Regional Management Corp. (RM) Q4 2019 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Regional Management Fourth Quarter 2019 Earnings Conference Call. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] As a reminder, all participants are in listen-only mode, and the conference is being recorded.I would now like to turn the conference over to Garrett Edson with ICR. Please go ahead.

Thank you and good afternoon. By now, everyone should have accessed to our earnings announcement and supplement 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 will 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, they’re difficult to predict and that 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 press release, presentation and recent filings with the SEC for a more detailed discussion of our forward-looking statements and 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, President and CEO of Regional Management Corp.

Thanks, Garrett and welcome to our fourth quarter 2019 earnings call. I’m joined by Rob Beck, our Chief Financial Officer, who will take you through the supplemental financial presentation available on our website.We closed 2019 with a record quarter, an appropriate capstone to a banner year. In the fourth quarter, we posted diluted EPS of $1.38, an improvement of 53% over the fourth quarter of 2018. The full year of 2019, we generated diluted EPS of $3.80, a 30% increase from 2018.Our team achieved the strong results through consistent sharp execution on our short and long-term strategic objectives. We continue to enjoy the benefit of our hybrid strategy of growing receivables in our existing branches, expanding our branch footprint.We do finance receivables to $1.1 billion at year end, an average receivables per branch topped $3 million for the first time. This receivable growth generated a year-over-year revenue improvement of 17% in the fourth quarter.Throughout this period of significant growth, we’ve also maintained stable and predictable credit performance. Our net credit loss rate of 9.2% in the fourth quarter of 2019 was comparable to our loss rate of 9.1% in the prior year period, and our year end 30-day and 90-day delinquency rate decreased 50 basis points and 30 basis points, respectively from the prior year period.We’ve also driven operating leverage, while continuing to invest in our business. Year-over-year we improved our efficiency ratio by 200 basis points to 41.7%. We improved our operating expense ratio by 80 basis points to 15.3% in the fourth quarter.Looking ahead to 2020 and beyond, Regional’s future is extremely bright, with tremendous opportunity to enhance our customer experience to our top and bottom line and generate significant shareholder value. For our customers, our goal is to provide best-in-class service whenever, wherever and however they choose to reach us.Our high customer satisfaction is a significant reason why we achieve double-digit growth in our finance receivables for 19 consecutive quarters on a year-over-year basis. Our branch operations remain fundamental to that success and growth. To that end, we opened 8 net new branches in the fourth quarter, and we expect to open between 25 branches and 30 branches in 2020.As Rob will explain in greater detail, we have significant capacity to fund our growth. We’ve also continued to make progress towards becoming a true omnichannel provider. We achieved another quarter of year-over-year increase and the percentage of new borrower origination is generated by digitally. With 22% of our new origination sourced through digital channels, up from 19% in the fourth quarter of 2018.As we discussed on our prior call, in 2020, we plan to make additional robust investments in our digital capabilities and technology infrastructure. We believe that these investments are vital to support our growth, better serve our customers, drive efficiency and expand margins over time.As we’ve consistently noted, the credit profile of our customers remains healthy. Approximately 66% of our core loan portfolio has now passed our new scorecard underwriting criteria. And the scorecards are performing in line with our expectations. We continue to believe that they will serve us well in any macroeconomic environment.In our press release, we described two first quarter 2020 development. First, as you know we’ve transitioned to CECL accounting effective January 1st. Rob will take you through the impact of the CECL transition shortly.Second, in January, human error caused an isolated IT infrastructure event that resulted in an extended outage of our loan management system. During the outage, we continue to book convenience check loans and our branches remained open, service to customers accepted most forms of payments.However, during that time, we were unable to originate branch loan and process certain types of electronic payment. As a result, we’re estimating that the outage will adversely impact net income by approximately $1.3 million in the first quarter of 2020 and by an additional $300,000 throughout the remainder of the year. We resolved this technology issue. Our system has since been functioning normally and we’re confident that the issue won’t occur again.Notwithstanding this development in the first quarter, the fundamentals of our business remain strong. We expect to continue our year-over-year double-digit receivable and revenue growth and despite the earnings headwinds associated with the CECL transition, we expect modest year-over-year growth in our diluted EPS in 2020. Following the CECL transition year, we look forward to returning to our year-over-year double-digits diluted EPS growth in 2021 and beyond.Finally as a reminder, we completed our $25 million stock repurchase program in the fourth quarter of 2019, having repurchased total of approximately 938,000 shares at a weighted average price of $26.65 per share. Our Board of Directors will continue to regularly evaluate our capital structure and opportunities to return additional capital to our shareholders.With that, I’ll now turn the call over to Rob to provide additional color on our financial.

Thank you, Peter and hello everyone. We’re extremely pleased with our fourth quarter results. On Slide 3 of the supplemental presentation, we provide you with the highlights for the quarter. As you can see, we generated fourth quarter net income of $15.7 million, up 46% from the fourth quarter of 2018. Our 5.6% return on assets and 21.1% return on equity in the fourth quarter represent 100 basis point and 540 basis point improvements, respectively from the prior year period.These robust returns were driven by a 17.4% year-over-year increase in average finance receivables and our $63 million sequential growth in ending receivables which was just under the record pace that we set in the third quarter of 2019. This growth resulted in a 17% improvement in revenues over the prior year period.On a year-over-year basis, we’ve now grown revenues by double-digits for 14 consecutive quarters. Our quarterly provision for credit losses rose $2.3 million or 9.9%. year-over-year. The increase was a result of a $4 million of higher credit losses due to the growth of our portfolio partially offset by an improvement in the allowance that is attributable to the impact of our credit scorecards.Flipping to Slide 4, our core loan products grew 22% or $195 million compared to the prior year period. Large loans grew 39% and now represent 55% of our total loan portfolio, while small loans grew 6% and makeup 43% of our total portfolio. As a reminder in the first quarter, we typically experienced a reduction in the size of our total loan portfolio as loan demand softens and existing customers use bonuses and tax refunds to pay down loans.Turning to Slide 5, both interest and fee yield and total revenue yield declined 10 basis points from the prior year period, primarily due to the change in the mix of our products. In the first quarter, we expect interest and fee yield to be approximately 10 basis points to 20 basis points lower than the prior year period, based on the ongoing change in the mix of our portfolio. It’s also worth noting that as of December 31st, 75% of our total portfolio has an APR at or below 36%.Moving on to Slide 6. Our annualized net credit losses as a percentage of average finance receivables were 9.2% for the fourth quarter of 2019, an increase of 10 basis points from the prior year period. The change in non-file insurance business practice that we’ve discussed on prior calls accounted for 10 basis point increase in our loss rate.Flipping to Slide 7. Our allowance for credit losses as a percentage of finance receivables ticked down 20 basis points sequentially in the fourth quarter to 5.6%. As you know, we implemented the new CECL accounting standard on January 1st. As a result, we increased our reserve by $60 million and reduced our equity by approximately $46 million, net of $14 million in taxes. Our reserve rate increased from 5.6% on December 31st to 10.8% on January 1st.Looking ahead, seasonal portfolio liquidation in the first quarter will result in a reserve release at the CECL reserve rate as of March 31st. Assuming current economic conditions, we expect our reserve rate to float between 10.4% and 11.2% throughout the remainder of 2020.As we’ve said consistently, CECL is strictly an accounting thing. It doesn’t present any challenges with respect to our debt covenants, funding of growth, cash flow over operations, for our ability to return capital to shareholders. We have more than adequate liquidity to fund and execute on our long-term strategies.Turning to Slide 8. On the delinquency front, our 30 plus day and 90 plus day delinquency levels at December 31st stood at 7.2% and 3.2%, respectively. At the end of the first quarter, we expect our 30 plus day delinquency rate to be flat with the prior year, inclusive of an approximately 40 basis point adverse impact associated with the system outage.The system outage will result in approximately $650,000 increase through our first quarter provision. Going forward, all else being equal, we expect to see overall improved delinquency and credit loss performance as a larger percentage of our portfolio is underwritten by our custom scorecards.Turning to Slide 9 and 10. G&A expenses of $40.9 million in the fourth quarter of 2019 were $4.3 million higher than the prior year period, in line with our expectations. Expenses associated with de novo branches opened since December 31st, 2018, accounted for $600,000 of the year-over-year increase in operating expenses, while incremental expenses necessary to support loan growth and existing branches accounted for an additional $1 million.However, even with our ongoing investments in digital capabilities, de novo expansion and the corresponding account growth, we continue to perform very well in managing our expenses as evidenced by the significant improvements in our operating expense and efficiency ratios.In the first quarter, we expect G&A expense to be about $7.7 million to $7.9 million higher year-over-year, inclusive of approximately $800,000 of expenses associated with the system outage. Most of the G&A expense increases related to higher branch operations expense and home office investments necessary to support our loan growth and de novo clients.We expect that our efficiency ratio and operating expense ratio will increase by 75 basis points and 30 basis points, respectively, compared to the prior year period, with all the increase attributable to the system outages expenses.Turning to Slide 11. Interest expense of $10.3 million was $600,000 higher in the fourth quarter of 2019 than the prior year period, primarily driven by larger long-term debt amount withstanding to the strong growth in finance receivables.On our fourth quarter interest expense as a percentage of average finance receivables improved 30 basis points sequentially to 3.8% primarily due to reductions in the Fed funds rate. We expect that our interest expense rate in the first quarter will be flat sequentially.As shown on Slide 12, our funding profile remained strong, aided by the $130 million asset-backed securitization that we completed in October of 2019, which added fixed rate funding at a weighted average coupon rate of 3.17%. our best execution to-date.On Slide 13, you can see that as of December 31st, we had $369 million of available funding and 51% of our outstanding long-term debt with at a fixed rate. Our fourth quarter funded debt-to-equity ratio was 2.7: 1.Slide 14 illustrates our strong same-store sales growth and the importance of our de novo expansion strategy. And our branches more than one year old, same-store sales were up 16.7% in the fourth quarter of 2019, compared to 13.7% in the prior year period, primarily due to record receivable growth over the past three quarters. Our most mature branches those opened for more than five years continue to grow at double-digit rates.Our branches benefit from digitally-sourced originations, which are an increasing part of our new loan growth as shown on Slide 15. As a reminder, these loans while sourced digitally are fully underwritten at our branches. We plan to continue to make significant investments in our digital capabilities, which drive growth, improve the customer experience and generate both front-end and back-end efficiencies.That concludes my remarks. I’ll now turn the call back to Peter to wrap up.

Thanks, Rob. It was an outstanding fourth quarter and a great end for the year. I’m grateful for all the hard work of our team members and their commitment to our customers. In 2019, we generated strong returns that we invested in our business and returned to our shareholders. We’ve developed a resilient business model that is capable of supporting sustained growth well into the future.As we look to 2020, our growth strategy remains firmly intact. We plan to increase our finance receivables within our existing branches, and open 25 to 30 new branches. We’ll also continue to invest in our digital capabilities and technology infrastructure in order to drive growth and provide for an even better experience for our customers and team members. With continued successful execution of our strategies, we’ll expand our market share and generate additional value for shareholders.Thank you again for your time and interest. I’ll now open the call for questions. Operator, would you please open the line?

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] Our first question is from David Scharf with JMP Securities. Please go ahead.

Hi. Good afternoon. Thanks for taking my questions and terrific end to the year. Hey, Peter I was wondering a couple of things. First, I wanted to just get a better handle on the digital sourcing. I know, I think on the last quarter you sort of called it out at your presentation for the first time. Can you remind me most of this direct-to-consumer, you know, consumers going to Regional’s website because of the solicitation or is this almost exclusively through kind of third-party as channel partners?

David. Hi, it’s primarily through third-party lead generators. We also get a fair number of customers or prospects going directly to our website, where we prequalify them and direct them to the branches. They meet our prequalification criteria and we’ve seen nice growth in that arena up to 22% in the fourth quarter of – 2019. So, nice progress, we’re investing in digital, we will continue to invest in digital so that we can serve our customers however, whenever they want to be served by us.

Got it. and I know you had mentioned, regardless of the channel, you’re doing the underwriting, you know, yourself at the branch level. But is that – should we be thinking about the customer acquisition cost changing either higher or lower as the mix of third-party source this business increases?

Great question. What we do, David is, we optimize all of our marketing spend such that to the last hour that we spend, we make sure it’s as efficient as can be. So on the margin, we are not spending more money on digital or mail, et cetera, just to push dollars that way we’re looking at the best investment of our marketing dollars and then applying them accordingly.

Got it, okay. And then one follow-up, I’ll get back in queue. The revenue website at least relative to our forecast was almost entirely related to stronger yield on the large loans. And I was looking back at my notes from last quarter, maybe as a follow up call and I think you had commented that the 29% yield would probably represent a high watermark, we kind of interpret that to be and that might be coming down a little bit it stayed up there. Is there anything, is it just geographic mix? I mean, is there anything on the pricing environment or just the geographic mix state, you know, pricing regulations that, you know, could potentially take that yield even higher or is this a good place to keep it?

I think it’s a pretty good place to keep it. Overall for the portfolio, you’ll see our yield continue to drop as we drive more of our customers to large loans, that’s been going on as you know for quite some time, but we’ve been able to maintain our overall yield on our large loans and that’s not state-specific, because our average APR for our large loans is in the 30% range and that’s well below the states in which we operate.

Got it. Great, thank you.

Thanks, David.

The next question is from Sanjay Sakhrani with KBW. Please go ahead.

Hi, this is actually Steven Kwok filling in for Sanjay. Thanks for taking my question. The first one just around the outage in the loan management system. I guess it’s like from the first quarter perspective, how should we think about the impact to the loan growth, because as we look back at last year, your loan growth was quite strong throughout the whole year. Any impacts that we should think about for the first quarter and then for the rest of the year as well?

So in terms of loan growth, the customers who couldn’t open loans in the branches for a period of time, we took all their names, kept a log, reached out to them and have seen a nice rebound in our overall receivable growth since then. So, you know, any of the business that we didn’t service during that period, we’re seeing come back, and we don’t feel that this will be a long-term issue for the balance of the year. And as demonstrated by our strong growth in 2019, we think we’ll be on a good trajectory for the balance of 2020.

And Steven, this is Rob. Just to remind you from my comments that, you know, we do normally experience seasonal liquidation in the first quarter related to bonuses and tax refunds. So you should expect to see that to continue in the first quarter of ‘20.

Yeah, good point, Rob, because, as you know, Steven that seasonally we have some liquidation in our first quarter. But that’s a natural occurrence of the business.

Yep, yep. Yeah, we tend to look at on a year-over-year basis that strips out kind of the seasonality there. And as a follow-up around the CECL provisions, I mean you mentioned that the reserve rate going forward should flow between 10.4% to 11.2%, can you talk about seasonality, how we should think about, you know, which periods will be the high points and which period will be low points of the reserve rate?

Yeah, and so that’s kind of the guidance we gave previously is that range. Obviously, the 10.8% one-time reserve that we took on January 1st is, you know, comfortably in between that range. I think as you look going forward, what we will do, as we see seasonality come through the CECL calculation, is, we will look to make some qualitative adjustments so that we mitigate some of those seasonal swings. So, that’s something that we’ll be, you know, providing more information on as we get through the year.

Got it, right. Thanks for taking my question.

Thanks, Steven.

The next question is from Vincent Caintic with Stephens. Please go ahead.

Hey, thanks. Good afternoon. I also wanted to follow-up on the system outage. So appreciate the guidance you gave for the first quarter and the rest of the year and you gave also some guidance about the provision and so on. Is this something that, so you gave first quarter, does it largely get complete in terms of impact by the second quarter? Or is it something that continues to trail for the rest of the year?

Yeah, I mean, the amount of impact to the last three quarters in total is $300,000 of net income. So we don’t view this as significant for the balance of the year.

Okay. So probably like mostly building that into second quarter then. And is it largely provisions or there like, if you could separate out the different impacts to your income statement?

Yeah, so it’s largely on the revenue lines from a credit standpoint, you would expect that either the NCL impact or the reserving that’s required will all happen in the first quarter. So what you see throughout the rest of the year that $300,000 Peter mentioned is really just some lost yield on some of the shortfall volume during the – that happened during the outage for a pretty deminimis amount.

Okay. That makes sense. So very helpful. Second question I have to ask, given the way the markets reacting, but any impact that you could foresee from a coronavirus pandemic to your business and particularly, I think one thing investors have been asking is just the – when people take out loans, what are they used for? I’m guessing it’s not for travel, but if you could describe what most the usage of loan origination support that help? Thank you.

I’ll take the second part of the question first. Our customers use their funds that from the loans for household expenses, for medical expenses, for unforeseen needs that they have and as you know, they treat it often like a line of credit where they pay it down and then they renew when they need more cash.In terms of the potential outbreak of the coronavirus, obviously, the health and wellbeing of both our customers and our team members are paramount. But among other things that we are doing is we’re developing plants to allow our team members to work remotely to centralize the certain servicing operations and to adjust our marketing efforts.We take this quite seriously and, you know, we will respond accordingly depending upon geography and severity, but we don’t want to put our team members at risk. At the same token, we want to make sure that we service our customers the way they need to be serviced, even if it’s remotely if a particular area has been hit.

Great, very helpful. Thank you.

Thank you.

[Operator Instructions] The next question is from Bill Dezellem with Tieton Capital. Please go ahead.

Thank you. I have three unrelated questions, please. First of all, relative to the system outage, I’ll just go ahead and pile on here. How long did that last?

It lasted seven - approximately seven business days, Bill.

Great, thank you. And then secondarily, in the auto loan business, what is your longest dated maturity? And would that equate to the very longest event that that business would exist?

Yeah, I mean, we have $10 million left in our portfolio and you know, that’s decreasing $2 million, roughly per month, but there’s going to be a tail on this. So as far as we’re concerned by the end of this year, you know, it’ll pretty much be gone. So we don’t see any issues with the rest of liquidation of the portfolio.

And do you happen to know what the maturity date is on the furthest out long?

I –

We’d have to get back –

I don’t know that, yeah.

Right and no worries at all. And then lastly, would you talk about your ability to grow the loans per branch? And now that you’ve crossed that $3 million mark, I mean, I find it interesting that the older branches are still growing at 15%. But with that in mind, how are you thinking about this?

Well, you know, a lot of the growth that we’ve generated is from our large loans. And that’s increased our receivables through grants and we’re continuing, you know, our strategy of bringing customers in with a small loan and then migrating those or graduating those for better creditworthy customers and have demonstrated ability to repay into larger loans. We think there’s a lot of upside remaining in our existing branches to grow that well beyond $3 million.Having said that, we also believe that our de novo branches are a good source of receivable growth and revenue growth. As we said before, you know, a new branch breaks even relatively quickly under a year and the payback is under two years, under CECL, that’s going to change a little bit.Rob, do you have that off the top of your head?

Yeah. So I think from an overall payback or breakeven standpoint, typically we would pay back in under a year and breakeven in under two years and with CECL on average adds roughly six months than those metrics.

But again, it doesn’t change the underlying cash flows of our business and it’s a reserve issue that we’re going to have to build as part of CECL.

Yeah, I mean the returns from, you know, discounted cash flow basis, IRR basis, you know, are still very strong, even though you’re accelerating the reserve upfront for CECL.

Great, thanks you both.

Thanks, Bill.

Next question is from John Rowan with Janney. Please go ahead.

Good afternoon, guys.

Hi, John.

On CECL. I mean, you have a seasonal business, right? So let’s just assume that allowance relatively flat throughout the years to create more earnings volatility within the year because of, you know, the pay down in one portfolio in 1Q?

Yeah, so in terms of liquidation impact, as you see that seasonal pay down, you will see a release on the reserve line that, you know, at year end we’re in a 5.6% LLR under the incurred loss model. Obviously, we’re not forecasting what our CECL number will be on March 31st. But the one-time build was at 10.8%. So, as you liquidate some of the portfolio in the first quarter, you will be releasing CECL at that higher rate.

Okay. So I mean, presumably then, you know, as we change the models and build in seasonality, it’s more seasonal, right, more earnings go toward the periods in which was a payoff and less earnings for the year go-to periods where there’s long building. This how I would –

Yeah, exactly. So as you get to liquidation, you’ll see a boost in earnings and as you build a portfolio aggressively, you’ll have that, you know, effectively a forward – bringing forward of reserves versus the traditional model. But as I said earlier –

Okay, just the housekeeping items. Can you just repeat the guidance you gave for 2020 earnings growth and G&A expense?

So, we haven’t given earnings growth guidance thus far and we don’t give guidance on that. ButRob, you gave –

Well we – we’ve given some guidance on the first quarter and I think the other thing –

That was – I thought you said that there was going to be mid – you know, low single-digit growth rate and then post 2021, you’d be back at double-digit growth.

Yeah, so lately, so we did say they’ll be modest full year EPS growth this year in 2020, and that’s, you know, as you would imagine is first year of comparable period – comp periods with CECL, you know, obviously reduces that percentage growth and then we expect to return to, you know, the double-digit growth rates in 2021.

Okay. And then what was the G&A guidance?

We didn’t give any G&A guidance for the full year, but for the first quarter, we said that it would be up $7.7 million to $7.9 million versus the prior year.

In versus the prior year, first quarter.

Yeah.

Okay, thank you very much.

And just you know, that includes the $800,000 impact of the outage as well as FAS 91, which, you know, is a little bit we can’t defer as much with the liquidation during the first quarter.

Okay, thank you.

Thank you.

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

I just want to thank everybody for your interest today, and we look forward to speaking with you on our next earnings call, if not sooner. Thanks so much everybody. Bye now.

This concludes today’s conference call. Thank you for standing by. You may disconnect your line. Thank you for participating and have a pleasant day.