Q1 2023 Regional Management Corp. Earnings Call
Speaker 1: The se to.
Speaker 1: And.
Speaker 2: I would now like to turn the conference over to Garrett Edson, ICR, please go ahead. Thank you, and good afternoon. By now, everyone should have access to our earnings announcement supplemental presentation, which we're really 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 two of our supplemental presentation, which contains important disclosure concerning forward-looking statements in the use of non-geft financial measures. Part of our discussion today may include forward-looking statements, which are based on management current expectations, estimates, and projections about the company's future financial performance.
Speaker 2: expense management and strong execution of our core business. We continue to be highly selected in making loans within our Titan credit box and we further tightened our new borrowers in the first quarter. As a result, and in part due to first quarter seasonality, we liquidated our portfolio by $23 million in the quarter. We intentionally slowed our year over year portfolio growth rate to 16 percent down from year over year growth rates of 19 percent in the fourth quarter and 31 percent in the first quarter of 2022.
Speaker 3: In light of the uncertain macroeconomic environment, we continue to be comfortable trading loan growth for credit quality, but we're well positioned to lean back into growth when warranted by the economic conditions and overall performance of our portfolio.
Speaker 3: Our credit tightening actions over the past several quarters have improved our credit profile and benefited early stage of the link with C's and role rates.
Speaker 3: The percentage of originations in our top two risk rates has steadily increased in recent years. Up to 61% in the first quarter of 2023, from 43% in the first quarter of 2019, and 53% from a year ago.
Speaker 3: Our auto-secured portfolio has also continued to grow as a percentage of our overall portfolio, and the credit performance of those loans has been very strong, with a 30-plus day delinquency rate of only 2.2% as of the end of the first quarter.
Speaker 3: We've also continued to moderate new borrower acquisition, while sharpening our focus on our region nations to present informer borrowers.
Speaker 3: New Barrow Originations declined at 26% of all first quarter Originations.
Speaker 3: down from 31% in the third quarter and 28% in the fourth quarter of 2022. As we've highlighted on prior calls, new borrowers initially perform more sun average than our seasoned present borrowers who remain in our portfolio following low-income financing and our former borrowers with whom we have extensive, honest credit experience. The higher credit losses on our new borrowers portfolio reflect the component of our...
Speaker 3: percentage of our portfolio has benefited from those actions.
Speaker 3: Our second half 2022 and 2023 Ventures are some of the strongest interportfolio and are currently performing in line with our expectations.
Speaker 3: As of the end of the first quarter, roughly 60% of our portfolio consists of the second half, 2022, and 2023, and number that we expect to increase to roughly 85% by year end. Only 17% of our portfolio, as of the end of the quarter, was originated in 2021. And when we expect that number to decline to under 10%,
Speaker 3: over the next six months. A healthier credit profile and our heightened collections focus have led to continue early indications of improved credit performance.
Speaker 3: Our 30-plus day delinquency rate at the end of the first quarter was 7.2%, up 10 basis points from 7.1 at the end of the year. However, when adjusting for the non-performing loan sale that we executed in the fourth quarter, our 30-plus day delinquency rate was 80 basis points better compared to year-end, improving from 8% to 7.2%.
Speaker 3: In addition, our first quarter 30 plus date delinquency rate was only 30 basis points, or 4% higher than the first quarter of 2019.
Speaker 3: We also continue to see significant improvements in first paying the default rates in the first quarter compared to 2019. Our first payment the default rate in February was 6.8% or 170 basis points better in February 2019.
Speaker 3: In addition, our early delicacy performance compares favorably to 2019 levels, a byproduct of the strong first payment thought rates that we observed at the end of last year. The delinquency rate of accounts one to fifty-nine days past due was 8.6% at the end of the first quarter. A 230 basis point improvement from the fourth quarter of 2022.
Speaker 3: and 270 basses points better than the first quarter of 2019.
Speaker 3: Our 60-89-day DLINC-G-R8 improved by 30 basis points from the fourth quarter to the first quarter and is now flat to 2019 levels. Our 90-plus-day DLINC-G-R8 is 70 basis points higher than 2019 levels. These late-stage buckets remain sticky as our older vintages continue to flow through.
Speaker 3: a process which we expect to occur throughout the balance of the year. Monthly row rates across all delinquency buckets improve sequentially within the first quarter, and in all but the latest stage buckets, they improved at a faster rate than we experienced in the first quarter of 2019.
Speaker 3: While our late-stage delinquencies continue to be elevated, we are encouraged by the green sheets that we are observing in early delinquency budgets and the performance of our more recent long Electronics.
Speaker 3: Looking ahead, we're optimistic that our conservative underwriting, the declining inflation rate, and continued strength in the labor market, particularly for our customer base, will drive credit improvement in our portfolio.
Speaker 3: We're expecting that our net credit loss rate will peak in the second quarter as late stages of the Lincoln accounts roll through to loss. Improven in our early delinquency buckets and ongoing credit tightening will drive improving in our net credit loss rate in the second half of the year, ignoring any further deterioration in the macro environment.
Speaker 3: In terms of growth, we'll continue to place our focus on our highest confidence of originations, those where we can achieve our return hurdles under an assumption of additional credit stress and higher future funding costs. We'll continue to emphasize present and formal moral originations with new borough lending disproportionately skewed to our newer states, including Arizona.
where we commenced operations in the first quarter. We continued to expect received growth in the mid-single digits in 2023, compared to 90% in 2022.
Our current credit box is the tightest in our company's history, but as macro conditions warrant, we will lean into growth where appropriate, guided by the underlying performance of our portfolio.
We also clearly recognize the need to closely manage expenses, something we've always done, while still investing in our capabilities and strategic initiatives, including geographic expansion.
As we discussed on the last call, we're largely limited sense growth in 2023 to the carryover impact of 2022 investments.
as we seek to complete several important technology, digital, and data analytics projects that are critical to the modernization and evolution of our Omni-channel business to drive further productivity and efficiency. In addition, having entered eight new states with the addition of Arizona and increased our dresser market by over 80 percent since 2020,
We'll slow our taste of new state entry in 2023 while capitalizing on the infrastructure investments for prior years. We currently expect to open five to seven new branches in 2023 and perhaps one additional state late in the year if justified by the economic conditions.
Based on current expectations and macro conditions, we continue to anticipate that our net income will be the strongest in the second half of the year due to stronger credit performance and higher revenues beginning in the third quarter.
The second quarter will be the low-point profitability for the year. As our revenue will decline, equivalently, due to first quarter portfolio liquidation, and our net credit loss rate will reach its peak as late-stage delinquencies roll to loss.
As we've done in the past, we'll make adjustments to our underwriting and growth strategy based on changes in our credit performance and the macroeconomic environment.
With ample borrowing capacity and a large, addressable market, we have the ability to quickly lean back into growth should we observe improving economic conditions.
And we have a long runway of controlled profitable growth with these products.
This is where our focus remains for the foreseeable future, as we seek to improve the customer experience and optimize results for our shareholders. Second, we'll continue to originate loans where we have a high degree of confidence in meaning and return hurdles in a stressed macro-economic environment.
profitability. And fourth, will maintain a strong balance sheet, ample liquidity and borrowing capacity, diversified and staggered funding sources, and a sensible, interstrait management strategy.
We'll continue to stay focused on making sound business decisions and line these principles.
which will allow us to drive attractive results over the long term for our customers, team members, communities, and shareholders.
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 first quarter results in more detail.
On page 3 of the supplemental presentation, we provide our first quarter financial highlights. We generated gap net income of $8.7 million and diluted earnings per share of $0.90. Our core results were driven by high quality portfolio and revenue growth and careful management of expenses, partially offset by increased funding costs and macroeconomic impacts on net credit losses and revenue.
and 3% respectively. We're very comfortable with this result, as it reflects our short-term strategy of reducing our growth rate in favor of a higher credit quality portfolio.
Page 6 displays our portfolio growth and product mix through the first quarter. We close the quarter with net finance receivables of just under $1.7 billion, down $23 million from year-end on credit tightening and first quarter seasonality.
While our portfolio is up 230 million, or 16% year over year, most of the annual growth rate is attributable to strong origination activity from early 2022.
As a band of the first quarter, our large loan boat comprises 72% of our total portfolio, and 86% of our portfolio carried an APR at or below 36%.
We'll continue to prioritize growth of our highest confidence originations in a way that optimizes our return. Looking ahead, we expect our ending net receivables in the second quarter to grow by approximately 5 million as we continue to monitor the macro environment and maintain our tightened underwriting.
As we've noted before, we've remained focused on smart controlled growth. If circumstances dictate, we're prepared to further tighten our underwriting or lean back into growth, either of which would impact ending that receivables in the second quarter.
As shown on page 7, our lighter branch footprint strategy in new states and branch consolidation actions in legacy states contributed to another strong same-store year-over-year growth rate of 12% in the first quarter. Our receivables per branch remain near an all-time high, coming in at $4.9 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 12% to $135 million in the first quarter. Our total revenue yield and interest in fee yield were 32% and 28.5%, respectively, in line with our expectations. Compared to the first quarter of last year, our total revenue yield and interest in fee yield declined to $100 million.
In the second quarter, we expect total revenue yield and interest in fee yield to be down 40 basis points and 30 basis points respectively compared to the first quarter. Over time, we anticipate that an improving credit environment and increased pricing on our newer loans will benefit our yield.
Moving to page 9, our 30-plus day delinquency rate as a quarter end was 7.2%, and our net credit loss rate in the first quarter was 10.1%. As a reminder, net credit losses in the first quarter benefited from the fourth quarter non-performing loan sale. In the second quarter, we expect delinquencies to improve gradually and net credit losses to be a priority.
delinquency buckets refilled following the fourth quarter non-performing loan sale. As of quarter end, the allowance was $184 million, or 11% of net finance receivables, up from 10.5% of net finance receivables at year end. The allowance continues to compare favorably to our 30-plus day counter-actual.
further by your end.
Over the long term, under a normal economic environment, we continue to expect that our net credit loss rate will be in the range of 8.5% to 9% based on our current product mix and underwriting.
And we believe that our reserve rate could drop to as low as 10%, with the improvement attributable to our shift to higher quality loans.
As we've always done, however, we'll manage the business in a way that maximizes direct contribution margin and bottom line results.
Flipping to page 11, we continue to manage G&A expenses tightly in the face of normalizing credit.
Genie expenses for the first quarter was $59.3 million, better than our prior guidance. Our annualized operating expense ratio was 14% in the first quarter, a 140 basis point improvement from the prior year period.
We remain very pleased with our disciplined expense management in this challenging economic environment.
We continue to monitor expenses tightly and prioritize those investments that are most critical to achieving our strategic objectives.
Over the long term, we believe that our investments in our digital capabilities, geographic expansion, data analytics, and personnel will drive additional sustainable growth, improved credit performance, and greater operating leverage. In the second quarter, we expect GNA expenses to remain flat to the first quarter at approximately 59 million.
Turning the pages 12 and 13 are interest expense for the first quarter with 16.8 million or 4% of average net receivables.
As a reminder, in the first quarter of last year, we experienced a $10.2 million mark-to-market benefit to interest expense and pre-tax income from our interest rate cap.
In the second quarter of 2023, we expect interest expense to be approximately $16.3 million, or 3.9% of average net receivable.
We continue to aggressively manage our exposure to rising interest rates as 89% of our debt is fixed rate as of March 31st with a weighted average coupon of 3.6% and a weighted average revolving duration of 1.8 years. As a result, despite the sharp increase in benchmark rates over the past year, our overall
We expect only a modest increase in interest expense as a percentage of average net receivables throughout the balance of the year.
We continue to maintain a very strong balance sheet with low leverage, healthy reserves, ample liquidity to fund our growth, and substantial protection against rising interest rates. As at the end of the first quarter, we had $581 million of unused capacity on our credit facilities, and $182 million of available liquidity consisting of unrestricted cash on hand.
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 first quarter funded debt-to-equity rate show is a conservative 4.2-1.
We have ample capacity to fund our business even if further access to the securitization market were to become restricted.
We incurred an effective tax rate of 25% through the first quarter.
For the second quarter, we expect an effective tax rate of approximately 26%.
We also continue to return capital to our shareholders. Our Board of Directors declared a dividend of 30 cents per common share for the second quarter. The dividend will be paid on June 14, 2023 to shareholders of record as of the close of business on May 24, 2023.
Replease, with our first 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 thank our dedicated team for their outstanding work and the best in class service they provide to our customers.
As I discussed earlier, in this challenging economic environment, we remain focused on strong execution of our core business.
including originating high-quality loans within our Titan credit box.
closely managing expenses, and maintaining a strong balance sheet. This straightforward approach allows us to concentrate our efforts on the key drivers of our results. At the same time, we're continuing to advance our long-term strategies of geographic expansion and key investments in technology, digital initiatives, and data and analytics. We expect to emerge from this economic cycle as a stronger company with a larger economy.
higher quality portfolio and improved operating efficiencies. Well-positioned to deliver attractive returns 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?
Secondly.
We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You'll hear tone and knowledge in your request.
If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press Start and 2.
We'll pause for a moment as callers join the queue. The first question comes from John Hatch from Jefferies.
Please go ahead. Afternoon guys and thanks for taking my questions.
You guys gave some really good detail for the upcoming quarter and that's helpful and some detail over the course of the year. I'm just wondering, given the mix and the tightening going on, what's the overall impact of the pandemic?
How do we think about yield trends kind of later this year and into next year overall?
Yeah, John , how are you? Thanks for joining the call. Yeah, we expect yields to modestly improve over the course of this year. Not going to give you guidance for next year because obviously the mix and our portfolio may change depending on the macro conditions and we may lean back into growth in higher yielding products later this year.
But we do expect modest increasing in yields in the second half of the year and that comes from two points of view. One, the improving credit that we expect in the second half of the year. So you have less interest reversals and then also we are repricing parts of our portfolio and it just takes a while for that to.
really materialize through your portfolio because it's only on new originations.
Okay, that makes sense and then maybe can you give us kind of with the guidance you've given or the discussion on the is like what.
What are kind of your macro assumptions and your unemployment assumptions in your guys' opinion if there's a major shift in unemployment?
I mean, is there some sort of relationship we could think about with the ALL changes tied to changes in unemployment relative expectations?
Yeah, and so we've we've guided to 11.6 to 11.7% here in the second quarter. Um, actually, no, no, no, we, we, we got it to 10.6. I'm sorry. I'm sorry. 10.6 to 10.7% in the second quarter. And in terms of, you know, there is a number of different variables that go into the allowance calculate.
we think that that's a prudent place to be, and we're very comfortable with our reserve at 11%.
Yep, that makes sense. And then thought of question is, you've done some branch optimization, you're opening branches in new markets. What do we, you've just given other opportunities for consolidation and market expansion? I'll show you a few college goals. I'll show you a few college goals.
Do you kind of envision having more stores than, you know, then current at the end of the year similar amount of storage or any any guidance you can give us there just in terms of. The store kind of yeah, so we're yeah, we're expecting to open up 5 to 7 new branches over the course of the year.
You know, there may be some consolidations that happened, but it's, it's really kind of activity as. Leases come up for renewal, so we're really not giving a lot of guidance there. What I will tell you, and it's in the supplement, you know, we are seeing much higher in our per branch.
which is driving more efficiency. And that's a result of the larger branches that we're putting in the new states. In fact, I think if you look at the three-year, one-to-three-year cohort, which includes some of the new markets as well of the one-year cohort.
They're up substantially and so we're now averaging for the entire footprint, you know, 4.9 million average balance per branch, but I will tell you in some new states and you really don't want to give what those states are. We have, you know, averages per branch that are north of $6 million.
Thanks John . Once again, if you have a question please press star then one.
I would like to turn the conference back over to Mr. Beck for any closing remarks. Thank you operator and thanks everyone again for joining the call. As we all know the macroeconomic environment remains challenging, but we are a resilient business. Our focus remains on strong execution of our core business and as I've said in the prepared remarks, that means originating high quality loans within our Titan credit box, Closely managing our expenses and maintaining a strong balance sheet. All the while investing in our longer term growth initiatives, which is geographic expansion.
I of.
The.
The.