria. Where appropriate, we'll also continue to pursue opportunities to increase pricing and expand our margins, including through growth in our small loan portfolio, a strategy that has been effective in recent quarters in improving our revenue yield. As we've always done, we'll manage the business with a goal of maximizing direct contribution margin and bottom line results. Second, we'll continue to meticulously manage expenses while also investing in our core business in a way that improves our operating efficiency over time and ensures our long-term success and profitability. We continue to allocate capital to improve our capabilities and pursue our strategic initiatives, including several important technology, digital, and data and analytics projects that are key to the modernization and evolution of our platform and omnichannel business. These investments are critical to achieving our strategic objectives and will create additional sustainable growth, improved credit performance, and greater productivity, operating efficiency, and leverage over the long term. Finally, we'll maintain a strong balance sheet with ample liquidity and borrowing capacity, diversified and staggered funding sources, and a sensible interest rate management strategy. As of the end of the first quarter, we had $478 million of unused capacity on our credit facilities and 81% of our debt was at a fixed rate with a weighted average coupon of 3.7% and a weighted average revolving duration of 1 year. Later this year, we expect to access the securitization market. However, given our significant existing liquidity and borrowing capacity, we have the flexibility to go to market when conditions are most advantageous. In summary, we'll continue to stay focused on making fundamentally sound business decisions in line with these key principles. We're well positioned to operate effectively through the current economic cycle. Though we remain measured 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 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 first quarter results as well as second quarter guidance.

Thank you, Rob, and hello, everyone. I'll now take you through our first quarter results in more detail and provide you with an updated outlook for the second quarter. On Page 4 of the supplemental presentation, we provide our first quarter financial highlights. As Rob noted, we generated strong net income of $15.2 million, or diluted earnings per share of $1.56, driven by solid revenue growth and continued expense discipline. We also exited the quarter with a strong balance sheet, healthy loan loss reserves, and an improved credit profile. Turning to Page 5. Demand remained strong in the quarter, and we maintained a cautious approach to underwriting, with an emphasis on higher-margin segments. Total originations increased 8% year-over-year. By channel, branch and direct mail originations increased by 2% and 30%, respectively, while digital originations were 9% lower year-over-year. As we've consistently noted, we've deliberately decelerated origination since 2022 as we appropriately balanced growth with credit quality and higher returns. Page 6 displays our portfolio growth and our product mix through the first quarter. We closed the quarter with net finance receivables of roughly $1.74 billion, down $27 million from year-end due to the normal seasonal liquidation expected in the quarter. As of the end of the first quarter, our large loan book comprised 72% of our total portfolio. In addition, slightly under 84% of our portfolio carried an APR at or below 36%, compared to just over 86% of our portfolio a year ago. As Rob previously noted, we've purposefully leaned into growth of higher-margin small loans in recent quarters as they will support future revenue yield offsetting increasing funding costs and exceed our return hurdles despite higher expected net credit losses on these particular segments. Looking ahead, we expect our ending net receivables in the second quarter to increase by approximately $30 million to $35 million as we exit tax season and begin to regrow our portfolio. During the quarter, we'll continue to monitor the economy and focus on originating loans that maximize our margins. As economic circumstances dictate, we're prepared to further tighten our underwriting or lean back into growth, either of which could impact ending net receivables. Turning to Pages 7 and 8. Total revenue grew to a record $144 million in the first quarter, up 7% from the prior year period. Our total revenue yield and interest and fee yield were 32.8% and 29.3%, respectively. Sequentially, total revenue yield was up 50 basis points, exceeding our outlook. Year over year, our total revenue yield was up 80 basis points due in large part to our pricing increases on newer loans and growth in our higher-margin small loan portfolio. In the second quarter, we expect a roughly 50 basis point sequential decline in total revenue yield, primarily due to higher expected interest income reversals from net credit losses in the quarter. As credit outcomes improve in parallel with an improving economic environment, we would expect to see benefits to yield. Moving to Page 9. Our delinquency and net credit losses were roughly in line with our outlook, despite a slower start to the tax season and continued inflationary pressure. Our 30-plus day delinquency rate as a quarter end was 7.1%, up sequentially, but an improvement from 7.2% at the end of the first quarter of 2023. Our net credit losses of $46.7 million were modestly better than our first quarter outlook, while we recorded an annualized net credit loss rate of 10.6%. Page 10 provides additional information on the performance of our front book and back book. The front book ended the quarter at 78% of our total book compared to 73% at the end of 2023 and represents 71% of our 30-plus-day delinquency. Our back book, which represents 18% of our portfolio, accounts for 25% of our 30-plus-day delinquency. Our front book and back book reserve rates are 10.1% and 14.1%, respectively. In the second quarter, we expect our delinquency rate to improve consistent with seasonal patterns. In addition, we anticipate that our net credit losses will be approximately $55 million in the second quarter as more of our back book loans roll to loss. Turning to Page 11. We increased our first quarter allowance for credit losses reserve rate by 10 basis points to 10.7%, slightly above our outlook due to macroeconomic considerations. As of quarter end, the allowance was $187 million and assumes a 2024 year-end unemployment rate of 5.8%. Looking ahead, we expect to maintain a loan loss reserve rate of 10.5% at the end of the second quarter, which would be a 20 basis point reduction from the end of the first quarter, subject, of course, to economic conditions. Flipping to Page 12, we continue to closely manage our spending while still investing in our capabilities and strategic initiatives. Our G&A expenses of $60.4 million in the first quarter were substantially better than our outlook, partially due to timing. Our annualized operating expense ratio was 13.7% in the first quarter, 30 basis points better than the prior year period, and our first quarter 2024 year-over-year revenue growth outpaced our G&A expense growth by 7.9x. We continue to aggressively manage our personnel expense. And as Rob noted, our beat on G&A expenses in the first quarter gives us the ability to spend more in marketing in the back half of the year to benefit 2025 results, assuming the economic conditions are right. We'll continue to manage our spending closely moving forward. In the second quarter, we expect G&A expenses to be approximately $62 million to support our larger portfolio and continued targeted investments in our operations. Turning to Pages 13 and 14. Our interest expense for the first quarter was $17.5 million, or 4% of average net receivables on an annualized basis, slightly better than our outlook on lower average debt and lower rates. 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 to our fixed rate debt issued through our asset-backed securitization program. As of March 31st, 81% of our debt is fixed rate, with a weighted average coupon of 3.7% and a weighted average revolving duration of 1 year. In the second quarter, we expect interest expense to be approximately $18.5 million, or 4.2% of average net receivables. As our fixed rate funding matures, and we continue to grow using variable rate debt, our interest expense will increase as a percentage of average net receivables. We also have a strong balance sheet and continue to maintain ample liquidity to fund our growth. We have $187 million of lifetime loan loss reserves as well as $336 million of stockholders' equity, a little over $34 in book value per share. As of the end of the first quarter, we had $478 million of unused capacity on our credit facilities and $169 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 markets. Our first quarter funded debt to equity ratio remained a conservative 4.0 to 1, with ample capacity to fund our business. We incurred an effective tax rate of 23.7% in the first quarter, slightly lower than our guidance due to discrete tax benefits related to equity compensation. For the second quarter, we expect an effective tax rate of 24% to 25% prior to discrete items. We also continue to return capital to our shareholders. Our Board of Directors declared a dividend of $0.30 per common share for the second quarter. The dividend will be paid on June 12, 2024, to shareholders of record as of the close of business on May 22, 2024. Finally, I'll note that we provide a summary of our second quarter 2024 guidance on Page 15 of our earnings supplement, and we've maintained our full year 2024 guidance. As a reminder, our quarterly net income typically is at its lowest point in the second quarter of each year, and we expect 2024 to be no different. That concludes my remarks. I'll now turn the call back over to Rob.

Thanks, Harp. Before we get into Q&A, I'd like to take a moment to thank the Regional team for the hard work, commitment to our hard-working customers, and delivery of outstanding results in the first quarter. We had an excellent start to the new year, and we look forward to continuing the momentum in the second quarter and beyond. While we remain conservative on our underwriting at this time, we're cautiously optimistic about the direction of the economy, and we're well positioned to continue our growth and increase our market share when the conditions are right. In the meantime, we'll continue to provide best-in-class service to our customers, advance our capabilities and strategic initiatives, and deliver sustainable returns and long-term value to our shareholders. Thank you, again, for your time and interest. I'll now open up the call for questions. Operator, could you please open the line?

[Operator Instructions] First question comes from John Hecht with Jefferies.

I know you guys, you mentioned a revenue yield about 50 basis points below Q2 from Q1, which I think is normal from a seasonal perspective, and I think that's suppressed because of delinquencies. But how do we think about core yields throughout the year, given pricing increases? And how should that influence the yields in the second half?

John, it's Harp. So, I think you're referring to second quarter guidance where we said that we would be lower by 50 basis points, and that very much is seasonal. Our NCLs are going to go up in the second quarter. So, that's very much due to that. In terms of yields for the full year, we did provide guidance, and we said that they were going to be 40 to 50 basis points up year-over-year. And that is inclusive of the pricing that we've spoken about previously.

Okay.

Yes. And John, I would just add that yields are up 80 basis points versus prior year and 50 basis points versus prior quarter. And if you look at Page 9 of the release, you'll see that it's all on the small loan side. So, small loans are up 280 basis points versus prior year and 150 basis points versus prior quarter. And that's important because we put on about $50 million of small loans since middle of last year. That's part of that higher risk but higher return business that we've been talking about. It's fantastic business. We're obviously putting it on in a very measured way, but it's having a meaningful impact on yields. And I would tell you that from a delinquency standpoint, that business probably cost us 10 basis points of delinquencies in the quarter, but 80 basis points of improved yield. So, we've got a dial that we can turn on. We're being measured in terms of how we do it and when we do it, because we're watching, obviously, the inflationary environment and seeing that hopefully continue to come down. But it's a big lever for us if we choose to pursue it more aggressively. And quite frankly, I think it's one of the biggest strategic advantages that we have versus others that cap themselves at 36%. Having this pricing power is something that sets us apart should we choose to lean in more aggressively at some point in time.

Okay. And then just on expenses, real quick, you beat your specific guidance by $5 million in the quarter. You referred to some of it was timing difference, but your Q2 guide is less than that. So, I guess the question is where are you getting some good leverage in the expenses, and how does that impact the expense rate past the next quarter?

So, John, it's Harp again. So, in terms of our beat this quarter, we really were focused on managing all lines, but we very much managed our personnel line. Part of what we said in the prepared remarks is there was going to be timing between first quarter and second quarter that's a little bit under $1 million that you'll see shift from first quarter into second quarter, which is part of that increase that you see in the second quarter guidance. The other increase that you see in the second quarter guidance is really marketing and volume-related expenses as our volumes pick up in the second quarter. But our beat versus first quarter was again due to that timing item, but also very much due to us managing our line items quite meticulously, specifically personnel.

And John, look, and that was a conscious decision. I think our people costs are actually down almost $800,000 versus prior year despite the growth in the business and obviously down versus fourth quarter, as you noted. And so, our view was, let's manage the business very tightly. It gives us dry powder to lean back into growth more aggressively later in the year. And so, we feel good about, quite frankly, how we executed on every line item. But you want to run the business in a relatively conservative way as you wait for the macro conditions to further unfold. And I think that we did a great job keeping a tight control of expenses.

[Operator Instructions] Next question comes from Matt Dhane with Tieton Capital Management.

That's Tieton Capital. I did want to delve a little bit more into, I guess, the conditions you're looking for before you do lean into growth, what more can you share with that around that? Because although the economy has been slowing, it still has decent GDP growth. And so I was looking to get a little bit more guidance on what you're looking for before you start growing the loan book again.

Yes. Matt, no, great question. Look, I think I've heard -- well, I haven't tracked what a lot of people are saying about the state of the customer, and I think that's really what is the driver of how aggressively you lean into growth. So, the metrics that we're looking at is consumers have had real wage growth last year. As you said, the economy's growing. There's still 8.5 million open jobs out there. Most of them or a large portion of them are for lower income folks. And that's all the positives that we see. Obviously, inflation is still higher than expected. We're not seeing, obviously, the number of rate cuts that we would have anticipated early in the year. Maybe we'll see 1. And so, where I look at it is the customer is still recovering from the inflation hangover, right? So, since 2020 to April of 2024, inflation's up about 21%. But wage growth for the, call it, the 20% or 40% segment of the population has been a little over 5%. And so, while the stimulus money helped people stay on top and meet their family obligations, they're still working their way through that inflationary period. And so, from our standpoint, we're able to be very selective in where we put on growth. We're able to be very selective where we put on some of the higher-risk, higher-return growth. And so, I think what we're really looking for is inflation to continue to fall. I will tell you that demand, in my opinion, has started to pick up here in the month of April. That's encouraging, but it has to be the right demand, obviously. You want to make sure customers with our underwriting that can pay their bills. So, that's where we're at. I feel like it's a good place to be because we've tested into the smaller loan portfolio. We're seeing how that's performing. We know how to turn the dials up to when we feel like it's the right time. But I don't think it's prudent necessarily to slam the accelerator down at this point in time, either. So, as long as we continue to make those right tradeoffs each and every quarter, I see things continuing to improve. I will also say that from a credit standpoint, the credit on the front book is performing in line with our expectations. Of course, everybody would like to have inflation go down faster, but we are where we are. And I would tell you that our 1 to 89 day delinquency bucket's about 190 basis points below 2019 and 200 basis points below the fourth quarter. And while delinquencies overall in the first quarter up 20 basis points versus the fourth quarter, when you normalize for the loan sale, it's actually down 70 basis points. So, we're seeing the trends, and although I don't typically say this, I will disclose that the April delinquency number is below 7%. And that's in line with the seasonal improvement that Harp talked about in the second quarter. So, we're feeling good about pricing and the impact. We're feeling reasonably good about credit, and we're cautiously optimistic about when we can might lean back into more aggressive growth as macro conditions continue to improve.

That's helpful, Rob. I appreciate the color there. One other dynamic I did want to ask about is you folks have entered a couple of new states here over the last several years. Just wanted to get some insights into how those have been developing relative to your expectations. And, yes, just what more can you tell us around those newer states?

Yes. Look, and, I think, it's in the appendix of the supplement. But you can see that the ENR per branch for branches open less than 1 year is now about $3.7 million, up from $2.3 million a year ago. And same thing for branches open from 1 to 3 years. Now, with the environment we in, we haven't added a ton of branches. So, that addressable market opportunity that we talked about from the new states, which is increased by 80%, in my mind is still largely untapped. And so, my expectation is we will add a few more branches this year. We've got some expense dollars, which may allow us to add more branches, and we'll see whether that's the appropriate thing to do. And then we'll be looking in 2025, of course, to continue to go after that untapped market and maybe even look at additional markets. But overall, we're pleased with the new states.

There are no further questions. I would like to turn the floor over to Rob Beck for closing remarks.

Great. Thank you, operator. Look, in conclusion, I'd just say we're very pleased with the outcome of the quarter. As I said, I think, we've executed on all lines across the P&L. And that's hard to do in any environment. So, we're really pleased with the effort, and I'm extremely pleased with the team and how they're executing. I talked about credit, I talked about pricing, continued expense discipline, that's at the heart of what we do. And as I said, I do believe that having this small loan business that can price above 36% is a real competitive advantage. And in a couple ways, not only the pricing power, but it also gives you the customer flow in that allows you to, which is part of our core strategy, to graduate those customers to a lower rate loan and a higher dollar loan. The customer is extremely satisfied by that. It improves their credit profile, and it's core to the business that we've been building over the last 7 or 8 years in growing our large loan book. I would also say that the $50 million of small loans that we put on, which are higher risk and higher returns, a very key part of our strategy is also to balance that out with a more low-risk product, which is our auto-secured business. And our auto-secured business, we put on about $30 million over that same time frame as the small loans. And that auto-secured business is very low delinquencies and losses. So, we're balancing out this business, a barbell strategy between taking on a little bit more risk on one end, which gives you good returns and strong revenue yields, even though it's slightly elevated losses and delinquencies. And we're balancing that out with that auto-secured book. So, everything we put in place and the hard work we did in the fourth quarter and the actions we took, we feel like they paid off for us in the first quarter. So, with that, I would just say, thanks, everybody, for joining the call and appreciate the call and have a good evening.