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Regional Management Corp. (RM)

Q2 2018 Earnings Call· Tue, Jul 31, 2018

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Transcript

Operator

Operator

Thank you for standing by. This is the conference operator. Welcome to the Regional Management Q2 2018 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference back over to Garrett Edson, 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, 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 would 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. 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, President and CEO of Regional Management Corp.

Peter Knitzer

Analyst

Thanks, Garrett, and welcome to our second 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 Executive Vice President and CFO, Don Thomas. He will speak later on the call. For those of you with access to a computer and a mobile device, we once again posted a supplemental presentation on our website at regionalmanagement.com to provide additional color to our remarks. We continued to execute on our plan in the second quarter, generating double-digit top and bottom line growth, stable-to-improving credit performance and discipline with respect to our operating costs. Turning to Page 3. For the second quarter, we reported diluted EPS of $0.70, with net income growth of 38.3% versus the prior year period. We generated year-over-year revenue growth of nearly 11%, driven by $120 million or a 17% increase in finance receivables. Our core small and large loan business grew 26% or $160 million versus the prior year period. This represents our eighth consecutive quarter of double-digit revenue growth and 13th consecutive quarter of double-digit growth in finance receivables. Provision for credit losses in the second quarter of 2018 was up 9% versus the prior year period, while growth in finance receivables was up 17%. Again, showing the stability of our credit performance. Meanwhile, annualized total G&A expenses as a percentage of finance receivables decreased 170 basis points from the prior year period. Turning to Slide 4. I want to take a couple of minutes to discuss our ongoing strategic initiatives. First, our operating system continues to perform very well. The modernization of our platform has provided enhanced functionality, such as automated underwriting, electronic payments, texting and our online portals. All of this new functionality helps provide our customers…

Donald Thomas

Analyst

Thanks, Peter, and good afternoon to everyone on the call. Turning to Slide 5. Our net income for the second quarter of 2018 of $8.5 million was up 38% compared to $6.1 million in the second quarter of 2017. Diluted earnings per share for the quarter was $0.70 based on a share count of 12.1 million. Picking up on Slide 6. Our ending finance receivables at June 30, 2018, were $847 million, which reflects a $121 million or 16.6% increase over the prior year period. On a sequential basis, ending finance receivables grew by $42 million from where they stood on March 31 of this year. On Slide 7, we break out the components of our ending finance receivables. As of June 30, 2018, core finance receivables stood at $777 million and now represent 92% of our total portfolio. Our growth continues to be primarily led by our large loan portfolio, which increased $124 million or 46% from the prior year and rose 8% from the end of the first quarter. Large loan finance receivables now stand at $392 million and continue to make up a majority of our core loan finance receivables. Meanwhile, our small loan category saw a $36 million or 10% increase from the prior year and a $24 million or 7% increase from the end of the first quarter. Our other loan categories were down $10 million sequentially and $40 million from the prior year as we continue to gradually wind down our automobile loan category, which now comprises less than $40 million of finance receivables. We expect finance receivables in our auto portfolio to continue to decline as we runoff the portfolio. On Slide 8, our 11% year-over-year revenue growth was primarily driven by 16% increase in our average finance receivables. This is our 11th…

Peter Knitzer

Analyst

Thanks, Don. To sum up, I'm proud of our entire team at Regional for their amazing efforts over the past few years. Our investments and their hard work have really paid dividends for us in 2018. Core small and large loan portfolios continue to drive double-digit top line growth. Credit remains stable to improving. We remain focused on managing our expenses. Looking at the balance of 2018, we're focused on our hybrid growth strategy, including expanding our footprint into the Midwest. We're investing in the back half of 2018 for an even more successful 2019 and strongly 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, could you please open up the line?

Operator

Operator

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

David Scharf

Analyst

To start with, Peter, I'm wondering given the pace of loan growth you're experiencing, you outlined how many successive quarters we've seen double-digit expansion. I'm wondering, is this more demand driven or is it much more a function of both the mix shift to larger loans as well as perhaps branch managers being freed up now that collections are centralized, trying to get a sense of, if this has been more sort of coming from the consumer or direct actions you've taken?

Peter Knitzer

Analyst

David, I think it's a combination of all these factors you've mentioned. Consumers, we think that all signs lead to them being healthy, and we haven't seen changes to that. The large loan growth clearly has -- stand our receivables and driven a lot of our growth. We also are growing small loans. We had a nice over 10% year-over-year increase in our small loan receivables. As you mentioned, the ability for our personnel and the branches to spend more time selling and servicing with Centralized Collections has helped. And we're starting our de novo expansion, again, which will help even further. There is the drag, as you know, of the auto portfolio [indiscernible], but by and large, we've been able to grow it at nice pace. We're not looking for home runs. We really want to grow at a predictable, possible level. So we feel like we're in good shape, and we expect the growth not at the exact same rate, but to continue over time.

David Scharf

Analyst

Got it. It sounds very broad-based. Maybe one other question on the demand origination front. I know it's still early with some of these affiliates, channel partners. But can you give a sense, I guess, LendingTree and any other affiliate, I mean, on a combined basis, is it a meaningful contributor of origination volume at this point?

Peter Knitzer

Analyst

It's growing. We're using today our digital channels for both lead generation and for servicing. So it's growing from virtually nothing a couple of years ago to the mid-teens and will continue to grow nicely as we bring out more affiliates in terms of our loan production. As far as servicing, we have texting. We have customer portal. We have electronic payments. We find those to be very important to a lot of our customers to interact with us, how they want, when they want. We also provide all the account detail on the customer portal. So it's really a combination of both sales generation as well as servicing.

David Scharf

Analyst

Okay. But mid-teens is a percentage of kind of recent origination volume, is that correct?

Peter Knitzer

Analyst

Yes, yes, that's right.

David Scharf

Analyst

Okay. And maybe just one last question for Don on the credit side. I know there is typically a pretty noticeable seasonal drop in loss rates from Q2 to Q3. It sounds like excluding the final hurricane rolls, that may be 9.0% was a more normalized level in Q2. Can -- I mean, should we be sub-8% in Q3, I mean, if we were to look at kind of the previous year's sequential movements?

Donald Thomas

Analyst

Yes. I think if you look, David, at the last 3 delinquency buckets, that expense suggests a decent decline in the third quarter from that 9% adjusted rate that you mentioned for the second quarter. So I wouldn't disagree with that.

Operator

Operator

Our next question comes from Sanjay Sakhrani with KBW.

Maja Feenick

Analyst · KBW.

This is Maja stepping in for Sanjay. First one is, I know that the total yield has been coming down as you've been increasing your percentage of larger loans. Is that -- is there a point that we should think about that it'll become a little bit more stable over the near to intermediate term?

Peter Knitzer

Analyst · KBW.

Yes. I think you saw some change even in the second quarter as the yield went up 20 basis points. The interest and fee yield went up. And it's going to go up again in the third quarter. So I think you're seeing that stabilization now in the middle of 2018.

Maja Feenick

Analyst · KBW.

Okay. And then on your originations growth this quarter, it was a bit slower from the first quarter. How should we think about it for the rest of the year, and then also into 2019 with the additional branch openings?

Peter Knitzer

Analyst · KBW.

Yes. I think some of it has to do with mix, and so I think we see seasonally different growth in different categories that contributes to that a little bit. But as move into the end of the third quarter, and especially, into the fourth quarter, we'll be opening 25 to 30 additional branches. And the amount of growth we'll see will be more significant in the fourth quarter than the third. And it'll depend specifically on exactly the timing of getting the branches open. So the sooner we get it done the more growth you can see.

Operator

Operator

Our next question comes from Vincent Caintic with Stephens.

Vincent Caintic

Analyst · Stephens.

First, on the securitization. So you got really good execution when you put out that securitization. Just kind of wondering what the thought is on the rate mix of your funding coming from securitizations, and particularly, could we see more margin expansion if you do take up your securitization mix and utilize more of this cheaper funding?

Peter Knitzer

Analyst · Stephens.

Yes. I think, in this first securitization, Vincent, that -- we were successful in reducing the cost of the warehouse funding, certainly, by some 50 basis points assuming the warehouse was completely full. And more than that, for a less than full warehouse. So we're pleased to get the first one done. Everything that we have used in terms of funding the company is secured. And so I think you'll continue to see us use secured funding moving forward. We'll continue to use the securitization market for our large loan receivables, and we just need to continue to grow and fund that using securitizations. And I think that if rates continue to go up, you'll continue to see the securitization market with fixed rates be at slightly better overall cost than where we are with our bank group today.

Vincent Caintic

Analyst · Stephens.

Okay. Great. That's helpful. And then separately, I think, it's maybe a little related to a prior question about the yields. I'm just kind of wondering as you're -- you've been growing quite a bit on each of the core products. Just wondering when -- if you think you have some pricing power or is that may be that way you think or maybe you don't think that way in terms of thinking about yield expansion as you grow and as you roll out also with more stores?

Peter Knitzer

Analyst · Stephens.

Well, I think, this is Peter, that there is some pricing power as we look at competitive landscape. And as interest rates rise, we've already taken some opportunity, which is helping our yield in the second quarter going into the third quarter, we may see more opportunity over time as the Fed continues to increase rates and our competitors raise their pricing as well.

Operator

Operator

Our next question comes from Mike Del Grosso with Jefferies.

Michael Del Grosso

Analyst · Jefferies.

I want to see if you could briefly comment on some of the credit trends experienced this quarter. There was a nice benefit both on charge-offs and DQs. Is this better underwriting of the new customers predominantly or is there also a component of repeat borrowers or maybe they aren't experiencing as much stress, any commentary there?

Peter Knitzer

Analyst · Jefferies.

Sure. Mike, we continue to look at our credit underwriting that we've tightened consistently over the past several years, which has not impacted our volume, we've been able to grow nicely. So what you're seeing is some of the benefits from Centralized Collections and a little tighter underwriting that occurred last year flowing through in our business. Yes, the consumer, we find healthy. We're always mindful and we try to say ahead of the curve on credit because that's just what you have to manage in asset business. As we move into the second half of the year, we're going to be introducing credit scorecards. Those credit scorecards will not only be resident in our branches for underwriting in the branches, but will also be utilized in our live check campaigns and our mail programs such that in the mail, we'll have better predictors of goods and bads as those who are likely to go bad. We'll also have augmented response rate models. So we hope to get higher response rate, better credit quality. So we're constantly looking at ways to improve our credit profile.

Michael Del Grosso

Analyst · Jefferies.

Great. So given that, how should we be thinking about the overall allowance levels? Should there be a commensurate improvement in that given the improvement -- potential improvement in charge-offs going forward?

Peter Knitzer

Analyst · Jefferies.

We're growing -- provision grows with -- as we grow. And so that's part of the function of what we're going to see.

Donald Thomas

Analyst · Jefferies.

Yes. The allowance itself is tied into the specific portfolios. And as we continue to see lengthening of the lives of our larger loan portfolio, it does increase the need for allowance. And so you have a little bit of upward pressure at the same time that we have lower losses coming from the large loan portfolio itself. So I would see them staying at the 5.7% or possibly moving up to 5.75% as we move forward as opposed to moving them.

Operator

Operator

[Operator Instructions]. Our next question comes from Matt Dhane with Tieton Capital Management.

Matthew Dhane

Analyst · Tieton Capital Management.

I wanted to delve a little deeper into the pricing actions. And is the pricing actions that you're taking, are those across all loan types? And would you also expect this to just continue to be part of your strategy going forward where according to interest rate increases that you probably would look at increasing your AT charge as well across your loans?

Peter Knitzer

Analyst · Tieton Capital Management.

Yes. Matt, our large loans are really where we feel that we have more pricing power. And it's not like quantum leaps where we're edging up as interest rates rise. So as that occurs and competitors move, we feel comfortable in that space raising our rates. So depending upon competitive actions and interest rates rising, we will continue to look to increase our prices while not deteriorating the quality of customer and the credit profile of customers that we bring in.

Matthew Dhane

Analyst · Tieton Capital Management.

Great. I wanted to also ask about the operating system -- the new operating system. How much of a role has that played in really supporting your strong growth here recently since that's been rolled out?

Peter Knitzer

Analyst · Tieton Capital Management.

Well, today, in our NLS platform, we have all of our credit matrices programmed into the system. So the ability for errors that could happen through manual underwriting as we've had prior to NLS has really been eliminated. So that helps from an overall credit perspective. We also have the opportunity to spend more time with the customer because our key members are not sitting there, pulling credit bureaus out of the system and making manual calculations. Going forward, we anticipate -- we couldn't use credit scorecards in our old platform. With NLS now completely built out from a functionality standpoint across our network, we're able to put in these scorecards, which will help us from that underwriting perspective.

Operator

Operator

At this time, seeing no more questions. I would like to turn the conference back over to Peter Knitzer for any closing remarks.

Peter Knitzer

Analyst

Thank you, Operator. I want to thank all of you for your interest in Regional Management, and we look forward to continue to stay in touch as we go through the third quarter and appreciate the questions that were asked. Thanks so much. Have a good day.

Operator

Operator

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