Thank you for standing by. This is the conference operator. Welcome to the Regional Management Second Quarter 2020 Earnings Call [Operator Instructions]. I would now like to turn the conference over to Garrett Edson of 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 Web site at regionalmanagement.com. Before we begin our formal remarks, I will direct you to Page 2 of our supplemental presentation, which contains important disclosures concerning forward-looking statements and the use of non-GAAP financial measures. Part of our discussion today may include forward-looking statements, which are based on management's current expectations, estimates and projections about the company's future financial performance and business prospects. These forward-looking statements speak only as of today and are subject to various assumptions, risks, uncertainties and other factors that are difficult to predict and that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guarantees of future performance, and therefore you should not place undue reliance upon them. 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 risks and uncertainties that could impact the future operating results and financial condition of Regional Management Corp. Also, our discussion today may include references to certain non-GAAP measures. A reconciliation of those measures to the most comparable GAAP measure can be found within our earnings announcement or earnings presentation and posted on our Web site at regionalmanagement.com. I'd now like to introduce Rob Beck, President and CEO of Regional Management Corp.

Thanks, Garrett, and welcome to our second quarter 2022 earnings call. I'm joined today by Harp Rana, our Chief Financial Officer. We continue to deliver consistent, predictable and strong results in the second quarter, including controlled growth of our high-quality loan portfolio. We finished the quarter with $12 million of net income and $1.24 of diluted EPS. We grew our loan portfolio to $1.53 billion, slightly ahead of the guidance we provided in our last call, and we grew our active accounts by 19% from the prior year. We expanded operations to the State of Indiana in the second quarter. And just last week, we opened our first branch in California, the world's fifth largest economy and a 33% increase in our addressable market. We continue to invest in our growth initiatives and capturing customers in new and existing markets, while also expanding our relationship with existing customers by graduating them to larger loans. For the fifth straight quarter, we logged double-digit year-over-year growth in our net finance receivables and quarterly revenue, which were up 29% and 23%, respectively. At the same time, we continue to manage our expenses tightly, driving sequential declines in G&A expenses for the last two quarters and causing our year-over-year revenue growth to outpace our expense growth by a ratio of 3:1. We have consistently demonstrated our ability to grow our portfolio and account base in a controlled and profitable manner. As pleased as we're about our second quarter financial and operating results, we're keenly focused on managing the credit quality of our loan portfolio while controlling our expenses as we face an uncertain economic environment. We've invested over the last several years in derisking our business by improving our custom underwriting models, expanding our collection staff and capabilities and shifting 85% of our portfolio…

Thank you, Rob, and hello, everyone. I'll now take you through our second quarter results in more detail. On Page 3 of the supplemental presentation, we provide our second quarter financial highlights. We generated net income of $12 million and diluted earnings per share of $1.24. Our solid results were driven once again by high-quality portfolio and revenue growth, disciplined expense management and the benefit of interest rate caps, partially offset by the expected year-over-year increase in our base reserve build and provision for credit losses. Year-to-date, we produced annualized returns of 5.2% ROA and 26.3% ROE. Turning to Page 4. Despite a number of credit tightening actions and higher risk segments, branch, digital mail and total originations hit record highs for second quarter as demand remained strong and we focus our efforts on larger, high-quality loans. We originated $277 million of branch loans, 5% higher than the prior year period. Meanwhile, direct mail and digital originations of $149 million were 31% above second quarter 2021 levels. Our total originations were $426 million, up 13% year-over-year. As you can see on Page 5, we continue to grow our digital channel through affiliate partnership expansion. As a reminder, all of our digital originations are sourced from affiliate partners or directly from our website and with the exception of loans originated through our end-to-end lending pilot, all digitally sourced loans are underwritten in our branches using our custom credit scorecard. In the second quarter, despite eliminating one of our higher-risk affiliates, digitally sourced originations ended at a record $54 million, up 49% from the prior year period and representing 33% of our new borrower volumes in the quarter. We continue to meet the needs of our customers through a multichannel marketing strategy. Page 6 displays our portfolio growth and product mix through…

Thanks, Harp. And as always, I'd like to acknowledge the excellent work of our team members who delivered another set of strong results in the second quarter. Our focus is now squarely on maintaining the credit quality of our portfolio while continuing to execute on our long-term strategic growth plans. The economic environment is difficult, but the labor market remains strong and our customers are resilient. The investments we made over the last several years to derisk our business by improving our credit models, shifting to a higher quality loan portfolio and investing in our collection staff and capabilities should prove valuable in the coming quarters. Having begun our credit tightening actions in the fourth quarter, we have a jump start on any potential increase in unemployment that may materialize later this year or next year. As we've done in the past, we'll manage our expenses tightly while continuing our investments in those things that will generate the greatest returns in the form of controlled, disciplined portfolio growth, improved credit performance and greater operating leverage. Ultimately, these efforts will position us to sustainably grow our business, expand our market share and create additional value for our shareholders. Thank you again for your time and interest. I'll now open up the call for questions. Operator, could you please open the line?

[Operator Instructions] The first question is from John Hecht with Jefferies.

I appreciate all your thoughts and details and thanks for taking my questions. First question is, you talked about -- you gave us some near-term kind of magnitude of yield change -- given your kind of credit management and thoughts on where you want to kind of deploy capital, where kind of -- where might that go over the course of the next four or five quarters, or can you give us just a sense for where that might balance out?

So John, I'm going to flip that one to Harp to talk about the yield change versus prior year. Harp, if you want to cover that one and then we can kind of discuss about way forward.

So John, if you look at the yields of 33.4% and you look at them year-over-year, you're probably looking at that 210 basis point decrease versus second quarter of '21. And what I want to point out to you is that second quarter of '21 actually increased over first quarter of '21. So what you had in the second quarter of '21 was a benign credit environment. So when you're looking at that 210 basis points in the second quarter of 2022, what you're seeing there is a dual impact, right? So you're seeing no longer a benign impact on credit in the yield. And then you're seeing the normalization of credit in that 33.4% number. So that's why the 210 basis point is probably what you're looking at. The guidance that we're giving at this point is for third quarter, and we imagine will be 60 basis points lower than where we are in second quarter as credit normalization continues to work through the portfolio.

And John, I'd just add to that, that the 210 basis points, about two thirds of that was related to the credit with the remainder due to portfolio mix. So a large part of where the yield ends up is where we end up seeing the economic environment going. And look, we have some pricing power, some things that we can do, but that takes time to feather through the portfolio. And we're somewhat unique versus some of our other competitors who have capped their rates at 36%. When we see an opportunity if the environment improves later next year, we have the opportunity to lean back into those higher risk segments and offset kind of the mix impact that we kind of self did to ourselves, if you will, by tightening credit. So I think that number is one that can normalize back up. And if you look at over the trend over the prior years, we're in that 33%, 34% range, give or take.

And then second question is more on, I guess, maybe going a little deeper in the credit environment. Clearly, we've heard this around from other market participants that the call it the lower credit bands have been, they're getting more impacted by inflation and as a result of having a harder time servicing and debt. I'm wondering if -- are you seeing us kind of creep up to -- like if you give credit scores, are you seeing a creep upward in your credit bands? Or is it seen pretty contained thus far into this inflationary period?

Well, I think for us, the industry overall has seen to cross over that 2019 delinquency level in the second quarter, if not earlier. We're still 10 basis points below that. We talked about the two portfolios or the two segments that we cut. The digital affiliate was performing poorly because we believe there was some adverse selection in that portfolio. And the impact of just that portfolio of $62 million, 4% of our book was about 50 basis points on our delinquencies in the second quarter and about 90 basis points on our NCL rate in the second quarter, which was still below prepandemic levels. So the rest of the portfolio through the second quarter performing well in the current environment. I think as you look ahead, there's a lot of uncertainty. I mean, we see some positives, in that gas prices have come back down after going up 3%. Despite more layoffs in the news, there's still 11 million open jobs. There seems to be a lot more open jobs for lower wage work rather than what you would call white-collar jobs. And so there's some positives. And obviously, the negative is inflation is still running hot. So we're watching it closely. That's why we're taking a prudent stance on where we're looking to hold our reserves until we get a better sense of where things are headed.

And then lastly, you got a dividend now, you've been pretty consistent with the buyback recently. How do we think about the balance of capital? I mean, is the capital return a higher priority now for you, or how do we just think about where that sits in the prioritization stack given the change in economic environment?

Well, John, we have these conversations every quarter with our Board in terms of shareholder returns and how we allocate our capital. The prudent thing in this environment is to obviously make sure that we have the reserves for any potential uptick in unemployment. That's why we've held on to 11% rate on CECL and plan to hold on that through the end of the year. From a prudent thing to do, I guess, if you look at JPMorgan, who's cut their buybacks than other large banks, I think that we'll be evaluating what the economic environment is like as we consider additional buybacks. Obviously, we did announce our $0.30 dividend this quarter and continuing to return capital to shareholders in that way.

[Operator Instructions] The next question is from John Rowan with Janney.

Just one quick question for me. The charge-off guidance sequentially puts you at about $35 million charged off in 3Q. And I believe, Harp, you said $11 million base reserve increase. So I'm assuming that that's just to fund your 11% reserve given the growth sequentially in the third quarter. Does that mean that we're at about a $46 million charge-off -- provision in 3Q?

Yes.

And I just want to add to that, because I think it's important is the reserves we built in the second quarter were solely for the growth of the portfolio. It was not for deterioration in credit. And I just think that's important in terms of -- from an overall industry standpoint, we had 11% reserves, and we just built at 11% for the growth of the portfolio and not anything for portfolio deterioration.

This concludes the question-and-answer session. I would like to turn the conference back over to Rob Beck for any closing remarks.

Thanks, operator, and thanks, everyone, for joining. Look, in summary, we had a strong quarter. I think the highlights were continued controlled growth as we've been tightening our credit since last year, along with our tight expense management, and that helped produce solid results. Overall, our portfolio quality has improved since 2019 as we've shifted our mix to higher quality loans. This helped to keep both our delinquencies and NPLs below 2019 levels this quarter even though today we have a higher inflation and negative GDP growth compared to 2019. So the environment is much different. Per my earlier comments, our higher rate -- higher risk portfolio has normalized. These customers appear to be most impacted by inflation. But the remainder of our portfolio continues to perform well in the current environment with both delinquencies and NCL rates below pre-pandemic levels at the end of the second quarter. But in the face of normalizing credit -- uncertain environment, we will continue to manage our expenses tightly while still investing in those strategic growth initiatives, which we know are critical to our future success and the creation of additional shareholder value. So I appreciate everyone's time today. Thank you very much, 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.