Regional Management Corp. (RM) Q3 2021 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Regional Management Corp Third Quarter 2021 Earnings Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Garrett Edson of ICR. Please go ahead.

Thank you, and good afternoon. By now, everyone should have access to our earnings announcement and supplemental presentation, which were released prior to this call and may be found on our website at regionalmanagement.com. Before we begin our formal remarks, I will direct you to Page 2 of our supplemental presentation, which contains important disclosures concerning forward-looking statements and the use of non-GAAP financial measures. Part of our discussion today may include forward-looking statements, which are based on management's current expectations, estimates and projections about the company's future financial performance and business prospects. These forward-looking statements speak only as of today and are subject to various assumptions, risks, uncertainties and other factors that are 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, you should not place undue reliance upon them. We refer all of you to our press release, presentation and recent filings with the SEC for a more detailed discussion about forward-looking statements and the risks and uncertainties that could impact the future operating results and financial condition of regional management Corp. Also, our discussion today may include references to certain non-GAAP measures. Reconciliation of these measures to the most comparable GAAP measure can be found within our earnings announcement or earnings presentation and posted on our website at regionalmanagement.com. I would now like to introduce Rob Beck, President and CEO of Regional Management Corp. Thanks, Garrett, and welcome to our third quarter 2021 earnings call. I'm joined today by Harp Prana, our Chief Financial Officer. In the third quarter, our strategic initiatives continued to fuel record growth and drive strong results. We posted $22.2 million of net income or $2.11 of diluted EPS, with very attractive returns of 7.1% ROA and 31.6% ROE. We continue to grow our market share and once again experienced double-digit year-over-year growth in our net finance receivables and quarterly revenue, which were up 24% and 23%, respectively. We generated record sequential portfolio growth of $131 million in the quarter, leading to another all-time high in net finance receivables and quarterly revenue. The successes of our long-term strategic initiatives are evident. We built a growth company with a focused omnichannel strategy and proven consistent execution. At the same time, we've derisked the business by investing heavily in our custom underwriting models and shifting more than 82% of our portfolio to higher-quality loans at or below 36% APR, enabling us to maintain a stable credit profile as we grow and deliver predictable superior results for our shareholders. In the third quarter, delinquency increased in line with expectations as government stimulus waned, but it's 4.7%, our 30-plus day delinquency rate is on par with the prior year and 180 basis points below third quarter 2019 levels. Our net credit loss rate during the quarter was 5%, the lowest in our history as a public company, a 280 basis point improvement from the prior year period and a 310 basis point improvement from the third quarter of 2019. Our strategic investments in digital initiatives, geographic expansion and product and channel development, along with our proven omnichannel marketing engine continue to drive substantial growth. We originated a record $421 million of loans in the third quarter, which was up 35% over last year and 19% above 2019 pre-pandemic levels. This includes $129 million derived from our new growth initiatives. The loans originated through these growth initiatives are performing as expected with solid credit experience and strong net credit margins. Thanks to our improved digital prequalification experience, which we've now rolled out to all but one state in our footprint, we originated a record $48 million of digitally sourced loans in the third quarter, up 34% from the second quarter. New digital volumes represented 28% of our total new borrower volume, with 57% originated as large loans. Our digital prequalification engine will continue to be integrated with new states as they roll out and with our existing and new digital affiliates and lead generators in the months ahead. Aside from our improved digital prequalification experience, we continue to test our new guaranteed loan offer product, which is an alternative to our convenience check loan product and provides online fulfillment with ACH funding into a customer's bank account. Within the next few months, we will also begin testing our end-to-end digital origination product, and we remain on pace to deliver an improved online customer portal and a mobile app in the early part of 2022. As we continue to build on our omnichannel model and expand our digital initiatives, we made significant strides to further strengthen our team during the quarter with the addition of Chris Peterson as our first Chief Data and Analytics Officer. A strong data and analytics function can transform an organization, and we believe that it will be a key enabler in delivering our long-term strategies. We are confident that our investment in data and analytics will ultimately drive a step change in customer insight and engagement, transform products and services, enable better business decisions and risk management and improve our core operations. In the third quarter, we also continued to grow our geographic footprint. Near the end of the quarter, we entered Utah as we expanded our operations to the western U.S. As a reminder, we entered Illinois in the second quarter and as of the end of October, our first branch has reached $2.8 million in receivables in 6 months, and the 4 branches in the state have exceeded $9 million in receivables. We're confident in our ability to quickly gain a strong foothold in new geographies as we expand. In the coming months, we expect to enter a new state and open 10 new branches across our network, and we have plans to enter an additional 5 to 7 new states by the end of 2022. As we've noted previously, thanks to our new digital initiatives, including remote loan closing capabilities, the branches in these states will be able to maintain a broader geographic reach. This will result in higher average receivables per branch and the need for fewer branches, which we expect will drive greater operating leverage. In the third quarter, we assessed our legacy branch network and decided to lean further into our omnichannel approach by optimizing our footprint. To that end, we closed 31 branches in the fourth quarter, where there were clear opportunities to consolidate operations into a larger branch in close proximity, while still providing our customers with the best-in-class service they've come to expect. These branch optimization actions will generate approximately $2.2 million in annual savings, which we'll reinvest in our expansion into new states. Along with our rapid growth, we continue to keep a firm handle on our balance sheet and credit quality. In October, we closed a 5-year $125 million private securitization transaction at a fixed coupon of 3.875%, which enables us to fund loans above and below 36% APR. The transaction increases our percentage of fixed rate funding further diversifies our funding sources and strengthens our overall liquidity position. Following the October securitization, our fixed rate debt as a percentage of total debt increased from 78% to 87%, with a weighted average coupon of 2.7% and an average revolving duration of nearly 3 years. Following the transaction, we also maintained $350 million of interest rate caps with strike rates of 25 to 50 basis points, covering $133 million in variable rate debt and future portfolio funding. In sum, we remain well positioned to fund our future growth, and we're well protected against the risk of rising interest rates. As I noted earlier, our credit profile remains very strong. We have achieved controlled growth with stable credit through prudent underwriting to our rigorous pre-pandemic standards and our ongoing investment in our custom scorecard. We have further protected our portfolio with the addition of enhanced verification processes implemented at the outset of the pandemic and the use of alternative data in our risk and response models to adjust for the impact of stimulus and forbearance programs. Across all product lines, FICO scores have increased since early 2020, and our highest growing customers make up a larger portion of our overall portfolio. As of September 30, approximately 87% of our portfolio had been originated since April 2020, the vast majority of which was subject to enhanced credit standards that we deployed following the outset of the pandemic. Consistent with our loan portfolio growth, we built our allowance for credit losses by $10.7 million in the third quarter. And as a result, our allowance for credit losses reserve rate at the end of the quarter was 11.4%. Our $150.1 million of allowance for credit losses as of September 30 continues to compare quite favorably to our 30-plus day contractual delinquency of $61.3 million and includes a $15.5 million reserve for additional credit losses associated with COVID-19. We released only $2 million of our COVID-related reserves in the third quarter as we continue to maintain a conservative stance as we monitor the impact of the delta variant, the pace of the economic recovery and the health of the consumer as the benefits of government assistance continue to dissipate. Looking ahead, absent any significant changes to the macroeconomic environment, we expect that our fourth quarter and full year 2021 NCL rates will be below 7%. Our allowance for credit losses will increase in the fourth quarter as the portfolio continues to grow, and we now anticipate that the reserve rate will return to pre-pandemic levels of around 10.8% by roughly mid-2022. Assuming the economic recovery remains on track, we believe that credit performance should remain strong into next year and that our 2022 NCL rate will be at or below 8.5% even as delinquencies continue to normalize off the recent historically low levels. As we near the end of 2021, we remain in the strongest position in our history. Our net finance receivables are at record highs, and loan demand remains robust as the economy recovers. We look forward to strong portfolio and top line growth as our strategic investments yield solid returns, and we continue to take market share. Based on our third quarter results, we're raising our expectations for full year 2021 net income to between 85 and $87 million, up from our prior range of $75 million to $80 million. Our revised outlook reflects our strong third quarter core portfolio growth of 25.4% over the prior year period, which outpaced the broader market. Our outlook also assumes the year-end net finance receivables will be approximately $1.4 billion, providing a strong jump-off point as we enter 2022 and further demonstrating the power of our omnichannel model. As a reminder, we're only providing a full year net income outlook for 2021 due to the unique circumstances we've encountered this year. We're having a record year, and we're extremely excited for our long-term future. Our omnichannel initiatives are working quite well for us, and we continue to invest broadly in our growth plans and digital capabilities. We'll bring our financial solutions to even in more states in the months ahead, while ensuring that our customers continue to receive outstanding service, and we'll continue to prioritize our credit quality, our balance sheet strength and driving operating efficiencies, which will lead to more profitable growth, the return of excess capital to our shareholders and sustainable long-term value creation. I'll now turn the call over to Harp to provide additional color on our financials.

Thank you, Rob, and hello, everyone. Let me take you through our third quarter results in more detail. On Page 3 of the supplemental presentation, we provide our third quarter financial highlights. We generated net income of $22.2 million and diluted earnings per share of $2.11, driven by significant portfolio and revenue growth, stable operating expenses, low funding costs and a healthy credit profile. The business continued to produce attractive returns with 7.1% ROA and 31.6% ROE this quarter and 7.8% ROA and 32.4% ROE year-to-date. We continue to demonstrate our ability to drive revenue to our bottom line and generate strong returns. As illustrated on Page 4, branch originations were well above the prior year as we originated $268 million of branch loans in the third quarter, 18% higher than the prior year period and 3% higher than 2019. Meanwhile, direct mail and digital originations also increased nicely year-over-year to $152 million, 80% higher than the prior year and 66% higher than 2019. Our total originations were a record $421 million, up 35% from the prior year period and 19% higher than 2019. Notably, our new growth initiatives drove $129 million of third quarter originations and have become a significant factor in our accelerating expansion. Page 5 displays our portfolio growth and mix trends through September 30. We closed the quarter with net finance receivables of $1.3 billion, up $131 million from the prior quarter and $255 million from the prior year period as we continue to successfully execute on our omnichannel strategy, new growth initiatives and marketing efforts. Our core loan portfolio grew $132 million or 11% from the prior quarter and $263 million or 25% from the prior year period as we continue to take market share. Large loans and small loans grew 12% and 10% on a sequential basis. For the fourth quarter, we expect demand to remain strong and to generate healthy quarter-over-quarter growth in our finance receivables portfolio, resulting in year-end net finance receivables of approximately $1.4 billion. On Page 6, we show our digitally sourced originations, which were 28% of our new borrower volume in the third quarter as we continue to meet the needs of our customers through our omnichannel strategy. During the third quarter large loans were 57% of our new digitally sourced originations. Turning to Page 7. Total revenue grew 23% to a record $111.5 million. Interest and fee yield increased 50 basis points year-over-year, primarily due to improved credit performance across the portfolio, resulting in fewer loans and nonaccrual status and fewer interest accrual reversals. Sequentially, interest and fee yield and total revenue yield each increased 40 basis points due to credit performance and the growth in our small loan portfolio in the third quarter. As of September 30, 67% of our portfolio was comprised of large loans and 82% of our portfolio had an APR at or below 36%. In the fourth quarter, we expect total revenue yield to be approximately 70 basis points lower than the third quarter, and our interest and fee yield to be approximately 50 basis points lower due to the continued mix shift towards larger loans and the impact of nonaccrual loans as credit continues to normalize. Moving to Page 8. Our net credit loss rate was 5% for the third quarter, a 280 basis point improvement year-over-year. Net credit losses were also down 240 basis points from the second quarter due to improving economic conditions and our lower delinquency levels. We continue to expect that our full year net credit loss rate will be below 7%. Flipping to Page 9, the credit quality of our portfolio remains strong, thanks to the quality and adaptability of our underwriting criteria and the performance of our custom scorecards. 30-plus day delinquencies have begun to normalize as expected. Our 30-plus day delinquency level as of September 30 was 4.7%, an increase of 110 basis points versus June 30, but comparable to the prior year and 180 basis points below 2019 levels. Our 90-plus day delinquency level increased only 40 basis points sequentially and remains below third quarter 2020 and 2019 levels. Moving forward, we expect delinquencies to continue to rise gradually towards more normalized levels. Absent any significant change to the macroeconomic environment, we expect strong credit performance into 2022, and we anticipate that our 2022 NCL rate will be at or below 8.5%, even as the historically low delinquencies continue to normalize. Turning to Page 10. We ended the second quarter with an allowance for credit losses of $139.4 million or 11.8% of net finance receivables. During the third quarter of 2021, the allowance increased by $10.7 million to $150.1 million to support our strong portfolio growth, but the allowance as a percentage of net finance receivables decreased to 11.4%. The allowance increase in the quarter consisted of a base reserve build of $12.7 million to support our portfolio growth and a COVID-related reserve release of $2 million due to improving economic condition. We continue to maintain a reserve of $15.5 million related to the expected economic impact of the COVID-19 pandemic. As a reminder, as our portfolio grows, we will build additional reserves to support new growth. We continue to reduce the severity and the duration of our macroeconomic assumptions given the stronger economy. We expect that the reserve rate at year-end will be comparable to current levels and will normalize to pre-pandemic levels of approximately 10.8% by around mid-2022. Our $150.1 million allowance for credit losses as of September 30 continues to compare very favorably to our 30-plus day contractual delinquency of $61.3 million. We are confident that we remain appropriately reserved. Flipping to Page 11. G&A expenses for the third quarter of 2021 were $47.8 million, up $4 million or 9% from the prior year period, driven by increased investment in our new growth initiatives, personnel and omnichannel strategy. G&A expenses for the third quarter also included $0.7 million of expenses related to the consolidation of 31 branches as a part of the company's branch optimization plan and the $3 million benefit related to the deferral of digital loan origination costs, of which $1.5 million was incremental to the quarter. On a sequential basis, our G&A expenses rose $1.4 million. Overall, we expect G&A expenses for the fourth quarter to be approximately $54 million as we continue to invest in our digital capabilities, our geographic expansion into new states and personnel to drive additional sustainable growth and improved operating leverage over the longer term. Fourth quarter G&A expenses will include an estimated $0.9 million of branch optimization expenses. Turning to Page 12. Interest expense was $8.8 million in the third quarter or 2.8% of our average net finance receivables on an annualized basis. This was a $0.5 million or 70 basis point improvement year-over-year. The improved cost of funds was driven by the lower interest rate environment and improved costs from our recent securitization transactions. We currently have $450 million of interest rate caps to protect us against rising rates on our variable price debt, which as of the end of third quarter totaled $219 million. $350 million of the interest rate caps at a 1-month LIBOR strike price between 25 and 50 basis points and a weighted average duration of 2.3 years. As rates fluctuate, the value of these interest rate caps will be mark-to-market value accordingly. Looking ahead, we expect interest rate expense in the fourth quarter to be approximately $10 million, excluding mark-to-market impact on interest rate caps, with the increase in expense attributable to the growth in our loan portfolio. Page 13 is a reminder of our strong funding profile. Our third quarter funded debt-to-equity ratio remains at a conservative 3.5:1. We continue to maintain a very strong balance sheet with low leverage and $150 million in loan loss reserves. As of September 30, we had $722 million of unused capacity on our credit facilities and $194 million of available liquidity, consisting of unrestricted cash and immediate availability to draw down our credit facilities. As a reminder, in October, we closed our seventh securitization, a private $125 million transaction that has a 5-year revolving period and a fixed coupon of 3.875%. The new securitization enables us to pay down higher cost variable rate debt, provides us with additional fixed interest rate certainty and allow us to fund multiple product types, both above and below 36% APR. Following the securitization, our fixed rate debt as a percentage of total debt increased from 78% to 87%, with a weighted average coupon of 2.7% and average revolving duration of nearly 3 years. Our effective tax rate during the third quarter was 23% compared to 27% in the prior year period. For the fourth quarter, we expect an effective tax rate of approximately 25%, excluding discrete items, such as tax impacts associated with equity compensation. The company's Board of Directors has declared a dividend of $0.25 per common share for the fourth quarter of 2021. The dividend will be paid on December 15, 2021, to shareholders of record as of the close of business on November 24, 2021. In addition, during the quarter, we repurchased 390,112 shares of our common stock at a weighted average price of $56.32 per share under our $50 million stock repurchase program. We continue to be extremely pleased with our outstanding performance throughout the year, a robust balance sheet and our near and long-term prospects for growth. That concludes my remarks. I'll now turn the call back over to Rob.

Thanks, Harp. And as always, I'd like to thank the regional team for their hard work and exceptional execution. I'd also like to thank our investors for their continued support. In summary, it was another outstanding quarter for regional. Our omnichannel operating model, new growth initiatives and superior credit profile continue to set us apart from our competition. We're a growth company at a value price, and we hope that you're as excited as we are about our future and the focused omnichannel strategy that we've developed. We'll continue to execute on our key strategic initiatives, positioning us to sustainably grow our business, expand our market share and create additional value for our shareholders. We look forward to continuing to provide our shareholders with predictable, consistent and high-quality returns. Thank you again for your time and interest. I'll now open up the call for questions. Operator, could you please open the line?

[Operator Instructions] The first question comes from John Hecht with Jefferies.

Quite a bit of growth in the digital channels. I'm wondering, can you -- is there any different characteristics you're seeing with the sizes of loans or anything you're seeing in terms of like as a seasoned delinquency migration with those relative to in-store loans?

Yes, on the digital side, it really is just activation around the growth initiatives as we've continue to add new channels, new digital affiliates and lead aggregators. Obviously, through those channels, it's a mix of small and large loans. From a percentage standpoint, 57% of those digital loans were large loans. So we've got a good mix, not quite consistent with the mix of our overall portfolio in terms of large loans, but still a healthy mix of large loans. And it's a great feeder channel for small loans. As you know, we bring customers in at a higher rate in smaller loans and then able to see their on us credit behavior with us and then graduate them up to larger loans in the future. So we started to grow our small loan portfolio last quarter, and we continued it this quarter. And while we're still going to continue to shift our mix to large loans, it's nice to have that growth on the small loan portfolio again and support the yield. From a credit performance standpoint, all our growth initiatives, including what we're doing on digital, are performing right on our model expectations and leading to strong net credit margin. So we're really pleased with the digital channel overall.

Okay. And then you guys talked about continued branch of -- well, you continue to optimize branches and make investments in digital initiatives. Maybe talk about -- those are kind of offsetting investments versus savings in branch. Maybe talk about like what do we think about kind of how that affects total expenses as we kind of go into '22?

Yes. We're not really giving guidance specifically on '22 investments, although I will tell you that we'll continue to lean into our growth initiatives. As you can see, they've paid off handsomely in the quarter, we generated $129 million, roughly 30% of our $420 million originations came from these growth initiatives. So I think the way to look at the branch optimization is, in the past, we've closed 8 to 10 branches a year. This year, we'll probably close a total of 34. We closed 3 earlier in the year. The way you think about the 31 that we closed is we're leaning into our omnichannel model. We've assessed, if we look at the performance of our new states and larger branches. And we looked at our existing branch network where we could optimize performance. Take smaller branches that were in close proximity, combine them, create a larger branch, which are more efficient to run and not lose anything on the performance side. In terms of how we're going to deploy our capital going forward, or our investment it's going to continue to invest in the core areas I've talked about, which is digital innovation, geographic expansion and new products and channels, all of which we're leaning into, and will require investment into next year.

Okay. And then just final question. Just remind me, Utah you're going in with branches or just digitally? And I guess on that same topic, are you able to go into new geographies just digitally or do you kind of internally require a branch to be there as well?

No, that's a great question. So yes, Utah, we're in with one branch to start. We have 4 in Illinois. So the 4 in Illinois, which I noted, they already have $9 million of balances after 6 months, and the largest is $2.8 million, which is a mature branch after 5 years is $3.7 million. So our light footprint approach into new states is really doing well. So as we look into Utah, we'll certainly look to add some more branches. That will be the go-forward model in most of our new states. But I will tell you, once we roll out our end-to-end digital originations product in the first quarter, which we'll start testing relatively soon, that does give us the opportunity for certain states, particularly where rates are lower and margins may not be as wide to be able to enter those states digitally and skim off the best customers in a very efficient way. We haven't done it yet, but the opportunity exists once we get our digital investments where we want to be.

[Operator Instructions] The next question comes from Sanjay Sakhrani with KBW.

This is actually Steven Kwok in for Sanjay. The first one I had was just around credit, particularly around delinquency rate. Just wanted to get a sense of what are you seeing from the health of the consumer? And as we look out over the near to intermediate term, do you think we can get back towards the 2019 delinquency and charge off levels? Or do we -- do you think like given your new -- newer mix of receivables that it could be perhaps a little bit different?

Yes. Steven, great question. Look, what we're guiding to, look, there's still uncertainty out there. We all know that. But what we're looking and seeing is the customer has kind of come into this post stimulus air with very strong balance sheet. We're starting to see the normalized credit. We said last quarter that delinquencies would start to rise, and that's exactly what we're seeing. And look, I anticipate over the next 12 months that delinquencies will normalize. I think NCLs, which we said should be at or below 8.5% next year, may not fully normalize until maybe 18 months out. So it's a little hard to predict. But what I would say is as we continue enhance our custom scorecards, as we continue to grow our large loan portfolio and improve the quality of our portfolio. I mean, I should point out, 82% of our portfolio is below 36%. That's a big shift over the last several years in terms of the quality of our portfolio. So I'm not going to get too far over my skis, but I think that we may see normalization lower than where we were in the past. How much I can't give you that right now.

Got it. Got it. And just a follow-up around the expenses. I know for this quarter, you had guided to about $52 million, and you came in at about $48 million on the expense side. Can you just talk about where the savings that you're getting? And then how much more runway there is going forward? Because it seems like you've been doing a lot better on the expenses each quarter as well.

It's Harp. So I'll take that question. So the largest driver of where we guided to last quarter, which was $52 million and then the $48 million roughly that we came in at was the deferral of digital marketing costs. So that $3 million that I talked about in the prepared remarks. So that decreased our expenses in the third quarter. Of that $1.5 million was within the quarter. And then the other $1.5 million was the accumulation of first quarter and second quarter. So $1.5 million was incremental to the quarter for the total of $3 million. So that reduced the expenses in third quarter, down to the $48 million versus the $52 million that we've given in guidance. For fourth quarter, we are guiding up to $54 million, and that has to do with $0.9 million of branch optimization costs, which will be in the fourth quarter as well as continued investment in our capabilities.

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

Thank you, operator, and thanks, everyone for joining. Look, stepping back, the business performed exceedingly well this quarter, breaking records on quarterly revenue, portfolio growth, total and digital originations, ending receivables and quarterly low NCLs. As we said last quarter, we expected delinquencies and losses to normalize over the next 12 months or so. We have controlled our growth with stable credit through prudent underwriting. We're underwriting at rigorous pre-pandemic levels using our enhanced scorecards as well as enhanced income and employment verification process since the start of the pandemic and using alternative data to impact our decisioning. Our new auto secured underwriting, as an example, we adjusted for very early in the launch of our product because we believe inflated used car prices are -- used car prices are inflated. I'm not sure everybody else has done that. And look, the performance to date has been fantastic. So an example of how well our new initiatives are performing, the first 1,200 auto secured loans, only 2 are currently in a delinquency stage. So net-net, as I said in the prepared remarks, we have built a growth company with a focused omnichannel strategy and proven consistent execution. We are focused on digital innovation, geographic expansion and new products and channels to drive our growth. At the same time, we have derisked the business by investing heavily in our customer -- custom underwriting models and shifting more than 82% of the portfolio to higher-quality loans at or below 36%, enabling us to maintain a stable credit profile as we grow and deliver predictable superior results for our shareholders. Thanks again for joining this evening. All the best.

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