Regional Management Corp. (RM) has delivered a strong start to 2024, reporting net income of $15.2 million and diluted earnings per share of $1.56 for the first quarter. The company's total revenue grew 6.6% year-over-year to $144.3 million, driven by a 7.0% increase in interest and fee income and a stable insurance income. This performance was achieved through a combination of prudent underwriting, strategic portfolio management, and disciplined expense control.

Business Overview

The company's net finance receivables stood at $1.74 billion as of March 31, 2024, down $27 million from the end of 2023 due to normal seasonal liquidation. The large loan segment, which accounts for 72% of the portfolio, grew 3.2% year-over-year, while the small loan segment increased by 7.6%. The company's strategic focus on higher-margin small loans has paid off, with the small loan portfolio growing by nearly $50 million, or 10%, since the middle of last year. This growth in the small loan segment, which carries a higher risk profile but also higher returns, has contributed to a 0.8 percentage point increase in the company's total revenue yield to 29.3% in the first quarter.

Credit Performance

Regional Management's credit performance remained relatively stable, with the 30-plus day delinquency rate improving to 7.1% as of March 31, 2024, from 7.2% in the prior-year period. The company's front book, which represents 78% of the portfolio, continued to perform in line with expectations, with a 30-plus day delinquency rate of 6.5% compared to 9.8% in the back book. The company's net credit losses of $46.7 million in the first quarter were modestly better than its outlook, and the annualized net credit loss rate was 10.6%.

To maintain a prudent approach during the current economic environment, Regional Management increased its allowance for credit losses to 10.7% of net finance receivables as of March 31, 2024, up from 10.6% in the prior-year period. This decision was driven by the company's consideration of more recent mixed economic indicators, including elevated inflation rates.

Financials

The company's disciplined expense management was a key contributor to its strong first-quarter performance. General and administrative expenses increased by only 1.9% year-over-year, with the annualized operating expense ratio improving to 13.7% from 14.0% in the prior-year period. This was achieved through a reduction in personnel expenses, which declined by 2.0% year-over-year, and the company's ability to leverage its growing loan portfolio.

Regional Management's interest expense increased by 4.3% year-over-year to $17.5 million, or 4.0% of average net finance receivables, due to a combination of higher average debt balances and a modest increase in the average cost of debt. However, the company's proactive interest rate management strategy, with 81% of its debt at fixed rates, has helped mitigate the impact of rising interest rates.

Outlook

Looking ahead, the company expects a sequential decline of approximately 50 basis points in its total revenue yield in the second quarter, primarily due to higher expected interest income reversals from net credit losses. For the full year 2024, the company maintains its guidance of a 40 to 50 basis point increase in total revenue yield compared to the prior year.

In terms of credit performance, Regional Management anticipates its delinquency rate to improve in the second quarter, consistent with seasonal patterns. The company also expects its net credit losses to be approximately $55 million in the second quarter as more of its back book loans roll to loss. The company plans to maintain its loan loss reserve rate at 10.5% at the end of the second quarter, subject to economic conditions.

Regarding expenses, the company expects its general and administrative expenses to be approximately $62 million in the second quarter to support its larger portfolio and continued targeted investments in its operations. The company's strong first-quarter performance on expenses, partially due to timing, has provided it with the flexibility to invest more in marketing in the back half of the year to benefit its 2025 results, assuming the economic conditions are conducive to faster growth.

Liquidity

Regional Management's balance sheet and liquidity position remain strong, with $478 million of unused capacity on its credit facilities and $169 million of available liquidity as of March 31, 2024. The company's funded debt-to-equity ratio stood at a conservative 4.0 to 1.0, providing ample capacity to fund its business operations and future growth.

Recent Developments

The company's geographic footprint has also been a key driver of its performance, with the expansion into 8 new states since 2020 increasing its addressable market by more than 80%. The company's newer branches, defined as those open for less than 1 year, have seen their average net finance receivables per branch increase from $2.3 million a year ago to $3.7 million as of the end of the first quarter of 2024.

Risks and Challenges

Despite the current economic uncertainties, Regional Management remains cautiously optimistic about the direction of the economy and the credit performance of its portfolio. The company will continue to prioritize credit quality over loan growth in the near term, while maintaining a strong balance sheet and ample liquidity to capitalize on growth opportunities when the economic conditions are more favorable.

Conclusion

Regional Management's strong first-quarter performance, disciplined execution, and prudent approach to managing its business during the current economic environment position the company well to navigate the challenges and seize the opportunities that lie ahead. The company's focus on higher-margin small loans, balanced with its low-risk auto-secured portfolio, its investments in technology and digital capabilities, and its commitment to delivering sustainable returns to shareholders make it a compelling investment proposition in the consumer finance space.