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Regional Management Corp. (RM)

Q1 2018 Earnings Call· Tue, May 1, 2018

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Transcript

Operator

Operator

Thank you for standing by. This is the conference operator. Welcome to the Regional Management First Quarter 2018 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Garrett Edson, Senior Vice President, ICR. Please go ahead.

Garrett Edson

Analyst

Thank you, 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. The 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.

Peter Knitzer

Analyst

Thanks, Garrett, and welcome to our first quarter 2018 earnings call. As always, I want to thank 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've once again posted a supplemental presentation on our website at regionalmanagement.com to provide additional color to our remarks. Overall, in the first quarter of 2018, we continued to strongly execute and remain on track to achieve sustainable, long-term, profitable growth. We generated another solid quarter of top line performance, delivered stable-to-improving credit metrics, and we remain disciplined with respect to our operating costs. Further, we've now been through a few months with our branch network fully converted to our new operating platform and are very pleased with its performance. We've begun to implement new capabilities across our branches, that, we believe, will bolster our sales and marketing efforts, credit performance and efficiency. Turning to Page 3, for the first quarter, we reported diluted EPS of $0.72. We generated year-over-year revenue growth of 10.3%, driven by $110 million or a 15.8% increase in finance receivables. Our core small and large loan business grew by 25.3% or $146.5 million versus the prior year period. This represents our seventh consecutive quarter of double-digit revenue growth and 12th consecutive quarter of double-digit growth in finance receivables. While the first quarter is typically characterized in the industry by portfolio liquidations due to consumers paying down loans with bonuses and tax refunds, we only saw a portfolio liquidation of $12.5 million or 1.5%, and we actually grew our large loan portfolio on a sequential basis. Provision for credit losses…

Donald Thomas

Analyst

Thanks, Peter, and good afternoon to everyone on the call. Turning to Slide 5. The top chart shows that our net income for the first quarter of 2018 of $8.6 million was up 13% compared to $7.6 million in the first quarter of 2017. Net income for the first quarter of 2017 was boosted by a $1.5 million tax benefit from share-based compensation, while net income for the first quarter of 2018 was positively impacted by approximately the same amount from the Tax Cuts and Jobs Act of 2017. Looking at the bottom of the page, the $8.6 million of net income translates into diluted earnings per share of $0.72 based on a share count of 12 million. Picking up on Slide 6, our ending finance receivables at March 31, 2018, were $805 million. This represents a nearly 16% increase over the prior year amount and marks the 12th consecutive quarter with double-digit growth for ending finance receivables. Notably, our finance receivables contracted by only $12.5 million or 1.5% from the end of 2017 versus our historical trend of being down 3% or more in the first quarter of every year. The improvement in 2018 is the result of the growth in our large loan portfolio, which more than offset the liquidation in our small loan portfolio. You can see this on Slide 7, where we break out the components of our ending finance receivables. As of March 31, 2018, core finance receivables stood at $724 million, up $146 million or 25% from the prior year period and now represent 90% of the total portfolio. Our large loan portfolio continues to drive most of our growth, as the portfolio increased $122 million or 50% from the prior year and rose nearly 5% from the end of the fourth quarter. The…

Peter Knitzer

Analyst

Thanks, Don. To sum up, as we closed out our first quarter, we're positioned right where we want to be. Our core small and large loan portfolios continue to drive growth. Credit remains stable to improving, and the investments we made over the past couple of years are beginning to manifest themselves in our operations and results. Moving ahead, we're excited to enter two new states, Missouri and Wisconsin in the second half of the year, as we build out our hybrid growth strategy. We also expect to complete our first securitization in the coming months, and we continue to expect to achieve operating leverage in 2018, leading to margin expansion during the year and enhanced profitability over the longer term. Our team has done a tremendous job over the past couple of years, positioning us to deliver long-term shareholder value. Thanks for your time and interest. I'd like to now open up the call for questions.

Operator

Operator

[Operator Instructions]. Our first question comes from David Scharf with JMP Securities.

David Scharf

Analyst

I was wondering, if I can start with a few questions on the branch network growth. I mean It looks like at the high end of your new store guidance that you're growing the network by almost 10% in just the second half of the year. I'm just curious, given that the company sort of took a couple of year hiatus, I don't know if there was a dedicated team previously that focused on all of the logistics around store openings, leases and the like, but can you give us a sense for when we head into next year, just from an operational standpoint, what you feel maybe the upper limit is of a realistic number of units you can open annually?

Peter Knitzer

Analyst

It's Peter. Thanks for the question. I wouldn't say that there is necessarily an upper limit, but as you know, we haven't opened a lot of branches during the NLS conversion. We think we have the capacity, if we can open 25 to 30 in two quarters, to open up more. We're going to be prudent as we go through our plans for 2019. What we have done, which we're pleased with, we have a team -- yes, we have folks -- focused on our new branch openings, but we've take a little more science to what we're doing. We have new methodology of evaluating what states and what geographies and what MSAs would be best in which to open them up. So we've said before that Missouri is a good state. And through our analysis, we've identified that Wisconsin's a really good state for us as well for a couple of reasons. One, the rates in both states allow us to pursue our small and large loan strategy, which is really important to our growth, and we also just hired, and it would be announced today or tomorrow, a new Vice President of the Midwest who has 30 years of experience in consumer finance, so we have the capability. We want to be prudent about pacing it, and we're using a more precise methods in identifying where to open new branches.

David Scharf

Analyst

Got it. And may be shifting just to the recent results. You mentioned the much smaller contraction seasonally than we typically see during tax refund season. Is your sense that's entirely related to the mix shift towards large loans? Or do you kind of -- have you noticed anything different in just consumer payment patterns and demand?

Peter Knitzer

Analyst

We haven't seen anything in particular with respect to consumer payment patterns and demand. Demand is strong. Irrespective of that, first quarter in small loans tends to be a quarter in which consumers liquidate the tax refunds and bonuses. Because large loans now comprise over 50% of our core loans, they tend to liquidate less. In fact they grew in the first quarter, so we really do attribute most of this to mix shift. Though consumer demand is still strong.

David Scharf

Analyst

Got it. And as we think about modeling the balance of the year. Obviously, the product mix shift impacts your blended yield, but I'm wondering, just focusing on some of -- the small and large products, the small loan category, it seems like the yield itself is kind of coming down sequentially. It was down to 40%. Should it stabilize around there? Or is there -- or is it a function of kind of the mix geographically that's bringing that down? Or are we pretty safe and sort of flatlining, maybe, a 40% APR assumption going forward?

Peter Knitzer

Analyst

Yes, David, it's going to come down a little bit, not as much as it has over the past year. What we have found is, in the small loan category, we're able to make larger and small loans where our credit profile is significantly improved, and we have more operating expenses, because we'll have fewer loans per receivable, so we've studied this very closely. And we feel that the larger/small loans with a slightly lower APR are quite profitable, so we'll see a little bit more yield decline but not as much.

David Scharf

Analyst

Got it. And then lastly, Pete, and I'll get back in line. On the recovery side, as we think about the impact of Centralized Collections, are the Centralized operations just focusing on late-stage delinquencies? Or -- I mean, trying to understand, are the branches still conducting some delinquency management functions? Or are they -- or is the idea that they're entirely freed up to generate and service new business?

Peter Knitzer

Analyst

The Centralized Collections is focused on late-stage delinquencies. What we have found is that early-stage delinquencies, either 1 to 60, 1 to 90, depending upon the geography. They tend to be sloppy payers, and they tend to be more part of the servicing responsibilities of the branches. When you get in the late stage, it's much more -- we found it much more efficient and effective to centralize that function. And that's why we've been building up over the past nine months our Centralize capabilities.

Operator

Operator

The next question is from John Hecht with Jefferies.

John Hecht

Analyst

Congratulations on a good quarter. I just want to take it a step back. We've had a lot of earnings reports, and for the first time in a long time, I think everybody's virtually beat on provision. Most have also beat on charge-offs and then you guys followed suit. I'm wondering, from your perspective, is there enough time for you to assess what's going on in consumer credit land? Is this just improvements in underwriting? Is there a more favorable competitive environment? Do think this is some of the ramifications of tax reform? Or do you have any opinions on that at this point of the year?

Peter Knitzer

Analyst

John, we definitely see some improvements in underwriting. Of course, that takes time to flow through the entire portfolio. It's hard to say whether the Tax Reform has some new -- how much of an impact that has had thus far. Clearly the sector is doing well, and we feel good. Our consumers are healthy. So I think it's a combination of all three, and we just know from either our collections efforts or our underwriting that, that's having an impact.

John Hecht

Analyst

Okay. And then, your small and large loan book has a reasonably good balance out, they're both in the low 40% in terms of the portfolio mix. At what point do you think you, kind of, hit a balance where they -- that might stabilize, so that the overall consolidated yield would stabilize?

Peter Knitzer

Analyst

I think we're going to hit it relatively soon from an overall yield perspective. From a -- we still see growth in the large loans as the predominant driving force, but with the larger/small loans, entering the portfolio, we don't see an overall significant yield impact going forward.

John Hecht

Analyst

And where do you -- like over the intermediate long term, where do you think the balance would shake out just on payment trends in origination volumes? I mean, is it at 70-30 large/small or is it -- yes, or is it 80-20? How do we think about that?

Peter Knitzer

Analyst

I don't think it's 80-20. It maybe 60-40, 70-30. With entry in two new states, we'll have an opportunity to build up our small loan portfolio, which, you know, is a feeder into our large loan business, and that's been the strategy that's been very effectively. So as we enter new markets with new branches, we'll see a little more balance there. But over the long run, clearly, I would say that 60% to 70% makes sense in terms of the our on large loans revenue to our small loans.

John Hecht

Analyst

Okay. And then last question, just so I'm clear in terms of my interpretation. I know you guys have made some big investments in the call centers and yes, the loan management implementation. Should we see -- and then also in ABS transaction, I guess. Should we see absolute cost levels drop in the second half or just stabilize? And that's -- and then the second is, whatever that base is for the second half, what rate should we think about the rate pace of increase for expenses going forward?

Peter Knitzer

Analyst

Well, in absolute terms, as we build out de novos, you're going to see expenses go up by definition. So we're going to see an increase year-over-year that's going to be the primary driving force come off a few expenses. We don't anticipate a lot of increase there beyond salary increases, et cetera, and bonus for accumulations and that way. In terms of absolute percents, we just see that as a percentage of receivables, we will start to -- it will continue to go down over time.

Operator

Operator

The next question is from Sanjay Sakhrani with KBW.

Maja Feenick

Analyst

This is Maja Feenick, in for Sanjay. I just wanted to check on the net charge-off rate this quarter. Was there any impact from hurricanes? And when should we see that 20 basis point on the delinquency rate flow through into losses?

Peter Knitzer

Analyst

I'll let Don take that.

Donald Thomas

Analyst

Yes, we had about 40 basis point impact on the loss rate this quarter, and we'll see the 20 basis point impact on delinquency flow through during the second quarter and then, we should be done with hurricane impact.

Maja Feenick

Analyst

Okay, and then, on the Credit Karma partnership that you announced this quarter, how should we think about that in terms of future growth? And what does the pipeline look like for future partnerships?

Peter Knitzer

Analyst

Well, we're thrilled to have Credit karma between -- we've Credit Karma and LendingTree. Those are two of the largest players out there, so we continue to generate good leads and convert loans from LendingTree, and we expect similar performance from Credit Karma. We started off with a very small portion of our originations coming from digital, and we see that growth into the high teens in the latter half 2018 and continuing to grow into 2019, so we're putting a lot of money into digital overall between texting, portal and electronic payments as well as digital leads, so it's becoming more and more important channel for Regional and continue to do so and to the future.

Operator

Operator

[Operator Instructions]. The next question comes from Vincent Caintic with Stephens.

Vincent Caintic

Analyst · Stephens.

Just a couple of questions. So the two new states that you're growing into, is it possible for you to give us, kind of, a intermediate impact from moving into those two states? How many stores are you thinking? How many stores could it be? And then, any other states that look attractive for you as you're looking at today?

Peter Knitzer

Analyst · Stephens.

Well, at this juncture, the lion share of what we're going to build in 2018 is going to be in those two states. In terms of future plans, we really haven't made that out. There's still opportunity in those two states, and we're continuing to look at other states as well. The new models that we've established, we feel, will help us tremendously. States are a generic view. We're going down with the ZIP Codes, and that may dictate that we build out more in these two states or look at another state into the future, but the granularity with which we can now assess where to put new branches will help us tremendously for '18 and into the future.

Vincent Caintic

Analyst · Stephens.

Okay, great that's helpful. And then separately, on the -- on going into the Credit Karma channel, and if you could just generally talk about how important that is? And also, about your marketing efficiency, how we should think about, I guess, the cost of that trending now that you're expanding into these channels?

Peter Knitzer

Analyst · Stephens.

Yes, Credit Karma, we feel is really important similar to LendingTree and other affiliates that we bring on, because we feel that digital leads, a; you attract a different profile of customer than you naturally attract through direct mail or walk-in traffic, so that's really important to us. In terms of efficiencies, there is economies as you target and refine both in the mail as well as online and digital. So you start off with as I always say, test and learn, test and learn, we've driven down our cost for acquisition tremendously with LendingTree, because you start off with a blank slate. We'll be able to use some of the learnings from LendingTree with Credit Karma, so we now start off with as high customer count as we did with LendingTree, because we've learned a lot. So we'll continue to invest in this channel and over time, drive down our cost of acquisition, and we always balance out and optimize between direct mail and referrals and digital leads. We optimize across all channels to maximize the benefit and efficiency that we can drive through our marketing spend.

Vincent Caintic

Analyst · Stephens.

Okay, perfect. Then the last quick one from me, the tax rates 23.8%, is this approximately right how we should be thinking about the rate going forward?

Donald Thomas

Analyst · Stephens.

Yes, Vincent, this is Don. You know, as we took a look at the new tax law, we set out at the start of this year, and I think we've said on the last call that we thought, our effective tax rate would be around 25% and starting last year, and moving forward, there is accounting standard change around share-based compensation where the tax effect of those items flow through your current tax provision rather than going through equity. So the variability in the tax line since that time has been greater, and we had a few share-based items come through in the first quarter of this year and that provided just a little bit of benefit. So I think we round up just below 24% for effective rate. But somewhere in that 24% to 25% rate is kind of where we think we may be.

Operator

Operator

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

Peter Knitzer

Analyst

Thank you, operator. Well, thank everybody for their time and interest today. I appreciate it very much, and we look forward to another quarter of Regional where we continue to deliver on our long-term growth objectives. Thanks so much. Bye now.

Operator

Operator

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