Regional Management Corp (RM) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to 2012 Regional Management Corporation's Third Quarter Earnings Conference Call. My name is Kim and I'll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Garrett Edson. Please proceed.

Thank you, Kim, and good afternoon. By now everyone should have access to our earnings announcement, which was released prior to this call. These documents 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 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.

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 on our website at regionalmanagement.com.

I would now like to introduce Tom Fortin, CEO of Regional Management Corp.

Well, thanks very much, Garrett, and good afternoon, everyone. Welcome to our third quarter earnings conference call. I'm here with our Chief Financial Officer, Bob Barry, who will speak shortly about our third quarter financial results.

Our headline numbers were solid once again in the third quarter -- total revenues of $35 million, up 33% from the prior-year, net income of $7 million and earnings per share of $0.55. Finance receivables as of September 30, 2012 were $396.9 million, up 33% from September 30, 2011. Bob will expand on these numbers in his remarks shortly.

Overall, we saw considerable positive momentum in our third quarter results as we continued to see double-digit growth in our key metrics, including net loan growth, revenue, and net income. Revenue growth of 33% exceeded our expectations as our de novo stores are performing well. We continued to achieve high teens same store revenue growth, recording an 18.3% increase in same store sales in the third quarter.

In addition, we were aided by and very pleased with our recent live check back-to-school campaign, which received a very robust response. We believe the positive response to our live check campaign bodes well for the next few months and leaves us optimistic about the prospects for our Christmas holiday campaign.

In terms of our branches, we grew our branch count at the end of the quarter to 213 locations, which includes the 19 Superior branches from our acquisition in January of this year as well as 24 de novo branches this year, seven of which were opened in the third quarter. As of today's call, we are up to 216 branches and we plan to open an additional five branches this year, giving us 221 branches opened by the end of this year, which is ahead of our original de novo development schedule.

In total, we will open 32 new branches in 2012. And we've been very pleased with our 2012 de novo class. And as selected opportunities have continued to present themselves in the marketplace, our de novo strategy has been somewhat expedited, especially in the state of Texas.

Despite the additional stores we plan to open in this quarter, our overall de novo plans for 2013 remain unchanged and we will continue to target several states in the Southeast and Midwest for geographic expansion, including Louisiana, Mississippi, Georgia, Missouri, Virginia and Kentucky. Further, we remain in the market for accretive small to mid-size acquisitions similar to our Superior acquisition in January.

In the third quarter, we purchased two small portfolios of accounts for approximately $500,000 and folded these accounts into existing regional branch locations for servicing. From a customer account perspective, we now service over 219,500 active accounts as of September 30, a 16.1% increase from the approximate 189,000 accounts we serviced as of June 30 of this year.

And our fourth quarter is typically our strongest quarter in terms of the growth of our customer base and our loan portfolio due to the holiday shopping season, while the first calendar quarter will typically see a decline in customer accounts, from December 31 to March 31, as customers use their tax refunds to pay down their loans.

One area of our portfolio we're particularly proud of is our furniture and appliance purchase loan product, otherwise known at RMC Retail, which has already more than doubled its total receivables from the end of fiscal 2011. Now, we've partnered with over 500 retail furniture and appliance stores as of September 30, and that number of partners has exceeded our expectations. While RMC Retail provides our portfolio with the lowest loan yield figures at around 20% to 23%, these are among the highest quality loans in our portfolio by a considerable amount with losses in the 2% to 3% range, a very healthy figure for the regional portfolio.

Further, we look at RMC Retail as another way to introduce customers to Regional generally and to potentially cross-sell an automobile loan or an installment loan to a higher credit score consumer, thus growing our revenue base while having the potential to further improve the quality of our loan portfolio. We're very happy with the outstanding performance of the entire RMC Retail team and will continue to look for retailers to directly partner with in order to provide customer financing at the point of sale and support our cross-selling efforts.

While we're satisfied with our overall performance in the third quarter, I would be remiss if I did not also touch upon our provision for loan losses in our efficiency ratio. Due to the success of our back-to-school live check campaign, we saw a greater than anticipated growth in our small loan unit. Now, while this is a boost to our top-line, we also have to take into account a higher provision for loan losses than we had been anticipating as that unit is proportionately responsible for the most charge-offs in our portfolio.

In addition, we saw an increase in our efficiency ratio in the quarter, mainly due to increased personnel costs from adding 46 new branches from a year ago as well as the added cost from being a public Company. We will continue to keep our focus on both figures to ensure that our cost structure is properly aligned with our growth plans.

Finally, in terms of regulatory concerns, there's no real update this quarter regarding any interactions with the Consumer Financial Protection Bureau nor is there much to report on the state level. We continue to believe that the CFPB's current focus is on payday loans, credit cards, and student loans and not on the installment loan industry. Nonetheless, we'll continue to work closely with the CFPB to educate them as to why installment loans are a much more attractive, safer and transparent product for consumers in all respects. And we will, of course, continue to keep you apprised of any regulatory developments on future calls.

With that, I'd like to turn the call over to our Chief Financial Officer, Bob Barry, who will discuss our third quarter results, and then I'll return to provide closing remarks. Bob?

Thanks, Tom. Good afternoon, everyone. Let's go right into our third quarter results. For the third quarter of 2012, we reported total revenue of $35.5 million, a 33% increase from the $26.7 million in the prior-year period. Interest and fee revenue for the third quarter of 2012 was $31.1 million, also a 33% increase from the $23.4 million in the prior-year period, primarily due to a 37% increase in average finance receivables.

Insurance and other income for the third quarter of 2012 was $4.4 million, again, a 33% increase from the prior-year period. Same store revenue growth, which we define as growth in stores who are open for more than one year for the third quarter of 2012, is 18.3%. Finance receivables at September 30 were $396.9 million, a 40% increase from $283.4 million in the prior-year period.

Finance receivables increased primarily to the addition of 46 branches since September 2011 through both de novo openings and acquisitions, including the 19 branches acquired in January of 2012 in Alabama. Same store loans receivable for stores opening at least one year grew 27.2%.

We have 213 branches in seven states open as of September 30. During the third quarter, we opened seven de novo branches. And as of September 30, we have 24 de novo branches. We have opened 24 de novo branches during 2012. At September 30, small installment loans made up 40% of our portfolio, large were 14%, automobile purchase loans were 39%, and furniture and appliance purchase loans were 7%.

Provision for losses in the third quarter were $7.4 million, compared to $4.6 million in the prior-year period, primarily due to the increase in loan volume. Accounts that were over 90 days contractually delinquent were 2.1%, consistent with the rate as of September 2011.

Net charge-offs as a percentage of average finance receivables for the third quarter of 2012 were 6.5% on an annualized basis, an increase from the 6.0% in the prior-year period. The increase was mostly due to growth in the portfolio, particularly in our small loans and [auto units] as well as uncertainties on the loans acquired in Alabama, which justified being additional conservative and prudent with our provision.

For the nine month period ended September 30, charge-offs as a percentage of average loans were 6.3%, compared to 6.0% in the prior-year period. General and administrative expenses for the third quarter of 2012 were $14.3 million, an increase of 39% from the $10.3 million in the prior-year period, primarily due to increased personnel costs from opening and acquiring an additional 46 branches since September of '11 as well as the increased costs from being a public Company.

Regional's efficiency ratio, the percentage of our general and administrative expenses to total revenue, in the third quarter of 2012 was 40.3% and 190 basis points above the 38.4% in the prior-year period. Net income for the quarter was $7 million, a 35% increase compared to net income of $5.2 million in the prior-year period. Diluted earnings per share for the quarter were $0.55, based on diluted share count of 12.8 million.

As of September 30, Regional had finance receivables of $396.9 million and outstanding debt of $258.3 million on a $325 million senior revolving credit facility.

At this point, I'd like to turn the call back to Tom for his closing comments.

All right. Thanks, Bob. So to sum up, our third quarter saw solid growth in most of our metrics and we believe that we're set up well for the holiday season and well into fiscal 2013. Our strategy of de novo branch growth, sprinkled with accretive smaller acquisitions, remains intact and we're very pleased with the recent response to our live check campaigns as well as the considerable growth we've seen at RMC Retail, all of which leads to a strong top-line growth.

That's it for our formal remarks. We thank you for your time and interest. And now, operator, we'd like to open up the call to questions.

Okay. (Operator Instructions). Your first question comes from the line of Bob Ramsey with FBR. Please proceed.

This is actually Tom for Bob. Just a quick question on net charge-offs here. So, it looks like year-over-year your net charge-offs were 50 basis points higher, and some of that's attributable to the live check campaign. Given that you're thinking this bodes well for the Christmas campaign as well, should we think about charge-offs also being 50 basis points higher year-over-year in the fourth quarter as well?

Tom, this is Bob Barry. I think that would be a reasonable assumption, yes.

Okay, great. And then, I also noticed that your reserve to loans came down about 90 basis points, from 6.5 to 5.6 year-over-year. Do you -- is that kind of like -- do you think that -- do you believe the loss content of the existing portfolio is lower now or kind of what's the rationale for drawing your reserve lower?

Breaking the allowance down into the four components, Tom, the small installment loans actually went up a little bit. Large installment loans came down. We continued to see good performance in the large loan category.

The big drop, though, was particularly in automobile. And in reviewing the losses in the automobile portfolio in the static pool, we had a dramatic change in our underwriting for automobile loans between 2008 and 2009. And the performance of our post 2008 loan portfolio has been very good, and that's beginning to show up in the lower charge-offs and resulting in a lower allowance.

Also, we believe that the growth in the auto credit scores unit, where we're dealing with a franchised car dealer, we're getting a better customer, a better car, and that's showing up in more favorable loss experience.

Okay, great. And then, if I kind of switch over to growth here, your same store loan growth of 27% was impressive. What exactly drove that same store increase?

Tom, I think it's a combination of the fact that we've the Superior transaction coming on in January of this year. So from a comparison point of view, that certainly helps. But as we've said fairly consistently, we see a historical pattern in our branch development curves, really over a five-year period, where we can precisely, if you will, plot out the expected receivables growth and corresponding store level income with every branch that we open. And it's a remarkably consistent pattern that we see.

At this stage, some 67% of our storefronts are actually younger than five years, so they've really yet to reach the full maturity bucket. And that's the steepest part of the development curve, so we have a large slug of stores from very recent vintages that are marching along through the steepest part of the curve. As we continue to grow, we would anticipate that those development curves would display a consistent pattern.

And yes, the third quarter was 18.3% on revenues, slightly ahead -- a bit ahead of our five-year historical average on same store sales of approximately 14.5%. So it was a very good quarter. There's no question that this very robust back-to-school campaign that we have described in our formal comments for live checks gave some tailwind to the numbers as well.

Okay, great. And then one last housekeeping question. What was the average gross loans receivable balance this quarter?

Gross loans?

The average gross loan receivable?

The average -- Tom, let me get back to you on that. I have the net, but I don't have the gross.

Okay, thank you.

Your next question comes from the line of John Hecht with Stephens. Please proceed.

Thanks very much and congratulations on a great quarter. The first question is do you guys give origination numbers per -- by product for this year and last year? And I'm just wondering, does that include the Alabama acquisition, both in the current period and the year-ago period?

No, it does not. Those are just regional originations, but does not include the loans that we acquired through -- [for] Superior.

Okay. And then, Tom, I'm wondering if you could talk about just market conditions. Are you seeing any opportunities for expansion of yields or contraction -- seeing contraction of yields based on competition and in any product?

Yes, John. I think generally we've actually seen a little bit of expansion in yields, certainly in our furniture product category. I'd say 12 months ago we were typically entering into retail installment sales contracts in the 19% to 20% range; that's bumped to really the 20% to 22% range.

So we've enjoyed a little bit of margin expansion in furniture. Some of that relates to the mix of retailers that we're working with. And now, with over 500 retail points of sale, the independent retailers are actually a larger proportion of the retailers than the chain or national retailers that we work with, such as Ashley Home Furnishings. So I think with some of these smaller retailers we're able to get a bit of a better margin.

I would say similarly we always experiment with our live check campaigns, trying to test and pair various offers with various terms to see what customers will take. And we were very pleased with our back-to-school campaign with the weighted average yields that we received off of that.

Automobile yields have been holding up fairly steadily for us. And in light of what we've previously described as pretty intensive competition throughout the direct and indirect channels, we were very pleased to see very stable yields in both the indirect and direct categories.

Great. Thank you. And the last question, a little bit more on the balance sheet, I wonder if you can give us an update on the progress toward the auto securitization. And on top of that, when might you seek an increase in your bank line?

Yes. We really don't have any comment we can offer at this point, John, on auto securitization. I think for planning purposes we're really looking at that in the first half of fiscal '13. With respect to the bank line, we have a $325 million commitment at this point with an accordion feature up to $400 million in the facility without any changes to the terms or additional credit committee approvals required from our 6 syndicate banks.

At this point in time, we have not gone to our banks to discuss additions to the lines to fill up that accordion over $325 million. Based on our thinking, that's something we would probably do in the latter half of fiscal '13, but I couldn't give you a specific month when that might occur. But as of the moment, we're not in conversations with the banks about an upsizing.

Okay. I appreciate the comments. Thanks, guys.

Sure.

Your next question comes from the line of Daniel Furtado with Jefferies. Please proceed.

Good evening, everybody. The first question I have is just if you could provide any commentary on delinquency roll rates, what you're seeing from that standpoint?

Dan, the delinquency at September 30, '12 was 6.3%, and it's down from 6.6% the same period in '11. The total decline came in the 30-day accounts, so the 60 to 90 and over 90 are holding steady.

Great. And is that partially a function of kind of a mix shift in the originations as you get more of the furniture and the auto business growing there?

I think yes, very definitely. The automobile and the furniture portfolios do have a lower delinquency on a steady-state basis, yes.

Okay. And then, the growth in the quarter, which was -- certainly exceeded our expectations, would you characterize that as relatively evenly spread or was it loaded toward the back end or how should I think about that, the growth in 3Q?

In terms of timing, Dan?

Yes. Yes, exactly.

I would say the bulk of our back-to-school campaign was really centered on hitting the households in the mailboxes the first couple of weeks of August. And we try and time those campaigns to the tax-free shopping weekend in each of the seven states in which we operate. I wouldn't say there was -- beyond that, there really wasn't any thought or concern here about the timing of the growth. I will say that across-the-board auto, furniture, certainly small loans driven by live checks, we were very pleasantly pleased with the growth that we did achieve. But no, I wouldn't say it was back-ended in any way.

Excellent. And when you think about -- and I'm sorry if I missed it, some of the prepared remarks -- but think about the success of the back-to-school campaign and as you roll that into the holiday season, I guess that would give you incremental positive view of what --. Again, not looking for guidance or anything, but just as you think about your holiday campaign, kind of take what you learned from this most recent one and kind of update the model, that would lead me to believe that, all things equal, that there's nothing to -- I guess all things equal, it should be relatively strong in the 4Q as well.

I would concur with that, Dan. And without giving any specifics, I would say that we were obviously pleased with the back-to-school response. I think it's reflective of the continued significant investment that we've made as an organization in the marketing analytics, the marketing team, the program and all of the thinking that goes into that. And I think it's also reflective of an accumulation of experience over the last dozen or so years of doing live checks.

Look, back-to-school is always a great indicator and a harbinger of what we might expect in the holiday season. So I'll leave it at that and just say we were thrilled with back-to-school and we think that's going to flow through to the holiday build.

Excellent. Thanks for your time, everybody.

Thanks, Dan.

(Operator Instructions). Your next question comes from the line of Ian Ellis with MicroCapital. Please proceed.

Yes, gentlemen, good afternoon and congratulations on a great quarter. Two areas of questions. First one, very straightforward, what sort of range do you have for the number of new store locations next year? And then, the other questions I have are related to RMC Retail. I'm interested in the average FICO score of the business written in the quarter versus last year, which the business last year obviously is kind of determining your current loss experience.

Sure. Hi, Ian. Just to give you a sense of a range of what we're thinking about for de novos next year, it would range between 35 and 45 units. And to give you a little bit of context, again, this year we had originally planned for 27 units. But again, due to what we see as very favorable and opportunistic market conditions, we've added another five, for 32 units.

So I would say we're broadly comfortable at 35 to 45. We have our operations teams actually out in the field this week teeing up properties for lease that we would expect to bring on fairly rapidly in the first calendar -- the first quarter of fiscal '13.

With respect to your second question on RMC Retail, I have the FICO information right in front of me. We've seen a very consistent pattern in RMC Retail of funding our deals in the 615 to 625 FICO score range, which we think is some 30 to 35 points -- FICO score points -- above the typical small loan consumer.

So, as Bob had indicated previously with respect to relative delinquencies of our various product lines, there's no question that this is among the most attractive credit score customers that we underwrite and serve. That's been very stable and I think it's reflective of the profile of retailers that we've partnered with.

Okay. No, that is impressive. The loss ratio on that FICO score is nevertheless impressive to me. I want to follow-up given that and what proportion of your originations was your largest partner at this point?

I'm sorry, what proportion is our largest partner?

Yes, of the retail business.

Let's see. It would be -- hold on, I have the information right here, Ian. 22% of our retail originations in the third quarter came from one chain operator of retail stores that happens to be the largest independent licensee of Ashley Home Furnishings stores. And that consists of 25 retail locations, for which we serve as a secondary retail partner.

Beyond that, it falls off very, very rapidly. The next largest partner would be approximately 8% of our retail originations. So the top two would comprise, call it, 30% of retailer originations.

Okay. No, that's very helpful. Thank you.

You're welcome.

Your next question comes from the line of Daniel Furtado with Jefferies. Please proceed.

Hey, guys. Just a quick follow-up. I completely agree with the notion that regulators are likely to view the installment business more favorably than the payday. Have you noticed anything, even anecdotally, from the consumer side? If you've noticed any kind of -- and I get it that you're not in the payday business, so you don't totally know, but the consumers are gravitating a little bit more towards this longer-duration product as well, or do you not have the data to really kind of conclude anything there?

Dan, we certainly don't have data on the payday industry, the propensity of customers or individuals to use a payday product and an installment product. I would say very generally, and we've maintained this for some time, we think it's a very distinct and separate product set serving different markets. That's not to suggest that on the margin perhaps there are some people who will use both the payday and installment loan product.

But I think by nature of the duration of an installment loan product, its maturity, the terms, all of those dimensions, I think it's a very, very unique and distinct product from payday. So personally, I really don't see a lot of migration from one market to the other, but I would be speculating and I don't have data to support that.

Understood. Thanks for the commentary anyway, Tom, I appreciate it.

You bet.

You have no further questions at this time. I would now like to turn the call over to Thomas Fortin for closing remarks.

Thank you, Kim. And again, we'd just like to thank everybody for their participation on this Halloween eve and we look forward to our next quarterly phone call with you. Thanks very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.