Thank you for standing by. This is the conference operator. Welcome to the Regional Management First Quarter 2023 Earnings Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. [Operator instructions] 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 and supplemental presentation, which were released prior to this call and may be found on our website @regionalmanagement.com. Before we begin our formal remarks, I will direct you to Page two of our supplemental presentation, which contains important disclosures concerning forward-looking statements and the use of non-GAAP financial measures. Part of our discussion today may include forward-looking statements, which are based on management's current expectations, estimates, and projections about the company's future and financial performance and business prospects. These forward-looking statements speak only as of today and are subject to various assumptions, risks and uncertainties, and other factors that are difficult to predict and that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guarantees of future performance and therefore you should not place undue reliance upon them. We refer all of you to our press release presentation and recent filings with the SEC for a more detailed discussion of our forward-looking statements and the risk 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 measure can be found within our earnings announcement or earnings presentation and posted on our website at regionalmanagement.com. I'd now like to introduce Rob Beck, President and CEO of Regional Management Corp.

Thanks, Garrett, and welcome to our first quarter 2023 earnings call. I'm joined today by Harp Rana, our Chief Financial Officer. Harp and I will take you through our first quarter results, discuss the actions we're taking to maintain the credit quality of our portfolio, and share our expectations for the second quarter and beyond, including our plans for continued quality growth. We had a strong start to 2023, as our team ably navigated a challenging economic environment. We earned $8.7 million of net income and $0.90 of diluted EPS in the first quarter by maintaining our focus on portfolio quality, expense management and strong execution of our core business. We continue to be highly selective in making loans within our tightened 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% down from year-over-year growth rates of 19% in the fourth quarter and 31% in the first quarter of 2022. 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. Our credit tightening actions over the past several quarters have improved our credit profile and benefited early stage delinquencies and roll rates. The percentage of originations in our top two risk ranks 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. Our auto-secured portfolio has also continued to grow as a percentage of our overall portfolio,…

Thank you, Rob, and hello, everyone. I'll now take you through our first quarter results in more detail. On Page three of the supplemental presentation, we provide our first quarter financial highlights. We generated GAAP 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. Turning to Pages four and five, while our loan products continue to experience strong demand, our credit tightening actions and collections focus had the intended effect of reducing total originations by 7% from the prior year. By channel, digital, direct mail and branch originations were down by 15%, 12% 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 six displays our portfolio growth and product mix through the first quarter. We closed the quarter with net finance receivables of just under $1.7 billion down $23 million from year-end from 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 of the end of the first quarter, our large loan book comprised 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…

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 tightened credit box, mostly 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, 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?

Certainly, we will now begin the question-and-answer session. [Operator Instructions]. The first question comes from John Hecht from Jefferies. Please go ahead.

Afternoon guys, and thanks for taking my questions. How you guys get some really good detail for, sort of, the upcoming quarter and that's helpful, and then some detail over the course of the year? But I'm just wondering, given the mix and the tightening going on, how do we think about yield trends kind of later this year and into next year overall?

Yes. John, how are you? Thanks for joining the call. Yes. We expect yields to modestly improve over the course of this year. I'm not going to give you guidance for next year because obviously the mix of 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 increase 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 re-pricing 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 what the ALL guidance you've given or where the ALL is and what discussion on ALL, is it like what 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 to expectations?

Yes. And so we've guided to 11.6% to 11.7% here in the second quarter, actually no.

No. No. No. We got it to 10.6% to --

I'm sorry, I'm sorry.

Yes, 10.6% to 10.7% in the second quarter. And in terms of, there is number of different variables that go into the allowance calculation that you specifically asked about the unemployment. So, our model has unemployment in fourth quarter going to 6.3%. Previously last quarter, we had talked about it going to 6.7%, and we do know that that may be a little bit higher than others have assumed. But given the macro headwinds, we think that that's a prudent place to be, and we're very comfortable with our reserve at 11%.

Yes, that makes sense. And then final question is, you've done some branch optimization, you're opening branches in new markets. What do we -- just given other opportunities for consolidation and market expansion. Do you kind of envision having more stores than current at the end of the year, similar amount of stores or any guidance you can give us there just in terms of the store kind of --

Yes, we're expecting to open up five to seven new branches over the course of the year. There may be some consolidations that happen, but it's really kind of BAU activity as leases come up for renewal. So, we're really not giving a lot of guidance there. What I will tell you in, it's in the supplement. We are seeing much higher ENR per branch, which is driving more efficiency, and that's a result, the larger branches that we're putting in the new states. In fact, I think if you look at the three year -- one year to three year cohort which includes some of the new markets as well as the one year cohort, they're up substantial. And so, we're now averaging for the entire footprint $4.9 million average balance per branch. But I will tell you in some new states, and really don't want to give what those states are. We have averages per branch that are north of $6 million. So, our larger branch model is working well.

Great. Perfect. Thanks guys.

Thanks, John.

[Operator instructions]. There are no more questions in the queue, and this concludes the question-and-answer session. 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 tightened 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 and then key investments in technology, digital and data analytics. And we believe that these investments and the way we're ably managing through this period of time positions us to be even stronger company through the economic cycle and deliver attractive returns to shareholders in the future. So, thanks again for joining and have a good evening.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.