Regional Management Corp (RM) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Regional Management Corporation third quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference Garrett Edson, Senior Vice President of 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 and which may be also 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 Corporation. 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 within our earnings announcement and presentation deck posted on our website at regionalmanagement.com.

I would now like to introduce Peter Knitzer, CEO of Regional Management Corp.

Thanks Garrett and welcome to our third quarter earnings call, my first as Chief Executive Officer of Regional.

Thanks as always to everyone participating this afternoon for your continued interest in our Company. I'm here with Don Thomas, our CFO, who will speak later on the call. I'm also here with some members of our financial team.

For those with access to a computer or a mobile device, we have once again posted a supplemental presentation on our website at regionalmanagement.com to provide additional color to our remarks.

I've now been at the helm of Regional for approximately three months and I would be remiss if I did not once again thank my predecessor, Mike Dunn, for helping to make this transition so seamless.

Since officially coming onboard in August, I have immersed myself in the business and hit the ground running, getting to know the team at all levels, not just in headquarters, but our folks in the field as well. And what I've come away with is that we have a very strong team already in place and are in a solid position to expand the business and succeed for the long term.

To that end, I'm happy to report record sequential growth in receivables of $50 million in the third quarter, which boosted us to almost $700 million in total receivables as of the end of the quarter. Key to supporting this growth in the future is our operating system conversion where our efforts are keenly focused. Once completed, the new operating system should open significant opportunities for Regional over the long term.

Let's get into the third quarter highlights, then I'll turn the call over to Don for some additional remarks around our financials, after which I'll talk a bit about our ongoing strategic efforts before opening up the call for questions.

Starting on slide 3, for the third quarter we recorded net income of $6.5 million comparable with prior year quarter. Diluted EPS was $0.56, up $0.50 from the prior year period as we had a lower weighted average share count this past quarter as a result of our stock repurchase program.

On the non-GAAP basis, net income was $6.7 million, up 3% from the prior year period and diluted EPS was $0.58 per share. We are particularly pleased with our top line performance as we saw a 13% increase in revenue in the quarter. From an interest and fee income perspective, we were up 15%, driven by our volume increase and a slight boost in yields.

We did see an increase in our provision and our operating expenses and we'll discuss that in further detail shortly. Returns remained solid for the quarter with an ROA of 3.9% and an ROE of 13.2%.

On slide four, the $6.7 million of non-GAAP net income this quarter is additional confirmation of our return to a seasonally driven pattern of bottom line performance. The bottom graph on the slide tracks our ending net receivables and as we just discussed, it was a very strong quarter as we grew our total finance receivables by nearly 16% to a record $696 million. This was the sixth consecutive quarter that our ending net receivables increased over 10% from the prior year period, and we continue to be driven by the performance of our core small and large loan portfolios.

Turning to slide five, we break down our revenue into its main components. The 13% year over year revenue growth rate was driven by the 15% increase in our average net receivables and partially offset by a 40 basis point decline in yields. Total revenue was also slightly impacted by our insurance income which was down $400,000 on higher claims expense.

On a sequential basis our total revenue yield improved 30 basis points and as we talked about in previous quarters, our revenue growth going forward should mostly correlate to our volume growth.

On slide six you can see our product category trends and as I previously mentioned on September 30, 2016 our total portfolio was $696 million, $95 million greater than September 30 of last year.

Our core loan products were up $119 million led by our large loan category, which now stands at $217 million or 31% of our total portfolio. As we noted on last quarter's call, we have consolidated convenience check loans into our small loan reporting due to our reclassification of renewed convenience check loans into the small loan category. The new combined core small loan category saw a $21 million or a 6% increase from the prior year and was up 9% from the end of the second quarter.

Our other loan categories were down $24 million from the prior year, primarily due to our automobile loan category. We like our auto business as it allows us to provide additional opportunities to serve our customers' needs, but it is a secondary focus compared with our core loan products.

On our last call we had mentioned that we thought we were beginning to see an inflection point in our auto originations. While this book has mostly stabilized, as you can see by the modest 4% sequential decline in finance receivables, we now expect the auto portfolio to decrease modestly in the fourth quarter as well, comparable to the sequential decline we experienced in the third quarter. We continue to make progress restructuring our auto business having fully implemented a centralized streamline repossession process and other functions.

I'll now turn the call over to Don to go through a few of the next slides.

Thanks Peter, and hello to everyone on the call.

On slide seven we show our seasonal pattern of delinquency. Our total delinquency of accounts one or more days past due as of September 30 was 18.2% and has shown nice improvement over the last several quarters. Our 30-plus day delinquency level stood at 7.1%, an improvement from 7.3% in the third quarter of 2015, but up from 6.8% at the end of the second quarter, which is consistent with our normal seasonal pattern.

We've totaled the 90-plus days past due dollars next to each of the last three delinquency bars in the graph. It's worth noting that consistent with the normal seasonal pattern our later stage delinquency buckets are elevated. This will result in higher net charge-offs in the fourth quarter then the third quarter which is consistent with the seasonal charge-off pattern for our business shown on the following slides.

Turning to slide eight, at the top you can see that the bars show the trend of our net charge-offs. If you compare the delinquency on the previous slide with the net charge-offs on this slide, you can observe how our net charge-offs rise and fall on a lagging basis following the seasonal delinquency trend of the Company.

In the third quarter of 2016, net charge-offs were $1 million higher than the third quarter of 2015 and $100,000 higher than the second quarter of 2016.

Again, I would remind everyone since we have a larger amount of accounts that are 90-plus days past due at September 30, we do expect our net charge-offs in the fourth quarter will be somewhat higher than the third quarter amount. For the third quarter, our net charge-off rate as a percentage of average net receivables was 8%, down 50 basis points year over year and 60 basis points from the second quarter. The increase in net charge-offs we expect for the fourth quarter will also increase our net charge-off rates as well.

The provision for credit losses of $16.4 million in the third quarter was up $2.3 million from the prior year period and up $3 million on a sequential basis. The increase in the provision was mainly attributable to the growth of our portfolio in the third quarter. As a reminder, when we originate a loan we have to provision for that loan at the beginning of its lifecycle while we recognize revenue over the life of the loan.

Provisioning for loan growth increases our allowance for credit losses. Sequentially, the third quarter allowance increased 8% or $2.9 million from the second quarter 2016 allowance. The 8% increase in our allowance is very close to the 7.8% sequential increase in our portfolio.

As a percentage of loans, the third quarter 2016 allowance was 5.6% versus 6.3% for the third quarter of 2015 due to our improving credit quality and to large loans with lower loss rates becoming a significantly greater portion of our overall mix.

Similar this quarter, we expect our allowance in the fourth quarter to rise along with our expected sequential portfolio growth. This, coupled with the seasonal increases in charge-offs I already mentioned, is expected to increase our total provision for credit losses in the fourth quarter over the amount in the third quarter.

Moving on to slide nine, you can see our G&A expense trend. G&A expense of $30.5 million in the third quarter of 2016 was up $4.3 million from the prior year period and up $0.9 million sequentially. Excluding $400,000 in loan system conversion costs in the quarter, our G&A expense would have been right at $30 million. The main reason for the year over year increase in G&A expenses were expenses related to our home office, specifically incentive expenses and salaries related to having an additional 13 employees.

During the three months ended September 30, 2015 we reduced the accruals for both our short and long term incentive plans to more appropriately reflect their status relative to their performance targets. We did not have similar reductions during the third quarter of 2016. We believe we won't see as pronounced an increase in the fourth quarter with respect to incentive expense but there will still be some impact to the personnel line item. We expect that our incentive plan expense will increase in future years from annual grants under our long term incentive plan that have three-year performance periods associated with them.

G&A expenses as a percentage of average net receivables was 18.1% for the third quarter, which was up from the prior year period that had the lower incentive expense but was down nicely from the second quarter of 2016.

Let's go to slide 10 now. This slide shows s trend of return on assets and return on equity. Looking at the return on asset trend in the top graph, you can see the returns on assets have generally been in the high 300 to low 400 basis point level for the last six quarters. You can also see that the return on assets trend shows our seasonality with slightly lower returns in the first half of the year and slightly higher returns in the second half of the year. The return on equity ratios follow a similar pattern. We expect these return trends to continue.

Let's turn briefly to slide 11. With respect to our Nortridge loan management system implementation we are now estimating about $500,000 of pre-tax non-operating system implementation expense in the fourth quarter.

I'll now turn the call back to Peter, who will provide some more color on the ongoing system conversion as well as other items.

Thanks Don. Let's go to slide 12 to give you an update on our current strategic initiatives.

First and foremost, we are making progress with respect to our Nortridge origination and servicing system conversion. At the beginning of October, we officially brought our branches in North Carolina, our third state, online. This brings our total number of branches on Nortridge to 62. To ensure the system is appropriately enhanced for our long term goals and successfully implemented, we've deliberately taken our time over the past few months to get things right and as a result our timeline to complete the implementation has moved back to 2017. While our initial expectation was to be converted by the end of 2016, we have found that converting one state at a time to be a much more effective plan to ensure that any state-specific nuances are addressed before converting additional states.

As we've talked about on prior calls, the new system will provide us with numerous long term benefits such a decision engine and electronic payment processing that will position regional to succeed in the long term. I am pleased to report that the states where we have already converted the enhanced functionality, most specifically the addition of the automated decision engine, is working quite well.

With respect to our marketing and online lending initiatives, we have been testing improved targeting in our mail channels, which helped us achieve our record growth in the third quarter.

We expect to test refinements to these campaigns in the fourth quarter and depending upon results, we would roll these out in either the first or second quarter of next year. Also we've been testing an online referral program with LendingTree in all of our states since last July and we are continuing to see a positive impact from that channel.

Given the newness of the online channel in our marketing mix and the criticality of reading performance over a reasonable period of time, we feel it is prudent to continue our test and learn strategy over the next several quarters before deciding to significantly expand our efforts. Importantly, the improved functionality that we've deployed online, including the ability to take a loan application 100% digitally, inclusive of an e-signature and electronic funding, is working well in South Carolina and we are rolling that capability out to the balance of our states by the end of the second quarter of 2017. Also, once the Nortridge conversion is complete, we will fully integrate our online offerings into Nortridge linking this channel to our origination and servicing platform.

Finally, at our last earnings call we indicated that we would open some branches in the fourth quarter. We have decided to defer these branch openings to the first quarter of next year. As you can see from our third quarter results, Regional's current branches have been more than up to the task of delivering strong portfolio growth for us.

So to sum it up, I've been very happy that the transition into the CEO role has gone so smoothly and I have to thank the entire team of Regional for helping me ease into the role. I thought we had a strong third quarter, particularly in the growth of our core small and large loan portfolios. Credit remained stable and we are appropriately building our reserves to handle our strong growth.

Our expenses were a bit elevated in this quarter for the reasons we discussed earlier, but we continue to manage them closely to ensure that they do not stray far from the levels we've seen over the past few quarters. We're making solid progress on our system conversion and extending the full adoption into 2017 to allow us to roll it out in the most effective manner. Most importantly, we're doing the right things necessary to ensure that the Company is positioned to grow both on the top line and bottom lines for the long term.

Thanks for your time and interest and I'll now open the call up for questions.

(Operator Instructions) Kyle Joseph, Jeffries.

I just wanted to get your thoughts given the strong growth we're seeing pretty much sort of across the board along with the yield expansion. Just wanted to hear your thoughts on sort of the overall competitive environment you guys are facing right now and if that's getting easier or what's driving those trends.

I think that really sticking to our knitting and offering competitive products that prospects and customers want to receive, coupled with improved marketing efficiencies and targeting that we discussed earlier on the call, has propelled our growth significantly in the third quarter. We always look at our competition and we strive to provide offers that are both competitive and in many cases better than our competition. We will continue to look at the marketplace to maintain a differential advantage so that we're offering our customers the best in class products available.

And then just in terms of auto, I know you mentioned the portfolio. We may see another quarter of decline in the fourth quarter, but as you mentioned you're structuring that business. Over time should that return to growth or what's your outlook there? And if you could comment on sort of your view of competition in that market as well that would be helpful.

Auto is very competitive marketplace and there are some very large players out there. We play more in the niche that serves our customers' needs. We anticipate, we've done some good consolidation of some of our processes and have much greater control over who we lend to, credit quality. We anticipate improving in our new originations and we do anticipate the slight decline in the fourth quarter.

In terms of 2017, we're evaluating our overall product portfolio. We like our auto product and we'll continue to offer it. We'll come back to you with a more definitive view of how that lines up with the rest of our products for 2017 and as you can see, even though there's been a slight decline in auto, the overall portfolio is growing nicely with a healthy yield.

And then one last one from me if you don't mind. Sorry if I missed this earlier. I know you mentioned no stores build in fourth quarter of 2016 and I mean I imagine you guys will be focused on Nortridge and the online roll-out in early 2017. But can you provide us with any idea on your outlook for store growth in 2017 and beyond?

We like building new branches and the branches that we planned on building in the fourth quarter we will build in the first quarter. With respect to a full year view of 2017, we'll come back to you at the end of the fourth quarter once we've laid out all of our go-to-market strategies and give you a stronger indication of where we think we're going to go with the de novos next year.

(Operator Instructions) Bill Delsym, Titan Capital Management.

I actually would like to follow up from the auto perspective. When you roll the clock forward, say five years from now, how do you believe that the auto business is going to look relative to what you see today?

Well, at this juncture I can't look out five years. That's a long term horizon. But I will tell you that our small and large loans are our core business and we like the auto business in terms of offering it to our customer base. It's a good companion product to our small and large loans. I don't see it growing to the rate of our large loans in any way, shape or form. That said, we want to continue to offer it. I can't really give you any guidance as to how big we will make it but it will not grow at the same pace as our core portfolio.

And what is your view on retail, Peter, and how do you want to see that business unfold?

We have a nice small retail business that today we do not have the functionality to provide same as cash, which many of our customers, whether they be the retailers that we work with or consumers, are accustomed to and like having. With the roll-out of Nortridge we will have that capability, so when we're completing our Nortridge conversions and have the functionality in place we'll be able to do that. We feel that that will put the retail business in a more competitive position than it is today.

And with that in mind, once you have that more competitive position in place, how do you want to move forward with the business?

At this juncture we're going to test and learn and see how that works. Retail loans do provide, again, a good companion product and a good feeder business for our small and large loans, so we like it from that perspective.

I don't really know at this juncture how fast we want to grow that or how fast we can grow that because we've had what I would call a somewhat inferior product offering relative to competition. So, as we get that we will see if we have dedicated resources as we do the auto for the retail business and I think having the right product. If you don't have the right product it's sort of hard to project out how much that business can contribute to our overall growth and profitability.

And then the insurance claims jump, would you talk to that please?

I'll take that one, Bill. We have some higher claims expense in the quarter and I think we've referred to some higher claims expense in prior quarters as well. The claims do move from product to product, from time period to time period, but we certainly have seen a higher level of non-filing claims expense in the third quarter of 2016. As we moved in to a large loan portfolio that's grown a lot in size, more of our non-filing claims have become large loan non-filing claims. Frequency is not up, that's not a concern, but the average size of the claim has grown, which has caused the impact on our net insurance line.

Thank you, and at this time I'm not showing any further questions. I would now like to turn the call back over to Peter Knitzer for closing remarks.

Thank you everybody for your interest and for joining the call today. We appreciate your support and your ongoing interest. I want to wish everybody a Happy Halloween and Thanksgiving. We'll be back at the end of the fourth quarter to give you our full year results and our fourth quarter results. Thank you all for dialing in today.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.