Regional Management Corp.
Q1 2021 Earnings Call Transcript

Published: 8 May 2021

[Operator:]

Welcome to the Regional Management First Quarter 2021 Earnings Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Garrett Edson of ICR. Please go ahead.

[Garrett Edson:]

Thank you and good afternoon. By now, everyone should have access to our earnings announcement and supplemental presentation, which was 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.

[Rob Beck:]

Thanks, Garrett, and welcome to our first quarter, 2021 earnings call. I'm joined today by Harp Rana, our Chief Financial Officer. Following our strong performance in the second half of last year, we carried forward the momentum into 2021. In the first quarter, we generated record bottom line results of 25.5 million of net income and $2.31 of diluted EPS. Our growth initiatives helped to reduce our typical first quarter seasonal liquidation and the impact of new stimulus payments, which in turn drove strong revenue performance. At the same time, we maintained a superior credit profile with historically low 30 plus day delinquencies, retained a tight grip on expenses while continuing to invest in our digital initiatives and growth strategies. And experienced low funding costs thanks to our strong execution in the securitization markets. Despite pressure from a combination of tax refunds and two stimulus payments in the quarter, our core small and large loan portfolio grew by $18 million or 2% over the prior year period and was down only $28 million or 2.5% quarter over quarter. This strong result was driven in part by the new growth initiatives that we implemented in 2020, which continued to perform very effectively. We originated $231 million of loans in the quarter, up 1% year over year and up 5% from the first quarter of 2019 with $29 million that are originated loans derived from new growth initiatives. The second round of $600 stimulus checks appeared to have been spent relatively quickly. The third round of $1,400 stimulus checks led to a temporary period of higher loan payment activity, along with some weakening of loan demand.

[Harp Rana:]

Thank you, Rob and hello everyone. Let me take you through our first quarter results in more detail. On Page 3 of the supplemental presentation, we provide our first quarter financial highlights. We generated net income of 25.5 million and diluted earnings per share of $2.31 resulting from our growth initiatives, stable operating expenses, lower funding costs and strong credit as illustrated on Page 4, branch originations were comparable to prior year. As we ended first quarter originating, $169.7 million of loans. Meanwhile, we grew direct mail and digital origination by 9% year over year to $61.7 million. Our total originations for $231.4 million, 1% higher on a year over year basis and 5% higher than the first quarter of 2019. Despite two rounds of government stimulus payments in the first quarter, our new growth initiatives drove $29 million a first quarter origination. Page 5 displays her portfolio growth index trends through March 31st, we closed the quarter with net finance receivables of $1.1 billion up $3 million from the prior year period, as we continue to successfully execute on our new growth initiatives and marketing efforts.

[Rob Beck:]

Thanks harp. In summary, it was an excellent first quarter for regional as our omni-channel operating model, new growth initiatives and superior credit profile contributed to record performance. We're excited to execute on our key strategic initiatives, which will position us to sustainably grow our business for years to come and ensure that our customers continue to receive the first class experience they have come to expect through our long-term investments in digital innovation, entering new markets and developing new products and channels. We are positioned to expand our market share and create additional value for our shareholders. 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:]

Thank you. We will now begin the question-and-answer session. Our first question is from John Hecht with Jefferies. Mr. Hecht, please go ahead.

[John Hecht:]

Rob, Harp, congrats on a good quarter. You guys are clearly differentiating yourselves from the pack with your year over year or, modest, but you had year over year growth. So a lot of people are seeing huge contraction in the portfolio, given stimulus and so forth. I'm wondering, can you give us any details on how much that would be the equivalent of like call it a line increase to maybe a recurring customer versus new customer activity?

[Rob Beck:]

Yes, John. Thanks for joining. I appreciate the kind words on the quarter yet, the way we're looking at the growth that we saw and I think the industry overall, I've heard various things plus, or minus down 10%, us having $18 million or roughly 2% core growth really stood out and I think a big driver of that is, as we mentioned in the call was we had $29 million of growth, new origination's from our growth initiatives. And that's a combination of things. It's new customers that we acquired, as you said, it's also deepening the relationship with existing customers. So if you recall some of the new initiatives that we launched at the tail end of last year, that really helped fuel our year-end growth. We direct mail program. We expanded to a larger risk response segment, particularly on the response side. And that brought in new customers. We also, if you recall, expanded our direct mail program, a wider geography around our existing branches, so that brought in new customers and we call that obviously our extended footprint strategy, which is going to help propel us as we go forward into new states and leverage our digital capabilities with fewer branches. But at the same time, we also opened up the credit box towards the end of last year to our very best customers are good and excellent customers with FICO above 640. So we also added additional balances with those customers, and that's what helped drive kind of a large loan growth that we saw in the first quarter. So net, really happy to grow, you know, 2% in our quarter loan portfolio, even without the new initiatives, we still would have performed, I think, better than the market. And I'll just, I'll call it planning last year at this time for what, postpaid pandemic life would look like. We put in our series of growth initiatives and we've been executing ever since, and that's really driving the outsides performance relative to the market in our opinion.

[John Hecht:]

Okay. That's helpful. Just curious to get an update kind of on the regulatory environment. Number one, the CFP, the small dollar rule I know has been toned down, but I guess there's a chance to get kind of salt settled in the court system. And do you guys see that having any meaningful effect on your collections practices? And then the second is understand your opening in LNO, but we also know they had a regulatory change earlier this year. Did that change any the way you offer your products there?

[Rob Beck:]

Yes, so the Small Dollar Lending Program that just came out, I think it's $13.5 million and that's pretty de minimis and we don't really see any impact on that with regards to collection practices, obviously we're monitoring anything that comes out of the, the CFPB or elsewhere, we have a very strong compliance program and feel comfortable that we're positioned to, to handle anything that might come our way with regards to Illinois, they put in all in great cap of 36%, which we knew prior to entering the state, it's the sixth largest state by population. It's an attractive market even at, a 36% all in rate cap. I mean, 81% of our portfolio today is already below 36% APR. And so we feel there's opportunity to really put on a lot of good business there. Now, naturally when there's a rate cap in any state, what that doses, you have to tighten up and who you can lend to. So the FICO score in Illinois is it would be higher than maybe in some states that were willing to lend to make sure we keep our net credit margins where we want to keep them. But it's an attractive market for us. I think there's others that are leaving the market are scaling back because they have a lot of branches. The great thing is we have the opportunity to go in there with fewer branches and leverage our new and improving digital capabilities to operate there with, with a lower cost and take some share.

[John Hecht:]

And that's a good segue to my last question is you, at some point, do you think your digital initiatives will allow you to enter a region that you have zero branches in?

[Rob Beck:]

No, I, we still feel there's a lot of value to that customer interaction that's enabled by having a brand's presence, what I think that how I would characterize it is, but that doesn't mean we need to have as many branches on every corner to maintain that relationship. So the model has got to evolve over time, but we feel that we can enter the new markets with, far less branch density still allow the consumers to interact with us, however, and wherever they want to, whether they want to come to a branch, which might be a little bit farther drive that used to be or deal entirely with us online, particularly once we get our end loan, origination process up and running at the end of this year, internally next year.

[Operator:]

The next question is from David Scharf with JMP Securities. David Scharf, your line is open.

[David Scharf:]

Actually that covered most of the questions I had, but there was maybe one I wanted to get a little more color on Rob, listen, we're at sort of the tail end of an earning season where pretty much every lender has, disclosed record low delinquencies and losses and documented the impact of stimulus. And obviously all eyes are more on growth than credit, but I'm wondering you had made the comment that 70% of the current portfolio has been originated, since April of 2020 under tighter underwriting standards. And as we think about the magnitude of loan growth, acceleration if not in the second, third quarter, at least by the end of the year, an entering next year, what are some of the signs you need to see, before sort of, wide net credit box a bit, become more aggressive or for lack of a better term, return to pre pandemic underwriting standards.

[Rob Beck:]

Yes, no I'm asking David, thanks, we started to see signs of, stabilization and at the tail end of last year, when we started open up the credit box to our good and excellent customers. So our very best customers. So we started extending larger loan size to the best customers as we get forward into this year. Naturally, using our data analytics, we are looking for opportunities in the portfolio to open up where it makes sense, without, getting ahead of ourselves. One of the great things about where we are from a credit standpoint. Now, obviously the stimulus has been a terrific, positive for the industry, but, we tightened appropriately at the start of the pandemic. We started to loosen up to our very best customers at the end of last year. The other thing is, we've increased the size of our portfolio for large loans. It's south 65% of our portfolio versus 57% at this time last year. Well, those are higher quality customers. And so when you look at where we stand today, we have a really superior credit profile. And what it does is it gives you a lot of flexibility, then to do the analysis, determine where you can open up the credit box to achieve attractive net credit margin. And that's what we would, we're doing on a normal course of business. The other thing I'd point out is, and this is you can see this in the, in the key. You can also see it in the release, our delinquency dollars, whether it's the miss paid bucket from one 29 days past due, or the 30-plus days past due in aggregate versus prior year, delinquencies were down $75 million in versus fourth quarter down $50 million. So the one 29 day bucket was 9% last year, it's 4.5% at the end of the quarter and 30 plus 6.6% last year. And it's now 4.3% in March and 3.7% here in April. So when you've got the underlying business momentum that I've talked about with the new growth initiatives, along with the solid credit, it really gives you a lot of flexibility and opportunity going forward. And, we have lots of head room for growth. You think there's going to be a strong rebound in the second half, similar to what we saw, last year when we put on $149 million of volume growth and the second half. And so we see lots of opportunity and we're going to be taking advantage of, of things we can do both from our marketing standpoint, our investment in our new strategies, but also where appropriate, loosening up the credit box. If it's pregnant, delivers, attractive returns.

[David Scharf:]

Got it. No, that's helpful. And, you lastly, just kind of pivoting to the, digital originations, you know, with a third of the volume, I'm curious, as you look at the competitive environment, are the, are, are you seeing more lenders that you would characterize as direct competitors surfacing more visibly on some of the digital partners or platforms like Credit Karma or Lending Tree that you're using. Just trying to get a sense for whether you kind of have a different view of application conversion and customer acquisition when you're in the digital environment, versus obviously more local physical presence with a branch network.

[Rob Beck:]

Yes. I'll say this, that a big part of our growth has been adding additional lead aggregators to our relationship profile. So the existing ones we have, we've been maintaining share. Now the real opportunity comes with the pre-qualification process, so think about an environment and today all the digital leads still get referred to our branches and our closed at our branches. So obviously with the development of an end-to-end capability, eventually we can close loans completely digitally. But in the meantime, with the new prequalification process, we're going to be linking that up with our digital lead aggregators through our API. And what that does for us, and it's a real power of it, and I'll just give you an example. Let's say one out of four applications or one out of five applications from a said unnamed lead aggregator only make it through to approval, while our branches have to go through the other three or the other four applications, and that's time consuming. With the prequalification bolted onto the process, the branches only get the applications that they know are going to approve, and that effectiveness, if you will, is a real positive, and what's so exciting about our pre-qualification process that we're going to be rolling out and linking up to the lead aggregators of the next quarter. And what that helps you do…

[David Scharf:]

It's a different set of competitive challenges depending on the channel you operate in.

[Rob Beck:]

You also move up -- sorry, go ahead.

[David Scharf:]

I'm sorry, go ahead.

[Rob Beck:]

I just said it also helps you kind of move up the funnel too because if you're able to move through approval, prequalification, you can move up the funnel with a lot of these lead aggregators. And that's a positive relative to competitors that don't have the capability.

[Operator:]

The next question is from Sanjay Sakhrani with KBW. Sanjay Sakhrani, your line is open.

[Steven Kwok:]

This is actually Steven Kwok filling in for Sanjay. But good quarter guys. The first question I have is just around the revenue yield, as it came in a lot stronger than what the expectations were, I guess. Can you talk about with the drivers of that, how much of that was related to better yields versus the mixing perhaps better than what you had expected, right?

[Harp Rana:]

Yes. I'll take that question. So year over year, revenue came in $1.7 million or 1.7% better. And the primary driver of that was better credit performance on the portfolio, meaning that fewer loans went into non-accrual status. And we had fewer interest accrual reversals. At the same time, we had mix shift to our larger loan, and then we had better portfolio quality year over year, which impacted the yield. So overall, when you look at the yield versus prior year, it looks fairly flat in terms of the interest in the income. But you're 10 basis points better because of all of those benefits that I just spoke about.

[Steven Kwok:]

Got it. And as we looked at the current quarter, you're guiding for the yield to come down 30 basis points, sequentially, what's the large driver of that? Is it the portfolio mix that's going to impact that?

[Harp Rana:]

It's really the impact of the last stimulus. It was the largest stimulus to date, and it's the impact that's supposed to have on our small loans, which are disproportionately affected both by the stimulus and also with tax refunds.

[Steven Kwok:]

Got it. And then just as a follow-up on the funding side, given that these interest rate caps that you've put in place, does that offer protection as rates rise? And if so, how should we think about the implications there?

[Harp Rana:]

No, they definitely provide a benefit as interest rates rise. So how I would think of them is probably as a capital hedge against rising interest rates rather than a perfect P and L hedge. So in the quarter, we had a mark-to-market adjustment of roughly $800,000, and that happens as the value of those hedges increase or decrease. As rates start to rise, the value of those hedges will increase. And we put on $300 million since the beginning of the pandemic and they have fairly low strike prices, they range from about 25 basis points to 50 basis points. So they're very much a part of our funding strategy as we move forward and help us manage that interest rate risk.

[Steven Kwok:]

Got it. So you would expect to continue to roll these through as we proceed ahead into next year?

[Harp Rana:]

When you say roll them through, I want to make sure I specifically understand what you mean. So the benefit of them as interest rates rise will continue to benefit us. In terms of thinking through further interest rate cap, that would really be dependent upon the price of the cap, the strike price of the cap, and where we thought the rates were going to go.

[Operator:]

The next question is from John Rowan with Janney. John Rowan, your line is open.

[John Rowan:]

I just have one quick question. The allowance rate, is that a good allowance rate to use going forward? Or are there any other COVID-19 or macroeconomic reserves that we could see released at some point?

[Harp Rana:]

All right. So our reserve is currently at $139.6 million, that's got a reserve rate of 12.6%. We've got $23.8 million in COVID reserve on the books right now. We released $6.6 million of that, given improving macroeconomic factors. So I would really think about this in two pieces, as we look to the future and improving economic conditions that would have a corresponding impact on that COVID reserve, just like it did in this quarter. And then when you think about the BAU reserve, which is at about 116, that we would build as we put on more volumes. And we would probably build that at the same rate, between 10.5 and 10.8, which is what we had used when we began reserving for CECL at the beginning of 2020. So that's how I'd think about that.

[John Rowan:]

Okay. So just make sure I understand this, there's $23.8 million COVID, that was before the quarter, and then you released $6.6 million out of that $23.8 million?

[Harp Rana:]

So out of the $139.6 million that we have today, $23.8 million today is COVID. At the beginning of the quarter, we had $30 million of which we released…

[John Rowan:]

Okay. I got you. I was interested if six was net of the -- okay. All right.

[Operator:]

This concludes the question, and that's the session. I'd like to turn the conference back over to Rob Beck for any closing remarks.

[Rob Beck:]

Yes. Thank you, operator. And just to summarize, really great quarter, really good underlying business net momentum is evidenced by what I think is out performance relative to the industry, both before and including our new growth initiatives. Like I said, lots of headroom for growth as we focus on our growth initiatives. Again, investing in digital innovation to build out our omnichannel strategy, our geographic expansion and the new products, including auto secured, and new channels as we look to expand with new digital lead aggregators, so all that foundationally supported by really superior credit, based on all the things I've mentioned, including tightened underwriting and a mix of the business, as well as government stimulus. So, we're poised to take advantage of the opportunities as the economy opens up. And we're already thinking about additional things we'll be investing in for next year to continue a strong growth into 2022 and beyond. So really pleased overall with the state of the business, the opportunities in front of us, and also that we've been able to return capital to shareholders. So thanks again for your time today, and look forward to speaking to you again soon.

[Operator:]

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