Q2 2023 Regional Management Corp Earnings Call
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Thank you for sending my does this the confronts operator this call is going to begin in a few moments please stand by.
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Thank you for standing by this is the conference operator welcome to the original management second Potter 2020 tree earnings call.
As a reminder, all participants listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions.
Joined up the question queue. You May press start then one on your telephone keypad.
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Now like to turn the conference over to Garrett Edison ICR. Please go ahead.
Thank you and good afternoon, everyone should have access to or anything else been supplemental presentation, which were released prior to this call may be found on our website at regional management dotcom.
For them to get him a phone or a box I will direct you to page to our supplemental presentation, which can change the important disclosure statements.
And the use of nausea financial measures.
Part of our discussion today may include forward looking.
Statements are based on management current expectations estimates and projections about the company's future financial performance and business prospects.
Looking statements speak only hasn't stay on the subject of various assumptions risks uncertainties and other factors that are difficult to predict and that could cause actual results differ materially from those expressed or implied the forward looking statements.
Mr not guarantee future performance and therefore, not placed on new lines appointment.
For all of your press release presentation of recent violence with the F. C. C for more detailed discussion about bold statements and the rest of uncertainty that could impact our future operating results in financial condition.
Also our discussion today may include references to certain non-GAAP measures reconciliation of these measures to the most comparable get.
With an earnings announcement or earnings presentation, and posted on our website or retail management dotcom.
Now like to introduce Rob <unk>, President and CEO original Bachelor Court.
Thanks, Garrett and welcome to our second quarter of 2023 earnings call I'm joined today by Heartburn at our Chief Financial Officer.
But I will take you through our second quarter results discuss the credit performance of our portfolio provide an update on some of our strategic initiatives and share our expectations for the second half of the year.
We're pleased with our second quarter results, we exceeded our expectations on both the top and bottom lines, we produce $6 million of net income and 63 cents of diluted EPS.
Demand remains strong in the quarter, allowing us to generate high quality portfolio growth near record quarterly revenue while simultaneously maintaining.
Conservative credit posture.
We also continue to close the manager G and a expenses.
Testing in our business driving our annualized operating expense ratio down to 13.6% in the court.
Our focus on portfolio quality expense management and strong execution of our core business is enable us to deliver consistent predictable and superior results quarter after quarter.
And a stress macroeconomic environment.
We've been encouraged by recent economic data, indicating a strong labor market moderating inflation and real wage growth.
Continued to be cautious and selective in making loans within our tightened credit box.
Our portfolio by 39 in the quarter.
Higher than expectations. However, we slowed our year over to your portfolio growth rate to 11% compared to 16% last quarter and 29% in the second quarter of last year.
We continue to be comfortable prioritizing higher quality credit over more rapid portfolio growth.
What we're prepared to link back into growth when justified by the economic conditions and the overall performance of our portfolio.
Are conservative underwriting combined with a strong love Japan has allowed us to continue to originate a greater proportion of loans to our best qualified customers.
Similar to last quarter originations to our top two risk ranks represented 60 per cent of volumes in the second quarter.
Up from 54% in the prior year period and from 45% in the second quarter of 2019.
Fridge income of our customers is increased by 19% since 2019 and the share of new bar originations continue to fall in the second quarter as we've emphasized president farmer borrows.
New borrowers represented only 22 per cent of second quarter originations down from 27% in the prior year period.
As we've highlighted on prior calls new borrowers initially perform worse on the allergies that our season present and former.
Borrowers, which we we have extensive on us credit experience.
We also continue to grow our auto security business, which is now eight per cent of our portfolio up from 5% a year ago.
The auto secured portfolio has a very attractive 30, plus a delinquency rate of only 2.1% as of the end of the second quarter.
Our second half 2022 vintages continue to outperform our first half 2022 vintages at our 2023 vintages are some of the strongest in our portfolio.
As of June 30th 70 per cent of our portfolio consisted of second half 2022, and 20 twenty-three vintages Ah number that we expect to increase the roughly 85% by year end.
Ah portfolios early faithfully concedes continue to benefit from several quarters.
Writing criteria, but later stage licensees have remained elevated trend that we observed across the industry.
Overall, we ended the quarter with the 31st day delinquency rate of 6.9%.
A bunch of improvement of 30 basis points from the first quarter, but 60 basis points above the second quarter of 2019 levels.
It's important to note however that our second quarters links to write was adversely impacted by the effect of slower portfolio growth in 2023.
The 2019.
Sequentially portfolio grew by less than 1% in the second quarter of 2023 compared to seven per cent growth in the second quarter of 2019, if we worked normalize for the effect of slower growth this year or 31st day delinquency rate would only be 30 basis points higher than second quarter 2019 miles driven by elevated.
Let's see and are late stage buckets.
Consistent with last quarter, our second quarter early stage delinquency outperform 2019 results.
One to 29 day, and 30 to 89 day delinquency rates were 250 basis points and 20 basis points better in the second quarter of 2019, respectively.
In addition, a bay first payments fault rate was more than 200 basis points better than the rate in May 2019.
Ah back book remains stress due to macroeconomic conditions is older free tightening vintages wrote through our later stages delinquency buckets. We continue to manage these buckets closely and we expect it moderating inflation and credit tightening will benefit the rolling from these buckets in the coming months.
Looking ahead woman tight credit bus and focus on originating loans, only where we can achieve our return hurdles under an assumption of additional credit stress and higher future funding costs.
By expanding the eight new states and increasing our addressable market by more than 80% over the past three years, we have ample opportunity to take advantage of high levels of consumer demand to drive stronger second half portfolio.
While still remaining selective in approving borrowers under a conservative underwriting criteria.
We expect full your 2023 portfolio growth in the mid single digits compared to 19% in 2022.
In addition in light of our conservative underwriting the declining inflation rate and continued strength in the labor market, we believe that our neck credit loss rate reached its peak in a second floor.
Performance in our early delinquency buckets and ongoing credit tightening will improve our neck credit loss rates in the second half of the year barring any further deterioration in the macro environment.
We also continue to anticipate that our second half net income will be stronger than our first half net income due to stronger credit performance at higher revenues.
In summary, we're pleased with our results and our current position and were encouraged by recent economic data. So we remain cautious on both at this time, we stand ready to make adjustments to our underwriting a growth strategy based on changes in our credit performance and the macroeconomic environment.
With ample liquidity significant borrowing capacity and a large addressable market.
You have the ability to quickly lean back into growth should we observe improving economic conditions.
I'll turn the call over to harp provide additional color on our financial results.
Thank you, Brian and handling it very well.
And that'll take you to our second quarter results in more detail.
On page three clinical presentation provider second quarter financial highlights.
We generated net income six.
$6 million and diluted earnings per share at 63 cents.
Ah results bigger than once again by high quality portfolio and revenue growth and careful management of extensive.
Partially offset by increased funding caught in the net.
Edwin macroeconomic conditions.
Turning to painted foreign fine while demand remains strong tiger underwriting standards and collection okay.
6% decline in total originate from the prior year.
By channel digital and branch originations break down by 19% and 7% respectively.
Direct mail origination.
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Consistently noted.
Deliberately reduced origination and rethink.
The appropriate balance crowd with further enhancing the credit.
Credit quality of our portfolio.
Complaint our portfolio broken product next.
Second quarter.
<unk> receivable and just under 1.7 billion at $13 million per March 31st and slightly ahead of archive.
Is it the end of the second quarter or enlarge phone that comprise 73 per cent of our total portfolio and 86 per cent of our portfolio and a P. R.
36 per cent.
Looking ahead week Becker, ending that receivable and the third quarter to grow by approximately $50 million.
We continue to monitor the economic environment and maintain our current underwriting standards.
Perfect Smart controlled growth.
Clearly given the continued uncertainty around consumer financial health.
Circumstances, dictate where prepared to further tighten our underwriting orlene back into growth either a branch could impact receivable and the third quarter.
As shown on page seven or later branch.
<unk>, a new state branch consolidation actions contributed to another solid paint store.
Three seven per cent.
An order.
<unk> branch for name right in your all time high.
Coming in at $4.9 million at the end of the quarter.
We believe considerable growth opportunity for name and our existing branch footprint under.
More efficient model, particularly in more branches.
Trying to pay today total revenue grew 9% to $133 million in the second quarter.
Total revenue yield an interesting emailed or 31.9% in 20th two per cent respectively.
A year over year decline emailed is attributable primarily truck continued mixture.
Larger higher quality loans and revenue from.
The credit impact of macro economic condition.
And the third quarter, we expect total revenue healed and interested in field to be up by 40 days.
And a second order.
<unk> and the credit performance and the impact of pricing increases on your mind.
We also anticipate that in prison credit environment and increased pricing.
<unk> further benefits for your meal and future quartered, particularly after a recent pricing action.
Portfolio over time.
Moving to page 930, plus the delinquency rate.
<unk> and was 6.9% in our net credit locked right in the second quarter is 13.1%.
Tightened underwriting contributed gradually improve delinquency profile from the prior quarter on that credit losses peaked in the second quarter is expected.
Third quarter, we et cetera, delinquency rate to increase only slightly compared to the second quarter is the typical third quarter seasonal increasing delinquencies is largely mitigated by improving credit performance.
In addition, we anticipate that net credit losses will be approximately $46.5 million in the third quarter.
Credit loss rank <unk> second order hi.
Please get the portfolio credit continue to perform as expected, particularly in our.
Credit tightening.
Turning to page 10 or allowance for credit losses declined slightly in the second quarter.
<unk> $2.4 million after incorporating slightly more optimistic view of the macro environment.
<unk>, including a higher likelihood of a soft landing.
With a lower ear and unemployment training to 5.5%.
Peak unemployment rate 6.4 per cent.
Order of next year.
A quarter and the amount was $181 million or 10.7 per cent finance receivables down from 11%.
Receivables as of March 31st.
<unk> continues to compare favorably turned 30, plus a contractual delinquency of $160 million.
We expect to end the third quarter with a reserve right between 10.5% and 10.6 per cent object to macro economic conditions.
Assuming credit continues some cream, we would expect a reserve right to decline further by your end.
The longterm under normal economic environment, we continue to expect that on that credit loss rate will be in the range of 8.5 per cent to nine per cent based on our current product next an underwriting and we believe that <unk> <unk> <unk> <unk>.
10 per cent with the improvement attributable to Russia to higher quality loans.
We've always done however, manage the business in a way that maximizes direct contribution margin.
Line resolved.
Looking to pay the lender then.
And we continue to closely manager.
Phil investing in our capabilities and strategic initiatives.
Many expenses for the second order for better than our prior guy coming in at $57 million.
Annualized operating expense ratio was 13.6% in the second quarter, a 110 basis point improvement from the primary appearing at <unk>.
We'll continue the manager sending closely moving forward.
In the third quarter.
<unk> to be approximately $63.5 million to support received both growth and to continue to invest in several important technology digital and data and analytics projects that are critical to the modernisation and evolution.
All business.
Okay. The longterm, we believe that these investments will drive additional annabelle growth and script credit performance.
Later operating leverage.
Turning to paint the 12th and 13th our interest expense for the second quarter was $16 million or 3.8 per cent an average net receivables on an annualized basis.
As a reminder, and a second quarter black here, we experienced a 3 million dollar mark to market benefits.
<unk> pre tax income from our interest rate cap.
In the third quarter of 2023, we expect interest extent to be approximately 70, 944% on average receivables with the increase in expense primarily attributable to are expected portfolio growth.
We continue to aggressively manage our exposure to anything interest rate is 88% a break at the fixed rate as of June 30th with a weighted average coupon at 3.6 per cent and then weighted average revolving duration of 1.6 here.
Despite the sharp increase in benchmark rate for the last 18 months, we've experienced the comparatively modest increase in interest expense as a percentage of the average net receivables.
<unk> of our interest rate management strategies that we expect to continue to enjoy throughout the balance of the year.
We also continue to maintain a very strong balance sheet low leverage healthy reserve.
Liquidity to <unk>, Stanford protection against rising interest rates.
The end of the second quarter, we had $641 million of unused capacity on her credit facilities and 147 million is available liquidity consisting of unrestricted cash on hand, and immediate availability to draw down on a revolving credit facilities.
<unk> staggered for revolving duration stretching out to 2026 and.
2020th we've maintained a quarter and unused borrowing capacity between roughly 400 and $700 million demonstrating our ability to protect ourselves against short term disruptions in the credit market.
Our second quarter funded debt to equity ratio for named a conservative 4.2 to one.
With ample capacity to fund our business, even if further access to the securitization market for them.
Come restricted.
Hurt and effective tax rate of 23 per cent for the second quarter for the third quarter. We expect an effective tax rate of approximately 24 per cent prior to discrete items, such as any tax and tax equity compensation.
We also continue to return to castle to our shareholders.
Our board of directors declared a dividend at 30 cents per share for the third quarter.
<unk> will be paid on September 14th 2023 to shareholders of record.
On August 23rd 2023.
We're pleased with our second quarter results are strong balance sheet in or near and long term prospects for control.
Annabelle correct that concludes my remarks, I'll now turn the call back over to Iraq.
Thanks, Harp before I turn the call over to questions I'd like to thank our hardworking team members for their outstanding customer service and the excellent results. They delivered in the second quarter as.
As we said in the past and is challenging economic environment, we remain focused on a consistent execution of our core business, including originating high quality loans within her tightened credit box, hopefully managing expenses and maintaining a strong balance sheet.
We're pleased to see that credit tightening the actions over the last several quarters Durbin strong performance and our more recent loves itches with early delinquency and first payment to false continuing to outperform 2019 levels.
Thanks in part to our geographic expansion over the past few years, we're well positioned to take advantage of robust consumer demand in the third quarter.
Growing within a conservative credit box will also keep a tight grip on expenses moving forward, while making key investments in technology digital initiatives and data and analytics that will further our strategic objectives and create additional sustainable growth improve credit performance, a greater operating leverage over the long term.
Of course, when the economic conditions are right in the future, we'll leverage our substantial balance sheet strength liquidity borrowing capacity to reopen our credit box and Lee further into growth.
Thank you again for your time and interest I'll know I'll open up the call to questions. Operator could you. Please open the lines.
Certainly.
Well now begin the question and answer session to join the question queue. You May press start then one on your telephone keypad, you hear a tone and knowledge in your request.
Are you using a speaker phone please speak up your handset before pressing any teeth.
Julie J U a question please press <unk>.
<unk> paused for a moment as color <unk>.
The first question comes from Sanjay had kidney from K B that for you. Please go ahead.
Alright. This is Stephen Clark filling in facade J. Thanks for taking my questions. The first one I had was just around the the benefit from the repricing how should we think about that I'm, calling for it if you could help us break out how.
How we we should have it by the yield to move going forward. Thanks.
Yeah, Stephen Thanks, Thanks for joining Uhm do Great question. You know is heartburn mentioned neutral portion of the presentation that we expect yields go with about 40 basis points in in the third quarter.
That's a mixture of both the credit normal normalizing as well as the repricing actions, we have taken it it takes a while to reprice your book and so you really don't see the full benefits of our repricing until next year, but what I would say to you is you know and we have the state of this before.
Sure normalization credit is worth about 100 basis points, you know in terms of.
Uhm repricing you know, it's going to be you know.
Similar amount, but the the timeframe by which that comes through it was a little bit longer.
Got it and then my follow up question is around the eight and a half the 9% law suite over the longer term can you help us break it out by product.
How should we think about it like small versus large and <unk> and then burst retail banks.
Yeah, so well retails just winding down so you know the eight eight and a half the 9% range and I just wanted to be clear about that was based on the current credit box as we have it today or has tightened. It is today you would expect it as we leaned back into growth and.
Loosen up credit and you'll get a higher some higher risk assets and some higher returning a P. R's you would expect it that that range will increase so that that guidance. We gave it was just based on the credit box today, we would update that.
Guidance, depending on how are mixed ships going forward in the future you know depending on.
What kind of originations, we put on the medical environment improves.
Got it thanks for taking my question.
Like.
Once again, if you'll have a question. Please press star then one.
The next question comes from <unk> capital. Please go ahead.
Alright. Thank you a couple of questions first of all relative to your entry into additional new States would you walk walk us through how you're thinking about that and.
And.
And then I do have a follow up.
Yeah. So you know we've entered <unk> eight new states, we have like four new states since June of last year, those states or all all going very well. We're we're seeing a lot of the growth. We're putting on is coming from those new states where somebody.
Uhm, a legacy states have been been more stable if you will particularly as we've tightened credit you know I think what you would expect is.
As as we move forward, depending on the macro environment, we'll start to see you know a rebound and grow in legacy states.
Continued growth in those new states, but but all those new states of you know and perform very well I mean, it's you know it's it's you know the addressable market. There's a lot a lot of demand out there and so we're just being smart about you know the rate of growth relative to what might be the macro.
Risks that are out there.
Thank you and and <unk>.
Relative to the.
The.
The the macro environment and your point that you could lean into growth or you could tightened back up.
What is it that you're looking for what are the the data points that would lead to.
To an inflection in your mindset.
Yeah. So I think it's it's the macro environment, which starts with inflation, which is as you know cooling you know a stable employment environment, which which were saying you know continue continuation of real wage growth, which you know for our customer.
Over the last year has grown about about 2% and so those are all positives. The economy is is growing and there seems to be uhm increased optimism that we're gonna have a soft landing. So you know I think the macro elements.
Seem to be falling into place you know I think the other side of that is is looking at the performance of our portfolio and the vintages. We put on you know since middle of last year, but even the most recent one.
And make sure they're performing as as expected within the current environment.
You know customers are still stress, they're still high inflation.
Gas prices picked up a little bit, but I think once we once we see that you know the performance of our vintages, which look good continue on that path and we don't see any material change in the economic outlook and will indeed have a softer landing then I think you know.
It will be much more comfortable really leaning back into growth more aggressively now I will tell you that you know we grew the receivables by 13 million this quarter or anything you were originally guided at five for the third quarter. We are now saying $50 million a receivable Grove now the last your third quarter, we were probably 70 or 75 somewhere in there.
That range and so we are putting on more growth, but we're doing it because you know they're strong customer demand and we're in a strong competitive position to be very selective on the assets. We put on and so you know I think that bodes well for for the future and we are guided.
That we expect you know mid single digit growth this year versus low to mid single digit growth, which is what we said last quarter. So you know we're hinting at you know a better better outlook in the second half for growth, but we're we're taking it in a in a measured way.
Rob that's helpful and then one additional question.
What percentage of your customer base are college graduates and the spirit of the question is relative to the student debt repayment.
Assuming that that does start to happen the potential impact that that might have on on your customer base.
Yeah, I don't I don't Wanna give <unk> I I don't have the probably the latest college graduate number in front of me, but I think the number you're looking for is the percentage of our portfolio that have student loans and and in that we've shared in the past and and you know for my it now so you know 19 per cent of our base.
This whether its customers or balance is have student loans and so you know the expectation is repayments are supposed to begin in October but I think as you know there is various government programs and on ramping of starting payments.
As long as a year for all customers without penalty. There's also income thresholds where customers below I think it's 33000 won't have to make payments and if you make more than that you may not have to make payments subject to the size of your family and your other obligations.
Patients. So we think that you know roughly 10 to 15 per cent of our customers would probably start to make payments on October versus the 19% hard to be too precise on that number and then in our underwriting you know we've always considered student loan payments in our underwriting and.
You know, we'll be looking to see if there's any further tightening we might do here you know as we see additional data is you know payments start to begin. So you know it's a long on ramp from the government's standpoint, you know I think we're position as well as you know anybody in the industry.
Three and we'll continue to monitor.
Great Rob Thank you very much and great quarter.
Nope I appreciate it thanks.
The next question comes from Alexander if he loves of those from Jeffrey. Please go ahead.
Questions.
Hey, guys. Thank you for taking my question. My My question is really on the originations again, so we're really frontloading a lot of the girls into three Q and four accused kind of just.
A lot lighter compared a year over year, but yeah I just wanted to confirm you know the mid single is it more like you know.
Is it the high single digits kind of just just Wanna make sure we have that kind of like forecasted correctly. Thank you.
Yeah, Yeah, I understand the nuance you know look from a business standpoint, we always have a fairly strong July and August .
You know back to school, particularly in in the South rabies.
Tends to be as early as next week and so we usually have a strong July and August September tails off as does October and then then we pick up in November and December . So you know I understand how calendar day shaking it can get a little tough, but you know I think.
If you look at kind of the growth rate, we're doing in the third quarter. The the $50 million. We we provided relative to last year. You know I think and you know maybe you can take a look at what we did in fourth quarter of last year of 100 million and you know make make an estimate based on based on kind of.
What we did in the third quarter.
Hopefully that's helpful.
Yeah, No Super helpful. You guys give a really good guidance. Thanks guys.
No problem.
Okay.
This concludes the question.
I would like to turn the conference back over to Mister back sorry.
Max.
Thanks, operator, and thanks, everyone again for joining this evening you know very happy with the quarter, we really executing well, we're delivering on the credit front.
Talked about seeing improve credit from or are tightening you know the recent finishes are performing very well as you see in the F. P. DS in the in the early buckets, you know I talked about and responsive Bill's question, the macro front and you know the increasing optimism assault.
You're landing so we'll we'll leave it at that you know I do want to reinforce the customer demand is strong but more importantly, we're in a strong competitive position to be selective on growth. We've got a strong balance sheet and liquidity to put on more growth and you know that's a good position to.
To be in at this point in time, you know we are prepared to lean back into growth and we're watching the indicators and I think I was pretty clear about what those indicators are so will will will follow our our growth pattern will will follow our comfort around you know both our portfolio performance and in the macro conditions.
You know and then.
Lastly, it's it's worth noting you know we continue to exercise tried expense controls.
But we will ramp up investment in the second half of the year spending on digital Entad analytics, another business capabilities to benefit 2024, it's it's always important to to close out your your year and put yourself in the best position for the following year and and that's.
What will work and to do so with that again. Thanks for everybody's time. This evening look forward to talking to you that <unk>.
This concludes today's conference call.
You may disconnect. Your lines. Thank you for <unk> and have a pleasant day.
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Mmm.
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