Q1 2024 Regional Management Corp Earnings Call

Participants

Garrett Edson; Investor Relations; Regional Management Corp

Robert Beck; President, Chief Executive Officer, Director; Regional Management Corp

Harpreet Rana; Chief Financial Officer, Executive Vice President; Regional Management Corp

John Hecht; Analyst; Jefferies LLC

Matt Dhane; Analyst; Tieton Capital Management LLC

Presentation

Operator

Greetings, and welcome to the Regional Management First Quarter 2024 earnings call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. So if anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Garrett Edson. Please go ahead.

Garrett Edson

Thank you and good afternoon, but now everyone should have access to our earnings announcement and supplemental presentation, which were released prior to this call 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. 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. 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 President and CEO of Regional Management Corp.

Robert Beck

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 will cover our first quarter financial and operating results, discuss the credit performance of our portfolio and share expectations for the second quarter and the balance of the year. We had a very strong start to 2024 as we outperformed 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 some.
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 inbox. We remain cautiously optimistic about the direction and the AMI 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 margin, we again originated roughly 60% of our loans to our top two 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% three years ago. 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.
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 backlog, the front book continues to season at lower level 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 long.
In addition, our outperformance on G&A expenses in the first quarter, part of which was 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 the 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 eight 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 and improving our revenue yield as we've always done. We'll manage that 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 in 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 one 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, while continuing 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 guide.

Harpreet Rana

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 our 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 originations since 2022 as we appropriately balance growth with credit quality and higher return.
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 carries an APR at or below 36% compared to just over 86% of our portfolio a year ago.
As Rob previously noted, we 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 $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 margin as economic circumstances dictate, we're prepared to further tighten our underwriting or lean back into growth, either of which could impact ending net receivable.
Turning to pages 7 and 8, total revenue grew to a record $144 million in the first quarter at 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 is 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 points sequential decline in total revenue yield, primarily due to higher expected interest income reversals from net credit losses in the quarter as credit outcomes improved 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 of 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 index. The top book ended the quarter at 78% of our total book compared to [76%] 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 law.
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 macro economic 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 points 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 7.9 times. 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 31, 81% of our debt is fixed rate with a weighted average coupon of 3.7% and a weighted average revolving duration of one 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 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 and unused borrowing capacity of between roughly $400 million and $700 million dollars, 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 - 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 maintained our full year 2024 guidance. As a reminder, our quarterly net income typically is at its lowest point in the second quarter each year, and we expect 2024 to be no different. That concludes my remarks. I'll now turn the call back over to Rob.

Robert Beck

So start 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.

Question and Answer Session

Operator

Thank you and we will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue, please press star two. If you would like to remove your question from the queue For participants using speaker equipment. It may be necessary to pick up your hand, we are pressing the star keys. First question comes from John Hecht with Jefferies. Please go ahead.

John Hecht

Hey, guys, thanks for taking my question. I know you guys, you mentioned the revenue yield about 50 basis points below Q2 to Q1 and from Q1, which I think is normal from a seasonal perspective, but have it 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.

Harpreet Rana

Hi, Jan. It's a hard. Thank you for the question.
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 on in terms of yields, for the full year, we did provide guidance and we said that they were going to be 40 basis points to 50 basis points up year over year. And that is inclusive of the pricing that we've spoken about previously.

John Hecht

Okay.

Robert Beck

Yes. And John, I would just add that, you know, 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 on 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 by 80 basis points of improved yields. So we're we've got a dial that we can turn on 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 E&O and seeing that hopefully continue to come down. But that'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 that cap themselves at 36% on having this pricing power is, um, is something that sets us apart from, you know, should we choose to lean in more aggressively at some point in time.

John Hecht

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

Harpreet Rana

So John, thank you for that question. 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 and 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 their volumes pick up in the second quarter. But our B versus first quarter was again due to that timing item, but also very much due to us managing our line items quite meticulously and specifically personnel.

Robert Beck

Yes, John look, and that was a conscious decision on. I think our people costs are actually down almost $800,000 versus prior year despite the growth in the business and obviously down versus Q4, as you noted. And so we 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 how we book, quite frankly, how we've executed on every line item. I mean, you know it some, but you know, you you want to run the business on a relatively conservative way as you wait for the macro conditions to further unfold. And I think that we did a great job on it, keep in keeping a tight control of expenses.

John Hecht

Great. Appreciate the answers.

Operator

Thanks very much. Thank you. And again, if you would like to ask a question, please press star one on your telephone keypad. Next question comes from Matt Dhane with Tieton Capital Management.

Matt Dhane

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

Robert Beck

Yes. Hey, Matt. No, great question. Look, I think I've heard what our track of 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 lean into growth. So, you know, the metrics that we're looking at is, you know, consumers bad real wage growth last year, as you said, the economy's growing and 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 in our we're not seeing obviously the number of rate cuts that we would have anticipated early in the year. I mean, maybe we'll see one. And so when I look at it is customer is still recovering from the inflation hangover, right?
So the last since April 2024 inflation is up about 21%. But wage growth in our kind of for the, call it the 20% or 40% you know, segment of the population has been a little over 5%. And so while stimulus has helped you and how the stimulus money, how people come in and stay on top and meet their their family obligations. You know, they're still working there through working our way through kind of that inflationary period. And so from our standpoint on, we're able to be very selective in where we put on growth, and 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 what we're really looking for is, you know, on really looking for is inflation to continue to fall. And I will tell you that On Demand, in my opinion, has started to pick up here in the month of April on. That's encouraging, but it has to be the right kind of demand. Obviously, you want to make sure it's on customers with our underwriting that we can can pay their pay their bills.
So that's kind of where we're at. I mean, I feel like it's some it's a good place to be because we have, you know, we've tested into the smaller loan portfolio we're seeing and how that's performing. We know how to turn the dials up to in oh two. We feel like it's the right time, but I don't think it's prudent necessarily to get out slamming the accelerator down at this point in time either.
So, you know, on as long as we continue to make those right trade-offs each and every quarter. I know I see I see things continuing to and improve. I will also say that from a credit standpoint, on the credit on the front book is performing, you know, 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 on, you know, our 1 to 89 day delinquency buckets about 190 basis points below 2019 and 200 basis points below the fourth quarter, while delinquencies overall in the first quarter up 20 basis versus the fourth quarter, when you kind of normalize for the loan sale to actually down 70 basis points.
So we're seeing the trends and dumb, although I don't typically say this, I will now disclose that in the April delinquency numbers below 7%, and that's in line with the on 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 on and we're cautiously optimistic about when we can, you know, might lean back into more aggressive growth as macro conditions continue to improve.

Matt Dhane

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

Robert Beck

Yes. I mean, look, I in it's in the I mean, I think it's in the appendix of the supplement, but you can see that the PPNR per branch on four branches open less than a year on is now about $3.7 million, up from $2.3 million on the P&L a year ago. And same thing for branches open from one to three years now yet out as we come with the environment we're in, we have an added a ton of branches.
So that addressable market opportunity we talked about from the new states, which is kind of increased by 80% on in my mind, is still largely untapped. And so my expectation is we will add a few more branches this year. Some we've got some expense dollars, which may be an L allow us to add more branches. 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.

Matt Dhane

Great cloudier. I've had that cards. My questions. Thank you.

Robert Beck

Great. Thanks, Matt.

Operator

Further question, I I'd like to turn the floor over to Rob Beck for closing remarks.
Great. Thank you, operator. On look in conclusion, I'd just say we're very pleased with the outcome of the quarter. As I said, I mean, I think we've we've executed on all lines across the P&L, and that's 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.
And I talked about credit. I talked about pricing on continued Express expense discipline. That's that's the heart of what we do. And you know, and as I said, I do believe that having this small loan business that can price above 36% is a real competitive advantage. And um, you know, in a couple of ways, not only the pricing power, but it also gives you the on the customer flow in that allows you to it, which is part of our core strategy to graduate those customers to a lower rate loan and a higher higher dollar loan. The customer is extremely satisfied by that improves their credit profile.
And it's some it's core to the business that we've been building over the last seven or eight years in growing our large loan book. I would also say that on the $50 million of small loans that we put on them, which are higher risk and higher returns on 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 timeframe as the small loans and that auto care 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 is gives you good returns and, you know, strong revenue yields, even though it's slightly elevated losses and delinquencies, and we're balancing that out with the that auto secured book. So from everything we put in place and the hard work we did in the fourth quarter and the actions we took, we feel like they're young. They paid off for us in the first quarter.
So with that, I'd just say thanks, everybody, for joining the call. And um, you know, appreciate the call and have a good evening.
This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.