Regional Management Corp. (RM) Q1 2017 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and thank you for standing by. Welcome to the Regional Management Corporation First Quarter 2017 Earnings Conference Call. At this this, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's presentation, Mr. Garrett More [ph] -- I'm sorry, Mr. Garrett Edson. Sir, please begin.

Thank you, Howard and good afternoon. By now, everyone should have access to our earnings announcement and slide presentation, which was released prior to this call and which may also be found on our website at regionalmanagement.com. Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements, which are based on the expectations, estimates and projections of management as of today. Forward-looking statements in our discussion are subject to various assumptions, risks, uncertainties and other factors that are difficult to predict and which 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 undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks and uncertainties that could impact the future operating results and financial condition of Regional Management Corp. We disclaim any intentions or obligations to update or revise any forward looking statements except to the extent required by applicable law. I would now like to introduce Peter Knitzer, CEO of Regional Management Corp.

Thanks Garrett and welcome to our first quarter 2017 earnings call. As always, thanks to everyone for participating this afternoon and for your continued interest in our company. I'm here with our CFO, Don Thomas, who will speak later on the call. I'm also here with some members of our financial team. For those of you with access to a computer or mobile device, we have once again posted a supplemental presentation on our website at regionalmanagement.com to provide additional color to our remarks. Our first quarter was characterized by continued solid execution of our long-term growth strategy. Our team is focused on our three main areas; growing the business within our existing footprint, controlling credit, and building out our new operating platform. As a result, we accomplished what we needed to, to keep the ball moving down the field. As you can see on slide three, finance receivables at the end of the quarter totaled $695 million. This was $23 million or 3% less than where we stood at the end of the fourth quarter and completely in line with normal seasonal liquidation of loan portfolios throughout the industry. The only difference this year was that the liquidation started about four weeks later than normal due to the delayed processing of tax refunds, which shifted our inflection point where we returned to portfolio growth from March to April. For the first quarter, we recorded net income of $7.6 million, an increase from $5.2 million in the prior year period, partially aided by a $1.5 million tax benefit from share-based compensation in the quarter, which relates to the adoption of a new accounting standard. Net income was up 47.5% in the first quarter of 2017, was a bit more than half of that increase due to the tax benefit. Diluted EPS for the quarter was $0.65 versus $0.40 in the prior year period. Our topline performance continues to hum along as we grew both revenue and our interest and fee income by 16%, driven by another double-digit increase in our average core portfolio receivables. Approximately $2.2 million of our revenue increase is due to a temporary shift of certain insurance claims, expensed into the provision for credit losses during a transition in the company's insurance carrier. As expected, our provision and net credit losses were elevated for two reasons. First, our strong portfolio growth of $88 million versus the first quarter of 2016. Second, as I noted on our last call, the higher amount of late-stage delinquencies we experienced at the end of the fourth quarter of 2016 rolled to loss in the first quarter. Additionally, as I just mentioned, the provision for the first quarter of 2017 contained an additional $2 point million [ph] due to the change in an insurance carrier. This line swing is temporary and will normalize by the end of 2017. It's important to note that these line swings ultimately have zero impact on our net income. Importantly, we worked diligently to materially reduce our delinquencies during the quarter and as a result, we expect lower net credit losses in the our next couple of quarters. Let me give you an update on our system conversion. The NLS system work is progressing very nicely. I'm pleased to note that we have successfully built out our core functionality for NLS loan origination and servicing system, including the online customer portal, texting and imaging capabilities. We are on schedule to resume converting branches in our remaining states in the second quarter and are on pace to fully convert to the new system by the end of 2017. In terms of our brand strategy, we talked on our last call about our hybrid approach to growth via increased marketing spend to support our current branches and targeted de novo expansion. Our same-store receivable growth was very strong at 13% in the first quarter. We accomplished that without a major marketing push as our marketing expense was actually down in the quarter on a year-over-year basis. Keep in mind that we still expect to spend a couple of million dollars more on marketing in 2017 versus 2016, as we work to drive additional traffic to our branches. Part of our marketing efforts will be on the digital front, where we are working to generate more digital leads as well as improve our online experience. We believe we will make more progress this year on digital leads, while we continue to test and learn on our online platform. On the de novo front, we added five new branches in Virginia during the first quarter and still expect to add five to 10 more de novo branches in that state before the end of the year. On our last call, we announced an ongoing initiative to expand our centralized collection capabilities to handle more of the effort for late-stage collections. In the first quarter, we added to the team in place and will continue to expand the group during the second quarter. We're confident that this will lead to improved overall collections in the future. I'll now turn the call over to Don to provide a little more color on the financials.

Thanks Peter and hello to everyone on the call. On slide five, we track the seasonality of our ending net receivables and net income. Ending net receivables increased double-digits from the prior year period for the eighth consecutive quarter, increasing 14% in the first quarter of 2017 to $695 million. Moving to slide six, you can see our product category trends. Our core loan products at March 31, 2017 were $105 million greater than the prior year period. And our large loan category now stands at $242 million or 35% of our total portfolio. Meanwhile, our small loan category saw a $25 million or 8% increase from the prior year and was down 6% from the end of the fourth quarter due to normal seasonality. Our other loan categories were down $7 million sequentially and $17 million from the prior year, primarily due to the ongoing liquidation in our automobile loan category. As noted previously, we're continuing to focus our growth efforts on our core loan products, while our auto and retail portfolios will remain complementary products to meet our customer's needs. We continue to offer the auto loan product to our customers as many want to take advantage of it, though we don't expect the volume associated with it to stem the current liquidation during 2017. Turning to slides seven and eight, the first of which is for total revenues and the second for interest and fee income. We break down our revenue into its main components. The 16% year-over-year revenue growth rate was driven by a 15% increase in our average finance receivables. And with our existing branch footprint, as Peter mentioned, we drove same-store finance receivables growth of 13%. We're continuing to focus on maintaining that double-digit same-store growth, which in time should begin to manifest in further improvement in operating leverage. From a total revenue yield perspective, we generated a 90 basis point increase sequentially, despite a 40 basis point decline in the interest and fee yield. Thus the yield increase was attributable to insurance income, which Peter touched on in his remarks. The decrease in interest and fee yield is consistent with a normal seasonal trend, whereby tax refunds are used to repay higher-yielding loans. And consistent with prior years, we expect yield to move up again as new loan volume is added to the portfolio. Moving to the top of slide nine, our provision for credit losses of $19.1 million in the first quarter was up $5.3 million from the prior year period, but slightly down on a sequential basis. As Peter mentioned, $2.2 million of the increase was due to an insurance carrier change. A portion of the increase in provision comes from the change in our allowance for credit losses. In the first quarter of 2016, we released $1.2 million of allowance versus the release of $0.3 million in the first quarter of 2017, which increased provision in this quarter by $0.9 million versus the comparable prior year period. The smaller release was mainly due to reserves associated with the change in insurance provider. As a percentage of ending financial receivables, the first quarter of 2017 allowance was 5.9% versus 6% for the first quarter of 2016. Net credit losses were up $4.4 million over the first quarter of 2016, and up slightly sequentially. We had expected higher net credit losses due to the elevated late-stage delinquency at the end of the fourth quarter of 2016. Also a portion of the rise in net credit losses in the first quarter of 2017 was due to the transition in our insurance provider. At the bottom on slide nine, we show the trend of our net credit losses. As expected, higher net credit losses in the first quarter of 2017 cost our annualized net credit loss rate as a percentage of average finance receivables to rise to 10.9%, up 120 basis points year-over-year. The losses from the insurance line accounted for 54 basis points of this increase. Turning to slide 10, which show our seasonal pattern of delinquency. Our total delinquency of accounts one or more days past due as of March 31st, 2017 was 15.7%, which is a historic low for the company and is the fifth consecutive quarter that this measure has been below 19%. Our 30-plus day delinquency levels stood at 6.5%, an increase from 6.2% in the first quarter of 2016, but down materially from 7.4% at the end of 2016 and consistent with our normal seasonal pattern. Thanks in part to the reduction of certain segments that were rolling to losses at higher rates, our delinquency profile has stabilized and we are expecting our net credit losses to trend lower in the second and third quarters of 2017 versus the first quarter. However, the total provision for credit losses, inclusive of insurance claims over the next couple of quarters, should remain around our first quarter level as it will be driven by portfolio growth. Moving on to slide 11. We continue to keep a close eye on our operating expenses. G&A expense of $31.5 million in the first quarter of 2017 was up $1.6 million from the prior year period, and up $2.6 million sequentially due in part to an increase in personnel costs as we moved forward to centralize our collections. Loan system conversion expenses in the quarter were approximately $400,000 as we focused on enhancing the functionality of the system. I'll note for you that while we expect to continue to give color as to quarterly system conversion expenses, for financial reporting purposes, we are now considering them as part of our normal operations, and thus, will not be reporting such expenses as non-GAAP expenses on a go-forward basis. Annualized G&A expenses as a percentage of average net receivables was 17.7% for the quarter, down from 19.3% in the prior year period, but up from 16.3% sequentially. As we noted on our previous call, consistent with our seasonality, we expected to see a sequential rise in this figure due to lower seasonal loan originations, which drive lower deferrals of salaries associated with those originations. We would expect to see lower G&A expenses as a percentage of receivables in the back half of the year, consistent with normal seasonality. That concludes my remarks and I'll now turn the call back to Peter to wrap-up.

Thanks Don. To sum-up, the first quarter of 2017 was solid on all fronts as we accomplished what we needed to do and establish a good springboard for the rest of the year. We kept seasonal liquidations low and continue to grow our top line and finance receivables by double digits on a year-over-year basis as well as growing our bottom line. We put the high delinquencies in the fourth quarter behind us, ending the quarter with our lowest delinquency rate on record for the company. And we continue to build our infrastructure as we begin the next phase of our NLS conversion process and start to integrate our online initiatives into our overall operations. We continue to build the foundation and set the stage for ongoing long-term profitable growth. Thanks for your time and interest and I would like to now open the call up for questions.

[Operator Instructions] Our first question or comment comes from the line of David Scharf from JMP Securities. Your line is open.

Hi, good afternoon. Thanks for taking my questions. I'm wondering on the credit side. Setting aside all the very helpful quantitative analysis you provided, can you give us a little color on what you're observing in terms of consumer behavior, possibly trends and first payment defaults, if anything, of that nature that tends to be a leading indicator? It's been an interesting earnings season in terms of some conflicting conclusions about credit normalization depending on who the issuer is. And I'm curious what you guys are seeing on the ground in terms of consumer health?

So David, our numbers look good in the context of -- we brought down the high delinquencies that rolled through from the fourth quarter. First quarter delinquencies are the lowest that we have experienced that anyone knows of in the company's history. In terms of first payment defaults, they look in line. As I mentioned on our call in the fourth quarter that we did find some vintages in our large loan portfolio, where we needed to change some of our criteria, that criteria is in place and has been in place for some time. And we expect our credit losses to improve sequentially in the second and third quarter. In terms of the health of the consumer, we're seeing that our consumers are doing reasonably well.

Got it. And given the fact that first payment defaults were generally in line and based on the trends you highlighted in delinquencies and pretty much a record low level. Not that you need to, given how strong same-store balances grew, but as you take in all of these metrics, is there any thought that you would potentially loosen up under -- did you feel an opportunity to loosen up underwriting standards just a little bit based on how low delinquencies are trending now? I'm curious what you think the ideal level, where that number should be and whether that's adjusted, maybe there is more growth opportunity?

Well, the answer is I don't think we're going to be losing our credit standards in the near term. We've seen other asset classes, whether it's auto or credit cards, see some stress in terms of their delinquencies and charge-offs. And we're going to continue the course of being prudent in managing our cost of credit. Now, if we see prolonged low delinquencies then that's really an option. But I think in this juncture, I do not see loosening our credit standards.

Got it. And just -- and in terms of some of the guidance commentary directionally, obviously, losses were elevated as you communicated a quarter ago, as a lot of those late-stage delinquencies rolled. When we think about the magnitude of where the loss rate should trend in the second and third quarter, I know you said it would trend downward, but should we look to a year ago, where there was a roughly 100 basis point decline from Q1 to Q2, same thing a couple of years ago, to trying to get a little sense or order of magnitude here?

I would say that we'll not move down that much. It will move down gradually. As I think I mentioned, if I didn't, I'll mention it now. In the fourth quarter call, a lot of what ran through to loss from our late-stage delinquencies, we're still experiencing some in the early part of this quarter and should run through. So, I don't anticipate a 100 basis point decline. As Don mentioned, we expect our total provision to be in line in the second quarter with first quarter as we grow. We're going into our growth season, as we've experienced first quarter liquidations in line with the seasonality of the business.

And I was going to ask about that provision -- that comment that Don made on provision expense. Should we be thinking about that Q1 provision level as the GAAP number you reported or should we be backing out the $2.2 million?

We'll continue to have some of the insurance-related items coming through the provision, David. So, my comment was including those items. Somewhere in the first quarter level of $18 million to $19 million.

Got it. And I'm going to -- and I'm just going to finish-off with an embarrassing question. Can you help me understand better this insurance movement, seems to impact an awful lot of line items? And I'm really unclear based on how generically described it was just as what's going on here?

Yes. David, I'll keep it high level, since it doesn't impact the bottom-line at all. But in switching insurance carriers, there's a certain timing, losing coverage for an ill carrier and picking up coverage from the new. And the coverage didn't uniformly bleed off as it is uniformly coming in. So, we had a little bit of a gap. And for few quarters here, we'll have a little bit of line swing impact.

Got it. Okay. Thank you very much.

Thank you. Our next question or comment comes from the line of John Hecht from Jefferies. Your line is open.

I think I'll try to put the lid on that last one. Do I read this as your insurance income will be elevated, but there'll be an offset provision that they nullify each other. So, we kind of shouldn't worry about trying to account for this change?

That's right, John.

Yes, that's exactly right, John.

Okay. Thank you. The -- just -- I guess going through a little bit of [Indiscernible], the G&A is still very controlled, obviously, but it -- is this the right kind of base case to think about through the year? Was there some kind of small other -- call it Nortridge and implementation items or anything in there that we should think about and how they fluctuate from here for the rest of the year?

I think that what Don has said in reporting just GAAP G&A expenses going forward is we feel that we're in a steady state level from an expense standpoint. We'll have some incremental expenses associated with building out our centralized collections. We'll also have lower expenses as we go into our growth season as we differ some of our origination costs. So, I don't foresee any material increase or decrease in our expenses going forward.

Okay. And then, obviously, you've been -- the growth pattern of the large installment loan is making that a much more balanced product with respect to the small installment loan. Is there a target kind of composition you're going forward? You're just -- whatever the customer wants or whatever fits your credit kind of quality the time you see it. How do we think about that mix going forward?

Your comment is spot on in terms of what the customer is looking for and what the customer qualifies for from a credit perspective and income perspective. So, we do foresee because the large loan market is much larger. Large loan market is much larger, yes, than the smaller loan market that we will continue to grow at a higher rate than in our small loans. That's a function of opportunity. And -- but we like both loans depending upon the customer's qualifications and their needs.

Okay. Thank you. And then last question I have is Nortridge, I mean, what's fully implemented? How should we think about the opportunities or benefits from it? Is it better underwriting overall? Is it better efficiencies and scale? Better servicing -- or what types of, I guess, long-term benefits should we see when that's been fully implemented?

Well, if I step back ParaData, which is the legacy system that we're migrating from, is a servicing platform. So, we're moving to Nortridge, which is both an origination and servicing platform. So our ability to underwrite using more sophisticated criteria and score cards will improve substantially. We will also be able to understand the dynamics of our customers in a more granular manner because we're going to have better information and better data on them. Additionally -- and we're experiencing this already, and states like North Carolina, Virginia and New Mexico, where we'll take electronic payments. And that is both the convenience to our customers as well as a quicker means for us to access payments via the phone and shortly, via the web as we open up our customer portal. So, we think that there are a lot of benefits and will free up our field personnel's time to serve our customers in a more fulsome manner. So we think there are a lot of advantages that will come when we fully roll out the Nortridge platform.

Wonderful guys. Thanks very much.

Thank you. [Operator Instructions] I'm showing no additional questions at this time. I'd like to turn the conference back over to management for any closing remarks.

We want to thank everybody for your interest and your time today. And we look forward to serving you on the future and thanks for your time and interest. Bye now.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.