Q4 2019 Earnings Call
Thank you for standing by this is the conference operator.
Welcome to the regional management fourth quarter 2019 earnings Conference call.
After the presentation they'll be an opportunity to ask questions to join the question Q you weigh press Star then one on your telephone keypad.
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I would now like to turn the conference over to Garrett Edson with I see our please go ahead.
Thank you and good afternoon by now everyone should have access to our earnings announcement and supplemental presentation, which was released prior to his call which may also be found on our website <unk> regional management Dot com before we begin our formal remarks, I will remind everyone that part of our discussion. Today may include forward looking statements, which are based in the expectations estimates and projections of management.
Today.
We're looking statements in our discussion are subject to various assumptions risks uncertainties and other factors there are difficult to predict and that could cause actual results may differ materially from those expressed or implied forward. Looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them were for all your to our press release presentation recent filings with the FCC.
For more detailed discussion of our forward looking statements in the risks and uncertainties that could impact the future operating results in financial condition of regional management core.
Any intentions are obligations to update or revise any forward looking statements except to the extent required by applicable law I'd now like to introduce Peter Knitzer, President and CEO of regional management Court.
Thanks, Garrett and welcome to our fourth quarter 2019 earnings call.
I'm joined by Rob that our Chief Financial Officer, who will take you through the supplemental financial presentation available on our website.
We closed 2019 with a record quarter and appropriate capstone to a banner year.
The fourth quarter, we posted deluded EPS of $1.38 cents.
And improvement of 53% over the fourth quarter of 2018.
The full year of 2019, we generated diluted as a $3 an 80 cents a 30% increase from 2018.
Our team achieved these strong results through consistent sharp execution on our short and long term strategic objectives.
We continue to enjoy the benefits of our hybrid strategy of grain receivables in our existing branches.
Expanding our branch footprint.
Uhhuh finance receivables to $1.1 billion at year end.
Average receivables per branch top $3 million to the first time.
This receivable growth generated a year over year revenue improvement of 17% in the fourth quarter.
Throughout this period of significant growth.
We've also maintained stable and predictable credit performance.
Our net credit loss rate of 9.2% in the fourth quarter of 2019 was comparable to our loss rate of 9.1% in the prior year period.
And our yearend 30 day, a 90 day delinquency rates decreased 50 basis points, and 30 basis points, respectively from the prior year period.
Also driven operating leverage while continuing to invest in our business.
Your every year, we improved our efficiency ratio.
200 basis points to 41.7%.
We improved our operating expense ratio by 80 basis points to 15.3% in the fourth quarter.
Looking ahead to 2020 and beyond regional futures extremely bright with tremendous opportunity to enhance our customer experience.
Our top and bottom line and generate significant shareholder value.
For our customers. Our goal is to provide best in class service whenever wherever and however, they choose to reach us.
Our high customer satisfaction is is that there's a good reason why we achieved double digit growth in our finance receivables were 19 consecutive quarters on a year over year basis.
Our branch operations remain fundamental to that success and growth.
Does that and we opened eight net new branches in the fourth quarter.
And we expect to open between 25 and 30 branches in 2020.
As Rob will explain in greater detail, we have significant capacity to fund our growth.
We've also continued to make progress towards becoming a true omni channel provider.
We achieved another quarter of year over year increase the percentage of new bar originations generated I did Joe leads.
The 22% of our new originations sourced through digital channels up from 19% into fourth quarter of 2018.
As we discussed in our prior call.
In 2020, we plan to make additional robust investment no digital capabilities and technology infrastructure.
We believe that these investments are vital to support our growth better serve our customers drive efficiency and expand margins over time.
As we've consistently noted the credit profile of our customers remains healthy.
Approximately 66% of our core loan portfolio has now passed our new scorecard underwriting criteria.
The scorecards are performing in line with our expectations.
We continue to believe that they will serve as well in any macro economic environment.
In our press release, we described to first quarter 2020 development.
First as you know we've transitioned to see still accounting effective January onest.
Rob will take you through the impact of the seasonal transitioning shortly.
Second in January human error caused an isolated I T infrastructure event that resulted in an extended outage or loan management system.
During the outage, we continue to book convenience check loans and our branches remained open service customers. They accepted most forms a payment.
However, during that time.
Able to originate branch loan and process certain types of Leptonic payments.
As a result, we're estimating that the out it will adversely impact net income by approximately $1.3 million, the first quarter 2020, and by an additional $300000 throughout the remainder of the year.
We have resolved this technology issue.
System has since been functioning normally and we're confident that the issue won't occur again.
Notwithstanding this development in the first quarter the fundamentals of our business remains strong.
We expect to continue our year over year double digit receivable and revenue growth and despite the earnings headwinds associated with the seasonal transition.
We expect modest year over year growth in our diluted EPS in 2020.
Following the seasonal transition year, we look forward to returning to our year over year double digit diluted EPS growth in 2021 and beyond.
Finally, as a reminder, we completed our $25 million stock repurchase program in the fourth quarter 2019.
Having repurchased a total of approximately 938000 shares at a weighted average price of $26.65 per share.
Our board of directors will continue to regularly evaluate our capital structure and opportunities to return additional capital to our shareholders.
With that I'll now turn the call over to Rob.
<unk> additional color on our financial.
Thank you Peter and Hello, everyone. We're extremely pleased with our fourth quarter results.
On slide three of the supplemental presentation, we provide you with the highlights from the quarter as you can see we generated fourth quarter net income of 15.7 billion up 46% from the fourth quarter 2018.
Our 5.6% return on assets and 21.1% return on equity in the fourth quarter, representing 100 basis point, and 540 basis point improvements respectively from the prior year period.
These robust returns were driven by a 17.4% year over year increase in average finance receivables and our $63 million sequential growth in ending receivables, which was just under the record pace that we set in the third quarter of 2019. This growth resulted in a 17% improvement in revenues.
Over the prior year period on a year over year basis, we've now grown revenues by double digits for 14 consecutive quarters.
Our quarterly provision for credit losses rose $2.3 million or 9.9% year over year. The increase was a result of a $4 million of higher credit losses due to the growth of our portfolio, partially offset by an improvement in the allowance that is attributable to the impact of our credit score cards.
Flipping to slide for our core loan products grew 22% or $195 million compared to the prior year period large loans grew 39% and now represent 55% of our total loan portfolio, while small loans grew 6% and make up 42% of our total portfolio.
As a reminder, in the first quarter, we typically experience a reduction in the size or total loan portfolio as loan demand softened an existing customers use bonuses and tax refunds to pay down loans.
Turning to slide five both interest in field and total revenue yield declined 10 basis points from the prior year period, primarily due to the change in the mix of our products in the first quarter, we expect interesting field to be approximately 10 to 20 basis points lower than the prior year period based on the ongoing chains in the mix of our portfolio.
It's also worth noting that as of December 30, Onest, 75% of our total portfolio has an AB are at or below 36%.
Moving onto slide six our annualized net credit losses as a percentage of average finance receivables were 9.2% for the fourth quarter of 2019, an increase of 10 basis points from the prior year period. The change in non file insurance business practice that we've discussed on prior calls accounted for a 10 basis point increase in our loss.
Right.
Flipping to slide seven our allowance for credit losses, as a percentage of finance receivables ticked down 20 basis points sequentially in the fourth quarter to 5.6% as you know we implemented a new seasonal accounting standard on January 1st as a result, we increased our reserve by $60 million and reduced our equity.
By approximately $46 million net of $14 million in taxes.
Our reserve rate increased from 5.6% on December 31st% to 10.8% on January Onest.
Looking ahead seasonal portfolio liquidation in the first quarter will result in a reserve at least at the Cecil reserve rate as of March 30, Onest, assuming current economic conditions, we expect our reserve rate to float between 10.4% and 11.2% throughout the remainder of 2020.
As we've said consistently ceaseless strictly an accounting change it doesn't present any challenges with respect to our debt covenants funding of growth the cash flow over operations or our ability to return capital to shareholders, we have more than adequate liquidity to fund and execute on our long term strategies.
Turning to slide eight on the delinquency from our 30, plus day and 90 plus day delinquency levels at December 31st stood at 7.2% and 3.2% respectively. At the end of the first quarter. We expect our 30 plus day delinquency rate to be flat to the prior year inclusive of an approximately 40 basis point adverse impact so.
She added with the system outage system outage will result in approximately $650000 increase to our first quarter provision going forward all else being equal we expect to see overall improved delinquency and credit loss performance as a larger percentage of our portfolio is underwritten by our custom scorecards.
Turning to slide nine and 10 DNA expenses of $40.9 million in the fourth quarter of 2019 were 4.3 million higher than the prior year period inline with our expectations expenses associated with de Novo branches opened since December 30, Onest 2018 accounted for 600000.
The year over year increase in operating expenses, while incremental expenses necessary to support loan growth in existing branches accounted for an additional $1 million. However, even with our ongoing investments in digital capabilities de novo expansion and the corresponding account growth. We continued to perform very well in managing our expenses.
As evidenced by the significant improvements in our operating expense and efficiency ratios.
In the first quarter, we expect DNA expense to be about 7.7 million to $7.9 million higher year over year inclusive of approximately $800000 of expenses associated with the system outage. Most of the DNA expense increases related to higher branch operations expense and home office investments.
Yes, this area to support our loan growth and to noble plans.
We expect that our efficiency ratio and operating expense ratio increased by 75 basis points, and 30 basis points, respectively compared to the prior year period with all the increase attributable to the system outages expenses.
Turning to slide 11 interest expense of $10.3 million was $600000 higher in the fourth quarter of 2019 in the prior year period, primarily driven by larger long term debt amounts of standing due to strong growth in finance receivables, our fourth quarter interest expense as a percentage of average finding.
And receivables improved 30 basis points sequentially to 3.8%, primarily due to reductions in the fed funds rate, we expect that our interest expense rate in the first quarter will be flat sequentially.
As shown on slide 12, our funding profile remains strong aided by the $130 million asset backed securitization that we completed in October of 2019, which added fixed rate funding at a weighted average coupon rate of 3.17% our best execution today.
On Slide 13, you can see that as of December 31st we had 369 million of available funding and 51% of our outstanding long term debt was at a fixed rate.
Our fourth quarter funded debt to equity ratio was 2.7 to one.
Slide 14 illustrates our strong same store sales growth and the important so hard to novo expansion strategy and our branches more than one year old same store sales were up 16.7% in the fourth quarter of 2019 compared to 13.7% in the prior year period, primarily due to record risk.
It will grow over the past three quarters are most mature brands is those open for more than five years continue to grow at double digit rates.
Our branches benefit from digitally sourced originations, which are an increasing part of our new loan growth as shown on slide 15. As a reminder, these loans was sourced digitally are fully underwritten and our branches. We plan to continue to make significant investments in our digital capabilities, which drive growth improve the customer experience and generate.
Both front end and back inefficiencies.
That concludes my remarks, I'll now turn the call back to Peter to wrap up thanks, Rob It was outstanding fourth quarter, and a great and for the year I'm Grateful for all the hard work of our team members and their commitment to our customers.
2019, we generated strong returns that we invested in our business a return to our shareholders.
We've developed a resilient business model that is capable of supporting sustained growth well into the future.
As we look to 2020, our growth strategy remains firmly intact.
Plan to increase our finance receivables within our existing branches and opened 25 to 30 new branches.
We'll also continue to invest in our digital capabilities and technology infrastructure in order to drive growth and provide for an even better experience for our customers and team members.
With continued successful execution of our strategies will expand our market share and generate additional value for our shareholders.
Thank you again for your time in interest I'll now open the call for questions. Operator would you. Please open the line.
Thank you.
We'll now begin the question and answer session to join the question can you maybe a press star then one on your telephone keypad, you'll hear a tone acknowledging your request.
We are using a speakerphone please pick up your handset before pressing any case.
To withdraw your question. Please press Star then too.
Our first question is friend, David Scharf JMP Securities. Please go ahead.
Hi, good afternoon, thanks for taking my questions and terrific terrific into the year.
Peter I was wondering a couple things first.
One of the just get a better handle on on the digital sourcing I know.
I think in the last quarter.
Called it out in your presentation.
For the first time.
Can you.
Remind me is most of this direct to consumer consumers going.
Regionals website because of the solicitation or is this almost exclusively through kind of third parties.
General partners.
[laughter], David Hi, it's primarily through third party lead generators, but we also get a fair number of customers or prospects going directly to our website, where we pre qualified.
Direct them to the branches they meet our pre qualification criteria and we've seen nice growth in that arena.
22% in the fourth quarter. This year 2019, so a nice progress we're investing in digital we will continue to invest in digital so that we can serve our customers. However, whenever they want to be served by us.
Got it and I know you had mentioned.
So the channel you're you're doing the underwriting.
Your your self that the branch level, but is that should we be thinking about.
The customer acquisition cost changing either.
Lower.
As the mix of.
Third party source is business increases.
Great question, what we do David as we optimize all of our marketing spend such that for the last dollar that we spend we make sure it's as efficient as can be so on the margin we're not spending.
More money on digital or mail et cetera, just to put us dollars that way, we're looking at the best investment of our marketing dollars and then applying them accordingly.
Got it Okay, and then one follow up I'll get back in queue.
The the revenue upside at least relative to our forecast was almost entirely related to.
Strong yield on the large loans and I was looking back at my notes from last quarter, maybe as a follow up call and I think you would.
Commented that the 29% yield.
Would probably represent a high watermark we had.
Kinda interpret that to me that might be coming down a little bit <unk>. It stayed up there is there anything just geographic mix I mean is there anything.
On the pricing environment, or just the geographic mix and state.
Pricing regulations that.
Potentially take that yield even higher or is this a good place to keep.
I think it's a pretty good place to keep the overall for the portfolio, you'll see our yields continue to drop as we drive more of our customers a large loans that's been going on as you know for quite some time, but we've been able to maintain our overall yield on our large loans.
And that's not state specific because our average JPR for a large loans isn't the 30% range and that's well below.
The states in which we operate.
Got it.
Thank you.
Thanks, David.
The next question is from Sanjay Sakhrani with KBW. Please go ahead.
Hi, This is actually Steven Kwok filling in for Sanjay <unk>. Thanks for taking my questions on the first one just around the.
Outage into low management system, I guess is like some of first quarter perspective, how should we think about the impact to the loan growth because as we look back at last year. Your loan growth was quite strong throughout the yet.
A whole year any impacts that we should think about that first quarter and then but the rest of the year right.
Well.
So in terms of loan growth the customers, who we couldn't.
I couldn't open loans in the branches for a period of time, we took all their names kept the lugs reached out to them and have seen a nice rebound in our overall receivable growth since then.
So.
Many of the business that.
We didn't service during that period, we're seeing come back and we don't feel that this will be a long term issue for the balance of the year and as demonstrated by our strong growth in 2019, we think will be on a good trajectory for the balance of 2020.
Hi, Stephen This is Rob just just to remind you from from my comments that we do normally experience seasonal liquidation.
The first quarter related bonuses and tax refunds. So you should expect to see that to continue this in the first quarter 20, yeah. Good point, because as you know Stephen that seasonally we have some liquidation in our first quarter, but that's a natural occurrence of the business.
Yeah, Yeah, Yeah, we tend to look at on a year over year basis that strips out kind of the seasonality there.
And as a follow up around the to see sell provisions I mean, you mentioned that the reserve rate going forward should flow between 10.4 to 11.2 can you talk about seasonality. How we should think about which tells me it's will be the high points, and which probably will be low points of the reserve freight.
Yeah, and so that's kind of the the guidance. We gave previously is that range. Obviously, the 10.81 time reserve that we took on January Onest is.
You know comfortably in between that range I think as you look going forward, what we will do as we see seasonality come through the the C. So calculation is we will look to make some qualitative adjustments so that we mitigate some of those seasonal swings.
So that's something that we'll be.
Providing more information on as we get through the year.
Got it right. Thanks for taking my question.
Thanks.
The next question is from Vincent can check with Stephens. Please go ahead.
Hey, Thanks, Good afternoon, I also want to follow up on the the system outage. So I. Appreciate the guidance you gave for the first quarter and the rest of the year and you gave some guidance about the provision hit and so on is this something that so you gave first quarter does it largely get.
Complete in terms of impact by the second quarter or is it something that continues to trail for the rest of the year.
Yeah, I mean, the amount of impact for the last three quarters in the total is $300000 of net income. So we don't view as is the significant and for the balance of Oh the year.
Okay, So probably like mostly building that into the second quarter, then and is it largely.
Provisions are there like if you could separate out the different impacts your income statement.
Yeah. So it's it's largely on the revenue line from a credit standpoint, you would expect that.
Either the NCL impact or the reserving that's required will all happened in the first quarter. So what you see throughout the rest of the year that 300000. Peter mentioned is is really just some some lost yield on on some of the shortfall and volume during the that happened during the outage.
In a pretty de Minimis amount.
Okay that makes sense so very helpful.
Second question I have to ask even though the way the market's reacting but.
Any impact that you could proceed from a krona virus, a pandemic to your business and particularly.
I think one thing investors have been asking is just the when people take out loans what are they use where I'm guessing it's not for travel, but if you could describe what most of the usage of.
Of loan origination support that help thank you.
I'll take the second part of the question first.
Our customers use.
There are funds the from the loans per household expenses for medical expenses.
We're seeing a needs that they have then as you know they treated.
Often like a line of credit where they pain and then they renew when they need more cash in terms of the.
Potential outbreak of the chronic virus.
Actually the health and wellbeing of both our customers and our team members are Paramount.
But among other things that we are doing is we're developing plans to allow our team members to work remotely [noise] to centralize certain servicing operations and to adjust our marketing efforts, we take this quite seriously.
And you know we will.
Respond accordingly, depending upon geography, and severity, but we don't want to put our team members at risk or the same token.
We want to make sure that we service our customers.
The way they need to be service, even if its remotely if a particular area has been hit.
Great very helpful. Thank you.
Thank you.
Once again anyone who has a question May press Star then one.
The next question is from Bill does woman with Titan capital. Please go ahead.
Thank you I have three unrelated questions. Please first of all relative to the system out he called let's go ahead and that pile on here, how long did that last.
And less than seven approximately seven business days, though.
Great. Thank you and then secondarily right in the auto loan business, what is your longer dated maturity, Oh and would that equate to the very longest then that that business would exist.
Yeah, I mean, we have $10 million left in our portfolio.
And you know, that's decreasing $2 million roughly per month, or but theres going to be a tail on this so as far as we're concerned by the end of this year you know it will pretty much be gone.
So.
We don't see any issues with the rest of liquidation of the portfolio.
And do you happen to know what the what this.
Maturity date is on that for this tout long.
I I would actually be buried habitat.
I don't know that yeah.
Right no worry at all and then.
Lastly, what would you talk about your ability to grow loans per branch and now that you've crossed that 3 million dollar mark coming I find it interesting that the older branches are still growing at 15%.
But with that in mind, how are you thinking about this.
Well you know a lot of the growth that we've generated is from our large loans [laughter] and that's increased our receivables per branch and we're continuing.
Our strategy of green customers in a with a small alone and then migrating those are graduating those were better credit worthy customers and have demonstrated the ability to repay inter larger loans. We think there's a lot of upside remaining in our existing branches to grow that well be.
On $3 million, having said that we also believe that or de Novo branches are good source Oh receivable growth in revenue growth as we've said before.
A new branch breaks even relatively quickly.
Under the under a year and the payback is under two years under Cecil Ah that's going to change a little bit Rob do you have that stop your head.
Yeah, So I think from a from an overall pay back or breakeven standpoint, typically we would pay back and under a year and breakeven in under two years and we'll see solid on average adds roughly six months to those those metrics.
But again it doesn't change the underlying cash flows of our business.
And.
It's a reserve issue that we're gonna have to build a as part of seasonal I mean, the returns from a discounted cash flow bases IR basis.
Now are still very strong, even though you're accelerating the reserve upfront for seasonal.
Great. Thank you both.
Thanks Bill.
The next question is from John Waldron Rowan with Janney. Please go ahead.
Good afternoon guys.
John on C.C.. So I mean, you have a seasonal business right. So, let's just assume the allowance relatively flat throughout the years it create more earnings volatility within the year because of.
You know the pay down in loan portfolio on one Q.
Yeah. So in terms of liquidation impact as you see that seasonal pay down you will see a release I'm on the reserve line that you know at year end, we're in a 5.6% alomar under the incurred loss model. Obviously, we were not forecasting one our seasonal number will be on March 31st.
But onetime buildings at 10.8% so as you liquidate.
Some of the portfolio in the first quarter, you will be releasing Cecil at that higher rate.
Okay. So I mean, presumably then.
As we changed the models and build and she is seasonality it's more seasonal write more earnings go toward the periods in which is a pay off unless earnings for the or go to periods, where there's long building that's how I yeah.
Yeah, exactly so as you Gotta liquidation you know you'll see a boost in earnings and as you build a portfolio aggressively you'll have that effectively a four and bringing forward of reserves versus the traditional model, but as I said earlier housekeeping items.
Yeah I'm can you just repeat the guidance you gave for 2020 earnings growth and GE and <unk> expense.
So.
We haven't given earnings growth guidance.
Thus far and we don't give guidance on that Rob you gave well we are years, we've given some guidance on the first quarter of and then I think the only thing where are you. They I thought you said that there was gonna be much Mitch you don't low single digit growth rate and then post 2021 you'd be back to double digit growth.
No that yeah. So yes. So we did say there will be modest full year EPS growth.
This year in 2020 in that's you know as you would imagine this first year comparable period comp period with C. So.
You know, obviously reduces that that percentage growth and then we expect to return to the double digit growth rates in 2021.
Okay, and then what was the Gionee guidance.
We didn't give any DNA guidance.
For the full year, but for the first quarter. We said did it wouldn't be up 7.7 to 7.9 million versus prior year.
In versus the prior year first quarter Yep Yep.
Okay. Thank you very much and that I should and you'll see you know that includes the 800000.
Impact of the outage as well as Fas 91, which is a little but we can't differ as much with the liquidation during the first quarter.
Okay. Thank you.
Thank you.
This concludes the question answer session I would now like to turn the conference back over to Peter Knitzer for any closing remarks.
I just wanted to thank everybody for your interest today.
And we look forward to speaking with you on our next earnings call if not sooner. Thanks, so much everybody bye now.
This concludes today's conference call.
Thank you for standing by you may disconnect. Your lines. Thank you participating and have a pleasant day.
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