Regional Management Corp. (RM) Q4 2018 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Regional Management Corporation Fourth Quarter 2018 Earnings Conference Call. As a reminder all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]. I would now like to turn the conference over to Garrett Edson, Senior Vice President, ICR. Please go ahead.

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 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. 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.

Thanks, Garrett, and welcome to our fourth 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, who will speak later on the call. 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. Our fourth quarter capped off a successful year at Regional. Our underlying business remained strong as we continue to generate consistent double-digit growth along with stable credit and disciplined expense management. We are well-positioned for success in 2019 and to create additional shareholder value over the long-term. For the fourth quarter, we reported diluted EPS of $0.90 versus $0.92 in the fourth quarter of 2017. As a reminder, the prior year period included $0.30 per share of tax benefits. Excluding these non-operating benefits, diluted EPS rose by a healthy margin from the prior year period. We also generated year-over-year revenue growth of 16% driven by a 14% or $115 million increase in finance receivables. We've now grown revenue by double-digits for 10 consecutive quarters and have achieved double-digit growth in finance receivables for 15 consecutive quarters. Let me take a couple of minutes to talk about where we currently stand on our overall long-term strategy. First, as we've discussed on prior calls, we plan to continue our hybrid growth model of increasing receivables per branch, while opening up new branches. In 2018, we managed to increase our average finance receivables per branch excluding those branches opened less than 12 months by 14%. There remains significant room to further increase our average receivables per branch over time utilizing our well-established sales and marketing programs as well as our proven ability to graduate our qualified customers to larger loans. Along with growing receivables in our existing branches, we plan to continue to open new branches this year. Last year, we entered Missouri in the third quarter, in the fourth quarter, we entered Wisconsin. With the addition of Missouri and Wisconsin, we now operate in 11 states. On the marketing front, new Risk and Response dollars for our direct mail campaigns that I discussed last quarter are performing quite well. These models will make us more efficient and allow us the flexibility to increase our investment in digital as part of our overall marketing mix. Credit quality is paramount to the success of our strategy. On prior calls, we have talked about our custom scorecard initiative to further improve our credit profile. I'm pleased to report that we've now implemented custom scorecards in nine of our 11 states with our new states Missouri and Wisconsin coming online in the next couple of months. Thus far, we've been happy with their initial performance and expect that they should contribute to lower net credit losses beginning in the second half of 2019 and into 2020. Along with credit, we continue to manage our operating expenses efficiently, while we invest in our business and our people. We will continue to maintain a disciplined control on expenses in the future. And last but certainly not least, before turning the call over on behalf of the entire Regional team, I want to congratulate and express my deepest gratitude to Don on the announcement of his retirement. Don has been a vital contributor to Regional success over the past six years and his strength in our capital structure, including doubling the size of our credit facility, and to a recent asset-backed securitization transaction. Don will remain CFO as we transition to a successor and he will stay on a while longer to ensure a smooth transition. Personally he's been a terrific partner to work with and we all wish him well in his next chapter. We are very excited about how Regional has progressed and about our plans for the future. There's so much opportunity to deliver long-term shareholder value. I'll now turn the call over to Don to provide additional color on the financials.

Thanks Peter. Turning to Slide 3 in the supplemental presentation, I'll start with some highlights for the quarter. As Peter mentioned, Regional's trend of strong performance continued into the fourth quarter closing out 2018 on a high note. We continued the double-digit increases in receivables and revenues and when excluding non-operating tax benefits from the prior year, the trend includes double-digit year-over-year increases in net income and EPS too. Our hybrid growth strategy produced $115 million or 14% year-over-year increase in our finance receivables which helped revenues grow 16.1% from the prior year period. You can also see that our provision for credit losses moved up 22% year-over-year with 8% of the increase due to a change in business practice to lower our utilization of non-file insurance which also had the offsetting impact of increasing insurance income and ultimately resulted in no impact on net income. Excluding this change, the increase in the provision for credit losses would have been consistent with the growth in our portfolio and therefore a good reflection of our stable credit profile. G&A expenses were up 8% in the quarter but improved 100 basis points to 16.1% compared to the prior year period when annualized as a percentage of average finance receivables. Flipping to Slide 4, our core small and large loan business grew 21% or $153 million versus the prior year period. Year-over-year growth in small loans was $62 million or 16.5% and our large loan portfolio grew $91 million or 26%. The small and large loan portfolios each comprised 47% of the total loan portfolio. At the end of the fourth quarter approximately 50% of our small loan customers qualified to apply for a large loan offer which represents a significant incremental lending opportunity in our existing book of business. Turning to Slide 5, our interest and fee income increased 13% year-over-year again largely driven by the 14% increase in finance receivables. We saw interest and fee yield decline 30 basis points sequentially and 40 basis points from the prior year due to changes in the mix of loans. Despite decline in the quarter, we continue to take certain pricing actions to support our interest and fee yields. Total revenue yield increased 50 basis points from the prior year period primarily due to higher insurance income. Beginning in the fourth quarter of 2018, the company lowered its utilization of non-file insurance which grossed up insurance income and net credit losses but had no impact on net income. Moving to Slide 6, our annualized net credit loss rate as a percentage of average finance receivables for the fourth quarter of 2018 was 9.1%, an increase of 10 basis points from the prior year period. Approximately 0.7% of net credit losses is attributable to the business practice change to lower our utilization of non-file insurance and the non-file impact on the current quarter was 0.3% greater than the prior year period. Overall, we expect net credit losses in the near to mid-term will continue to contain approximately 70 to 75 basis points related to this change in business practice. Over time, we expect some improvement in net credit losses as the custom scorecards that we have implemented should have an impact on losses beginning in the second half of 2019 and then a greater impact in 2020. Turning to Slide 7, on the delinquency front, our 30-plus-day and 90-plus-day delinquency levels at December 31, 2018, stood at 7.7% and 3.5% respectively. Our 30-plus-day delinquencies increased 20 basis points on a year-over-year basis and the 90-plus-day delinquencies increased 10 basis points both indicating a generally stable credit performance overall. Flipping to Slide 8, G&A expenses of $36.6 million in the fourth quarter of 2018 was $2.6 million from the prior year period, a bit better than we had initially expected. Approximately $2.2 million of the increase was related to personnel expense and we also saw additional occupancy expenses during the quarter. Further a portion of the increase was due to the opening of 14 de novo branches late in the quarter and those branches will have a full quarter of G&A expense in the first quarter of 2019. Compared to the first quarter of 2018, G&A expenses for the first quarter of 2019 are expected to be about $4 million higher. On a year-over-year basis, we still expect first quarter 2019 will show a slight improvement of G&A expenses as a percentage of average net receivables. Interest expense of $9.6 million was higher in the fourth quarter of 2018 compared to the prior year period due to increases in interest rates and higher long-term debt amounts outstanding due to finance receivable growth. In December, Regional completed its second securitization a $130 million transaction and was able to do so in a challenging market. At December 31, 2018, 46% of the company's outstanding debt was fixed rate debt. The company is well-positioned for future growth as its diversified sources of funding contain $407 million of unused capacity at the end of 2018. Looking ahead to the first quarter of 2019, we expect interest expense to be about $0.4 million to $0.5 million higher than it was in the fourth quarter of 2018 driven primarily by higher interest rates. As a result, interest expense in the first quarter of 2019 is expected to be $2.8 million to $3 million higher than the first quarter of 2018. I want to conclude my remarks on a personal note and thank Peter and the entire Regional management team for the collaboration and creation behind the outstanding success and growth of Regional over the past six years. I have full confidence in the expertise and dedication of the management team to lead Regional to further growth and profitability. That concludes my remarks and I'll now turn the call back to Peter to wrap up.

Thanks Don. To sum up, 2018 was a very successful year for Regional. We grew our top and bottom-lines by double-digit while expanding our margins. Our core small and large loan portfolio continue to perform very well driven by our hybrid growth strategy of increasing receivables per branch and adding de novo branches. We remain squarely focused on credit quality with the implementation of custom scorecards which are expected to improve credit performance in the latter part of 2019. Lastly, we completed two successful asset-backed securitizations further diversifying our funding sources and positioning us strongly for the future. Looking into 2019, we remain keenly focused on our hybrid growth strategy, maintaining stable credit performance, and managing expenses closely to deliver increased shareholder value. Thank you for your time and interest. And I'd like to now open up the call for questions. Operator, could you please open the line.

Certainly, Mr. Knitzer. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Sanjay Sakhrani with KBW. Please go ahead.

Hi, this is Maja. Maja Feenick in for Sanjay. Thanks for taking my question. My first question the dynamics between the change in business practices on both the provisions and the insurance income. Is that something that you expect will continue do you expect the provisions to be a bit elevated from that and then the insurance income also to be elevated in 2019?

That is correct, Maja.

Okay.

We continue to see slightly elevated net credit losses and we will also see higher insurance income moving forward.

Got it. And then your originations outlook, I know you guys have changed the number of the de novo branch outlook for 2019 to 15 to 30. What is that, I guess what are you thinking originations growth wise next year?

We feel very comfortable with our originations growth and we are leaving ourselves open to the 15 to 30 because we may choose to invest more in our infrastructure and digital which long-term is going to help our overall franchise from a growth and customer service standpoint. So we want to leave the flexibility for that. Our de novo's that we started in 2018 are doing just fine, they're performing well.

Our next question is from David Scharf with JMP Securities. Please go ahead.

Hi, good afternoon. Thanks for taking my questions. Congratulations, best of luck going forward, Don. We'll miss you.

Thanks, David.

I don't suppose it's worthwhile to give a parting shot of asking for EPS guidance since it's your last call?

Well, this is Peter, David. And now I'm going to take over the call.

All right.

No, as you know, we don't pick it.

You got a lot counsel out of those calls. Hey, I was curious, Peter, I want to follow-up on the last question regarding how to think about de novo growth and obviously it sounds like from your response you want to preserve some flexibility? Maybe looking beyond just the 2019 guidance trying to get a feel for just from an operations standpoint, staffing, retail, site procurement all that like what the company's sort of peak capacity is for new stores, sort of looking at a vacuum because you obviously rolled out the low-end of that just in the fourth quarter of this past year. I mean in an environment where you really wanted to maximize branch footprint growth. Do you have the resources to go beyond 30 in a year?

We do. We feel that there's tremendous opportunity and from year-to-year, we want a balance. We have great same-store growth, we expect that to continue. We are increasing our presence in digital and that's generating more growth than it had in the past. So I wouldn't read anything into the future with respect to de novo's data. We have a lot of runway, we have a lot of Greenfields and we're just going to modulate it every year. We still may build 30, we may build 15, but that doesn't diminish our commitment to increase our footprint over time.

Got it, got it. Shifting to just yield and maybe some color on how we ought to think about forecasting this year and beyond. There was actually a bigger mix shift towards small loan growth this quarter than in the past and yet the weighted average yield looks good sequentially, it reined in for all of your products and I know last quarter you highlighted that you were maybe going to get a little tailwind from moving into higher loan states. Can you give us a sense for whether the current level based on product mix is likely to hold steady or if there's any possibility of average yield increasing this year and in 2020?

David, I don't know that it would increase very much. We have taken some very selective pricing actions. Our yield is a little bit cyclical as we go through the cyclical delinquency and charge-offs. There's some credit related impacts that hurt our yield a little bit more in fourth and first quarter and we see a little higher yield the rest of the year. And Wisconsin and Missouri are very good states overall from a rate perspective and as those branches grow absolutely there will be a little bit of support there but no major change during the year 2019.

Got it. Thanks. And then lastly on credit, I know I'm sure you've commented on this in the past. I'm going to fess up and plead ignorance. Can you walk me through the mechanics of what you mean by these non-file insurance claims? Just how that works?

Sure. David, this is Don. So when we have insurance coverage on an account, we have the opportunity to file an insurance claim as the account moves into a certain status. And if we do that then it is an insurance claim, it falls in the insurance line. And what we mean by utilizing non-file insurance less is even though we have an opportunity to file a claim under the insurance, we're electing not to in some cases and that allows it simply to fall into the net credit losses of the company and we've been working with this particular insurance coverage and trying to make sure that it is trying to achieve some degree of improved profitability with it and to do that, we just need to utilize it less than, than we have been and that's where we are.

And in the context, David, and I didn't comment when Maja asked the question but there'll be no impact on our net income. So it really is a line shift and we're just choosing the file less non-file claims.

So by deferring filing a claim, you're just recognizing it as accrued premium for longer period, is that way the insurance income goes up?

The insurance income is up because it is a net line; it is net of claims and certain other direct expenses. So when our claims go down, then the insurance line goes up as a result.

Our next question is John Hecht with Jefferies. Please go ahead.

Hey guys, thanks, and Don, congratulations and I look forward to keeping in touch with you as you do something more relaxing and fun.

Fully, thank you.

Couple of questions, one is the -- just -- I guess getting an update. The auto purchase loans you've been running them, winding that down and the retail purchase loan portfolios have been pretty flat. Should we just kind of model those accordingly?

Yes, I think that's fair, John. Auto is down and we'll continue to liquidate in 2019 and we feel pretty much we will hold steady.

Okay. In terms of product mix, you guys for some of this earlier talking about loan growth, you had a pretty good balance between small and large loans. Now I know a lot of the strategy is to bring in new customers to small loans and then graduate the ones that are -- the ability -- which have the ability to pay into larger loan. So we had a good balance now in terms of thinking about the portfolio mix going forward or will this shift further into larger loans over time?

There will be a continued shift, we like small and large loans and the mix that we have but there'll be a continued shift towards large loans that obviously won't be as fast as we've had in the past. But a good portion of that, half of our small loans are eligible to apply for a large loan. So we have a lot of opportunity. Some folks don't want a larger loan and that's okay too. We want to provide our customers with what they want and need. So there'll be a continuation of large loans growing faster than small but not at the rate that you've seen in the past.

Okay. And then just because this has been commented on and it's -- the media's gotten hold of this, I mean any thoughts on delayed tax refunds or modifications and sizes, are you seeing anything at this point?

We're watching it closely, John, as I'm sure everybody is and it's little early, we're going to wait over the next coming weeks to see what happens. Obviously the initial reports price is down and filings are down. So we're going to take another look over the next couple of weeks. But we're watching it.

[Operator Instructions]. Our next question comes from Bill Dezellem with Tieton Capital Management. Please go ahead.

Thank you. I actually had a couple of questions. The first one is relative to the first quarter, what seasonality and profitability is there and really where I'm coming at this from trying to understand what -- why we would not be able to minimum annualized the $0.90 reported this quarter as we move into 2019?

Yes, Bill, I would say that the first and second quarters typically don't see much of a change in ANR across those periods. And so they're probably the toughest two quarters. Third and fourth quarter we're building ANR nicely and so those tend to be higher profitable quarters within the year, first quarter with lower originations, you typically defer some salary for originating a loan and so when originations are lower, you're deferring less and you have more expense just flow through the P&L. So those are some of the challenges and then of course the Fed with their rate increases has created some challenges as well. And because we opened de novo's kind of late last year, I think that's a bit of a headwind as we're moving into the first half of the year as well. Does that help?

Great, thank you. That does help; I appreciate it and all of that of course being offset by the higher rate of growth that you're demonstrating.

That's correct.

Great, thank you. And then a question of ignorance you referenced how the tightening of your underwriting standards in the middle part of 2018 had a negative impact on delinquencies. And it seems that you're actually tightening credit standards to improve credit losses as opposed to seeing that go the other way. So help us understand what you're communicating there and what's actually happening?

Yes, thanks Bill, it's Peter. When you tighten credit, we're going to see folks who might otherwise be eligible for renewals. We're going to make it a little more difficult for good reasons for the long-term but as you do that you're going to increase delinquencies in some NCL. As a result, so there's a short-term component to it. And over the long-term, it's absolutely the right business decision. But there is -- there is some short-term impact just by doing that.

And so in theory you find that some of those customers are ultimately not able to repay their loan but other customers they are. It just takes them longer than it otherwise would have when you're not renewing and they have to come up with that money on the spot?

Yes, it's harder sometimes when someone can't renew to continue to make the payments as we tighten the credit and so therefore they're not eligible for more money and to not renew them. And it's a phenomenon that you'll see really throughout the industry that when you tighten credit, there is a short-term impact on delinquency and NCL, again we were in this for the long run and our expectation is that particularly the second half of 2019, these actions will significantly improve our overall credit profile.

So this is the classic case where we should be thanking you for tightening credit now when things look good as opposed to waiting until there's a credit cycle?

Yes, exactly.

Okay, all right. Well, thank you. The last question for now is you've talked a little bit about the non-file insurance. But would you step back and just from a broad brush perspective, what was the thought process behind why you made the change? What is it you're trying to accomplish?

Yes, Bill, we're looking at the insurance products individually and just making sure that we're managing each one that we're looking at the profitability of that product and managing it somewhere where we believe is the appropriate range of profitability and for that particular product, there has been a lot of changes, we did our state conversions and a lot of other changes in the company and as things lined out and we could see that profitability was not quite where we wanted it. And we just made a change in the utilization of the insurance products, so that the profitability now will fall in a better range.

Great. Thank you both, and Don, congratulations on your retirement. We're sorry to see you [indiscernible] but wish you the very best.

Thanks, Bill. Appreciate your kind words.

There are no further questions at this time. I would like to turn the conference back over to Peter Knitzer for any closing remarks.

I want to thank everybody for their time and interest today. And we look forward to a terrific 2019. Bye now.

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