Q3 2021 Regional Management Corp Earnings Call
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Thank you for standing by this is the conference operator, welcome to the regional Management Corp, third quarter 2021 earnings call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask a question.
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I would now like to turn the conference over to Garrett Edson of ICR.
Please go ahead.
Thank you and good afternoon by now everyone should have access to our earnings announcement and supplemental presentation, which were released prior to this call and may be found on our website at regional management Dot com before we begin our formal remarks I will direct you to page two of our supplemental presentation, which contains important disclosures concerning forward looking statements and the use of non-GAAP financial measures part of our discussion today may.
Include forward looking statements, which are based on management's current expectations estimates and projections about the company's future financial performance and business prospects. These forward looking statements speak only as of today and are subject to various assumptions risks uncertainties and other factors that are difficult to predict and that could cause actual results to differ materially from those expressed or implied in the forward looking statements. These statements are.
Not guarantees of future performance and therefore, you should not place undue reliance upon them.
All of you to our press release presentation and recent filings with the SEC for more detailed discussion of a furlough of statements and the risks and uncertainties that could impact the future operating results and financial condition of regional Management Corp. Also our discussion today may include references to certain non-GAAP measures reconciliation of these measures to the most comparable GAAP measure can be found.
Within our earnings announcement or earnings presentation, and posted on our website at regional management Dot Com I would now like to introduce Rob Beck, President and CEO of regional Management Corp.
Thanks, Garrett and welcome to our third quarter 2021 earnings call I'm joined today by Harp Pronto, our Chief Financial Officer in the third quarter, our strategic initiatives continued to fuel record growth and drive strong results, we posted $22 2 million of net income or $2 11 of diluted EPS.
With very attractive returns of seven 1% ROA and 31, 6% Roe.
We continue to grow our market share and once again experienced double digit year over year growth in our net finance receivables and quarterly revenue, which were up 24% and 23% respectively. We generated record sequential portfolio growth of $131 million in the quarter, leading to another all time high in net finance.
And quarterly revenue.
The successes of our long term strategic initiatives are evident we built a growth company with a focused omni channel strategy and proven consistent execution at the same time, we've derisked the business by investing heavily in our custom underwriting models and shifting more than 82% of our portfolio to higher quality loans at or below <unk>.
36% APR.
Enabling us to maintain a stable credit profile as we grow and deliver predictable superior results for our shareholders.
In the third quarter delinquency increased in line with expectations as government stimulus waned, but it's four 7% our 30 plus day delinquency rate is on par with the prior year and 180 basis points below third quarter 2019 levels, our net credit loss rate during the quarter was 5% the lowest in our history as a.
Public company, a 280 basis point improvement from the prior year period, and a 310 basis point improvement from the third quarter of 2019, our strategic investments in digital initiatives geographic expansion and product and channel development, along with our proven Omnichannel marketing engine continue to drive substantial growth.
We originated a record $421 million of loans in the third quarter, which was up 35% over last year and 19% above 2019 pre pandemic levels. This.
This includes $129 million derived from our new growth initiatives. The loans originated through these growth initiatives are performing as expected with solid credit experience and strong net credit margins.
Thanks to our improved digital Prequalification experience, which we've now rolled out to all but one state in our footprint, we originated a record $48 million of digitally sourced loans in the third quarter up 34% from the second quarter, New digital volumes represented 28% of our total new borrower volume with.
57% originated as large loans.
Our digital Prequalification engine will continue to be integrated with new states as they rollout and with our existing and new digital affiliates and lead generators in the months ahead.
Aside from our improved digital Prequalification experience, we continue to test our new guaranteed loan offer product, which is an alternative to our convenience check loan product and provides online fulfillment with <unk> funding into our customers Bank account.
Within the next few months, we will also begin testing our end to end digital origination product and we remain on pace to deliver an improved online customer portal and mobile app and the early part of 2022.
As we continue to build on our Omnichannel model and expand our digital initiatives. We made significant strides to further strengthen our team during the quarter with the addition of Chris Peterson as our first chief data and analytics officer.
Our strong data and analytics function can transform an organization and we believe there will be a key enabler in delivering our long term strategies.
We are confident that our investment in data and analytics will ultimately drive a step change in customer insight and engagement transform products and services enabled better business decisions and risk management and improve our core operations.
In the third quarter. We also continued to grow our geographic footprint near the end of the quarter, We entered Utah as we expanded our operations to the Western U S. As a reminder, we entered Illinois in the second quarter and as of the end of October our first branches reached $2 8 million in receivables and six months and the four branches in the state have.
Exceeded $9 million in receivables.
We're confident in our ability to quickly gain a strong foothold in new geographies as we expand in the coming months, we expect to enter a new state and opened 10, new branches across our network and we have plans to enter an additional five to seven new states by the end of 2022.
As we've noted previously thanks to our new digital initiatives, including remote loan closing capabilities. The branches in these states will be able to maintain a broader geographic reach this will result in higher average receivables per branch and the need for fewer branches, which we expect will drive greater operating leverage.
In the third quarter, we assessed our legacy branch network and decided to lean further into our omnichannel approach by optimizing our footprint to that end. We closed 31 branches in the fourth quarter, where there were clear opportunities to consolidate operations into a larger branch in close proximity while still providing our customers with the best in class.
They've come to expect.
These branch optimization actions will generate approximately $2 $2 million in annual savings, which we'll reinvest in our expansion into new states.
Along with our rapid growth, we continue to keep a firm handle on our balance sheet and credit quality in October we closed a five year $125 million private securitization transaction at a fixed coupon of three 875%, which enables us to fund loans above and below 36% APR.
The transaction increases our percentage of fixed rate funding further diversifies, our funding sources and strengthens our overall liquidity position.
Following the October securitization, our fixed rate debt as a percentage of total debt increased from 78% to 87% with a weighted average coupon of two 7% and average revolving duration of nearly three years. Following the transaction. We also maintained $350 million of interest rate caps with strike rates of <unk>.
25% to 50 basis points, covering $133 million in variable rate debt and future portfolio funding in sum, we remain well positioned to fund our future growth and we're well protected against the risk of rising interest rates.
As I noted earlier, our credit profile remains very strong we have achieve controlled growth with stable credit through prudent underwriting to a rigorous pre pandemic standards and our ongoing investment in our custom scorecards we.
We are further protected our portfolio with the addition of enhanced verification processes implemented at the outset of the pandemic and the use of alternative data and our risk and response models to adjust for the impact of stimulus and forbearance programs.
Across all product lines FICO scores have increased since early 2020, and our highest scoring customers make up a larger portion of our overall portfolio.
As of September 30, approximately 87% of our portfolio had been originated since April 2020, the vast majority of which are subject to enhanced credit standards that we deployed following the outset of the pandemic.
Consistent with our loan portfolio growth, we built our allowance for credit losses by $10 7 million in the third quarter and as a result, our allowance for credit losses reserve rate at the end of the quarter was 11, 4% or $150 1 million of allowance for credit losses as of September 30th continues to compare quite favorably.
Two our 30 plus day contractual delinquency of $61 3 million and includes a $15 5 million reserve for additional credit losses associated with COVID-19.
We released the only $2 million of our Covid related reserves in the third quarter as we continue to maintain a conservative stance as we monitor the impact of the Delta variant.
Of the economic recovery and the health of the consumer as the benefits of government assistance continue to dissipate.
Looking ahead absent any significant changes to the macroeconomic environment, we expect that our fourth quarter and full year 2021, NCL rates will be below 7% our allowance for credit losses will increase in the fourth quarter as the portfolio continues to grow and we now anticipate that the reserve rate.
We will return to pre pandemic levels of around 10, 8% by roughly mid 2022, assuming the economic recovery remains on track. We believe that credit performance should remain strong into next year and then our 2022 NCL rate will be at or below eight 5% even.
As delinquencies continue to normalize off the recent historically low levels.
As we near the end of 2021, we remain in the strongest position in our history. Our net finance receivables are at record highs and loan demand remains robust as the economy recovers, we look forward to a strong portfolio and top line growth as our strategic investments yield solid returns and we continue to take market share.
Based on our third quarter results, we're raising our expectations for full year 2021, net income to between $85 million and $87 million up from our prior range of $75 million to $80 million.
Our revised outlook reflects our strong third quarter core portfolio growth of 25, 4% over the prior year period, which outpaced the broader market. Our outlook also assumes the yearend net finance receivables will be approximately $1 4 billion, providing a strong jump off point as we enter 2022 and <unk>.
Further demonstrating the power of our Omnichannel model.
As a reminder, we're only providing a full year net income outlook for 2021 due to the unique circumstances, we have encountered this year.
We're having a record year and we're extremely excited for our long term future. Our omni channel initiatives are working quite well for us and we continue to invest broadly in our growth plans and digital capabilities, we will bring our financial solutions to even more states in.
In the months ahead, while ensuring that our customers continue to receive outstanding service and we'll continue.
To prioritize our credit quality, our balance sheet strength, and driving operating efficiencies, which will lead to more profitable growth the return of excess capital to our shareholders and sustainable long term value creation I'll now turn the call over to harp to provide additional color on our financials. Thank you Robin Hello, everyone. Let me take you through our.
Third quarter results in more detail.
On page three of the supplemental presentation, we provide our third quarter financial highlights.
We generated net income of $22 2 million and diluted earnings per share of $2 11, driven.
Driven by significant portfolio revenue growth stable operating expenses low funding costs and a healthy credit profile. The business continued to produce attractive returns with seven 1% ROA and 31, 6% ROE this quarter and seven 8% and 32, 4% ROE year to date, we continue to.
To demonstrate our ability to drive revenue to our bottom line and generate strong returns.
As illustrated on page four branch originations were well above the prior year as we originated $268 million of branch loans in the third quarter, 18% higher than the prior year period, and 3% higher than 2019. Meanwhile, direct mail and digital originations also increased nicely year over year to 152.
80% higher than the prior year and 66% higher than 2019, our total originations were a record $421 million up 35% from the prior year period, and 19% higher than 2019, notably our new growth initiatives drove a $129 million of third quarter origination and have become a <unk>.
<unk> factor and our accelerating expansion.
Page five displays our portfolio growth and mix trends through September 30, we closed the quarter with net finance receivables of $1 3 billion up $131 million from the prior quarter and $255 million from the prior year period as we continue to successfully execute on our omnichannel strategy, new growth initiatives and marketing effort.
Our core loan portfolio grew $132 million or 11% from the prior quarter and $263 million or 25% from the prior year period, as we continue to take market share.
Large loans and small loans grew 12% and 10% on a sequential basis.
For the fourth quarter, we expect demand to remain strong and to generate healthy quarter over quarter growth in our finance receivables portfolio, resulting in year end net finance receivables of approximately $1 4 billion.
On page six we show our digitally sourced originations, which were 28% of our new borrower volume in the third quarter as we continue to meet the needs of our customers through our Omnichannel strategy during the third quarter large funds or 57% of our new digitally sourced originations.
Turning to page seven total revenue grew 23% to a record $111 5 million interest and fee yield increased 50 basis points year over year, primarily due to improved credit performance across the portfolio, resulting in fewer loans in nonaccrual status and fewer interest accrual reversals.
Sequentially interest and fee yield and total revenue yield each increased 40 basis points due to credit performance and the growth in our small loan portfolio in the third quarter.
As of September 30th 67% of our portfolio was comprised of large loans and 82% of our portfolio had an APR at or below 36% in.
In the fourth quarter, we expect total revenue yield to be approximately 70 basis points lower than the third quarter and our interest and feel to be approximately 50 basis points lower due to the continued mix shift towards larger loans and the impact of non accrual loans as credit continues to normalize.
Moving to page eight our net credit loss rate was 5% for the third quarter of 280 basis point improvement year over year net credit losses were also down 240 basis points from the second quarter due to improving economic conditions and our lower delinquency level. We continue to expect that our full year net credit loss rate will be below seven.
Percent flipping.
Flipping to page nine the credit quality of our portfolio remains strong thanks to the quality and adaptability of our underwriting criteria and the performance of our custom scorecards 30, plus day delinquencies have begun to normalize as expected our 30 plus day delinquency level as of September 30 was four 7% and.
<unk> of 110 basis points versus June 30.
Comparable to the prior year and 180 basis points below 2019 levels are 90, plus day delinquency level increased only 40 basis points sequentially and remains below third quarter 2020 in 2019 level moving.
Moving forward, we expect delinquencies to.
To continue to rise gradually towards more normalized levels absent any significant change to the macroeconomic environment. We expect strong credit performance into 2022, and we anticipate that our 2022 NCL rate will be at or below eight 5%, even as the historically low delinquencies continue.
To normalize.
Turning to page 10, we ended the second quarter with an allowance for credit losses of $139 4 million or 11, 8% of net finance receivables during the third quarter of 2021, the allowance increased by $10 7 million to $150 1 million to support our strong portfolio growth, but the allowance as a.
Percentage of net finance receivables decreased to 11, 4%.
The allowance increased in the quarter consisted of a base reserve build of $12 7 million to support our portfolio growth and a COVID-19 related reserve release of $2 million due to improving economic condition.
We continue to maintain a reserve for $15 $5 million related to the expected economic impact of the COVID-19 pandemic.
As a reminder, as our portfolio grows we will build additional reserves to support new growth, we continue to reduce the severity and the duration of our macroeconomic assumptions given the stronger economy.
We expect that the reserve rate at year end will be comparable to current levels and we will normalize to pre pandemic levels of approximately 10, 8% by around mid 2022, our $150 1 million allowance for credit losses as of September 30th continues to compare very favorably to our 30 plus day.
Contractual delinquency of $61 3 million, we are confident that we remain appropriately reserved.
Flipping to page 11, G&A expenses for the third quarter of 2021 were $47 8 million up $4 million or 9% from the prior year period, driven by increased investment in our new growth initiatives personnel and Omnichannel strategy G&A expenses for the third quarter also included <unk> 7 million of expenses.
Related to the consolidation of 31 branches as a part of the Companys branch optimization plan and a 3 million benefit related to the deferral of digital loan origination costs of which $1 5 million was incremental to the quarter on a sequential basis, our G&A expenses rose $1 4 million or.
<unk>, we expect G&A expenses for the fourth quarter to be approximately $54 million as we continue to invest in our digital capabilities, our geographic expansion into new states.
And personnel to drive additional sustainable growth and improved operating leverage over the longer term.
Fourth quarter G&A expenses will include an estimated <unk> $9 million of branch optimization expenses.
Turning to page 12 interest expense was $8 8 million in the third quarter or two 8% of our average net finance receivables on an annualized basis. This was <unk> 5 million or 70 basis point improvement year over year. The improved cost of funds was driven by the lower interest rate environment and improved costs from our recent securitization trans.
Section.
Currently have $450 million of interest rate caps to protect us against rising rates on our variable price debt, which as of the end of third quarter totaled $219 million.
$350 million of the interest rate caps about one month LIBOR strike price between 25, and 50 basis points and a weighted average duration of two three years as rates fluctuate the value of these interest rate caps will be mark to market value accordingly.
Looking ahead, we expect interest rate expense in the fourth quarter to be approximately $10 million, excluding mark to market impact on interest rate caps with the increase in expense attributable to the growth in our loan portfolio.
Page 13 is a reminder of our strong funding profile, our third quarter funded debt to equity ratio remains at a conservative three five to one we continue to maintain a very strong balance sheet with low leverage and a $150 million in loan loss reserves as of September 30th we had $722 million of unused capacity on our credit.
<unk> and $194 million of available liquidity, consisting of unrestricted cash and immediate availability to draw down our credit facilities.
As a reminder, in October we closed our seventh securitization a private 125 million transaction that has a five year revolving period and a fixed coupon of three 875%.
The new securitization enables us to pay down higher cost variable rate debt provides us with additional fixed interest rate certainty and allow us to fund multiple product types, both above and below 36% APR.
Following the securitization are fixed rate debt as a percentage of total debt increased from 78% to 87% with a weighted average coupon of two 7% and average revolving duration of nearly three years.
Our effective tax rate during the third quarter was 23% compared to 27% in the prior year period for the fourth quarter, we expect an effective tax rate of approximately 25% excluding discrete items, such as tax impacts associated with equity compensation.
The company's board of directors has declared a dividend of 25 cents per common share for the fourth quarter of 2021, the dividend will be paid on December 15, 2021 to shareholders of record as of the close of business on November 24 2021.
In addition, during the quarter, we repurchased 390112 shares of our common stock at a weighted average price of $56 and 32 per share under our $50 million stock repurchase program.
We continue to be extremely pleased with our outstanding performance throughout the year, our robust balance sheet and our near and long term prospects for growth that concludes my remarks, I'll now turn the call back over to Rob.
Thanks, Harp and as always I'd like to thank the regional team for their hard work and exceptional execution I'd also like to thank our investors for their continued support in summary, it was another outstanding quarter for regional our Omnichannel operating model new growth initiatives and superior credit profile continue to set us apart from our competition.
We're a growth company at a value price and we hope that you are as excited as we are about our future and the focused omnichannel strategy that we've developed.
We will continue to execute on our key strategic initiatives positioning us to sustainably grow our business expand our market share and create additional value for our shareholders. We look forward to continuing to provide our shareholders with predictable consistent and high quality returns.
Thank you again for your time and interest I will now open up the call for questions. Operator could you. Please open the line.
Thank you we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad.
You will hear a tone acknowledging your request if you were using a speakerphone. Please pick up your handset before pressing any keys.
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We will pause for a moment as callers join the queue.
The first question comes from John Hecht with Jefferies.
Please go ahead.
Hey, guys. Thanks afternoon, Thanks for taking my questions.
Yes, quite a bit of growth in the digital channels. I'm wondering can you is there any different characteristics you are seeing with the sizes of loans.
Or anything Youre seeing in terms of like as it seasons delinquency migration with those relative to in store loans.
Yes, Thanks, John Hey, Ed how are you doing on the digital side.
It really is just the activation around the growth initiatives as we've continued to add.
New new channels, new digital affiliates and lead Aggregators.
Obviously through those channels, it's a mix of small and large loans.
From a percentage standpoint, 57% of those digital loans, where large loans.
So we've got a good mix not quite consistent with the mix of our overall portfolio in terms of large loans, but still a healthy mix of large loans and it's a great feeder channel for small loans as you know we bring customers in at a higher rate than smaller loans, and then able to see their on us credit behavior with.
And then graduate them up too.
Larger loans in the future so.
We started to grow our small loan portfolio last quarter. We continued at this quarter and while we're still going to continue to shift our mix to large loans. It's nice to have that growth on the small loan portfolio again support the yield from a credit performance standpoint in all our growth initiatives, including what we're doing on digital.
Our performing right on our model expectations and leading to strong net credit margin. So we're really pleased with.
With the digital channel overall.
Okay, and then you guys talked about.
Continued.
Branch optimum.
We continue to optimize branches and make investments in digital initiatives.
Maybe talk about you know those are kind of offsetting investments versus savings in branch, maybe talk about like what do we think about kind of how that affects total expenses as we kind of go into 'twenty two.
Yes.
We're not really giving guidance specifically on 22 investments, although I will tell you that we will continue to lean into our growth initiatives. As you can see they've paid off handsomely in the quarter, we generated $129 million, a roughly 30% of our 421 four.
420 million of originations came from these growth initiatives. So I think the way to look at the branch optimization is.
In the past, we've closed 8% to 10 branches a year.
This year, we will probably close a total of 34, we closed three earlier in the year. The way you think about the 31 that we closed as we are leaning into our Omnichannel model.
We've assessed it.
We look at the performance of our new states and larger branches.
And we looked at our existing branch network.
There, we could optimize performance take smaller branches that were in close proximity.
Combine them create a larger brands, which are more efficient to run and not lose anything on the.
On the performance side.
In terms of how we're going to deploy our capital going forward our investment.
It's going to continue to invest in the core areas I've talked about which is.
Digital innovation geographic expansion and new products and channels.
All of which were leaning into and will require investment into next year.
Okay.
And then just the final question is regarded Utah, you're going in with branches or just digitally and I guess on that same topic are you able to go into new geographies, just digitally or do you kind of internally require a branch to be there as well.
No that's a great question so yes.
Utah, we're in with with one branch to start.
We have four in Illinois, So the Florida, Illinois, which I noted we have already have $9 million of balances after six months and the largest is $2 8 million which is.
Our mature branch after five years is $3 7 million so our.
Our light footprint approach into new states is really doing well.
So as we look into Utah, we'll certainly look to add some more branches.
That will be the go forward model in most of our new states, but I will tell you once we rollout our end to end digital originations.
<unk>.
In the first quarter, which will start testing relatively soon that does give us the opportunity for certain states, particularly where.
Rates are lower than margins may not be as wide to be able to enter those stage digitally and <unk>.
Skim off the best customers in a very efficient way.
We haven't done it yet, but the opportunity exist once we get in our digital investments, where we wanted to be.
Great I appreciate that thanks, guys.
Great. Thank you.
Once again, if you have a question. Please press Star then one.
The next question comes from Sanjay <unk> with K B W.
Please go ahead.
Hi, This is actually Steven Kwok filling in for Sanjay. Thanks for taking my questions at the first one I have was just around credit, particularly around delinquency rate just wanted to get a sense of what are you seeing from the health of the consumer and as we look out.
Over the near to intermediate term do you think we can get back towards the 2019.
Delinquency and charge off levels or do we do you think like given your new deals new mix of receivables that it could be perhaps a little bit different.
Yeah, Hey, Steven.
How are you great question look what we're guiding to and look there is still uncertainty out there. We all know that but what we're looking and saying is the customer has kind of come in too.
This post stimulus there with very strong balance sheets were starting to see the normalized credit we said last quarter that delinquencies would start to rise and that's exactly what we're seeing and look I anticipate over the next 12 months that that delinquencies will normalize I think npls, which we said should be.
At or below eight 5% next year.
Not fully normalize.
Until maybe 18 months out so.
So it's a little hard to predict but what I would say is as we continue to enhance our custom scorecards as we continue to grow our large loan portfolio and improve the quality of our portfolio I mean, I should point out 82% of our portfolio is below 36%.
Big shift over the last several years in terms of the quality of our portfolio.
<unk>.
Im not going to get too far over my skis, but I think that.
We may see normalization lower than where we were in the past.
How much I don't I cant give you that right now.
Got it got it thanks for the color and just a follow up around the expenses I know this quarter you had guided to about $52 million and you came in at about $48 million on the expense side can you just talk about where the savings that youre getting and then.
Much more runway there is that going forward because it seems like you've been doing a lot better on the expenses each quarter as well thanks.
Yeah, Hey, it's harp, so I'll take that question. So the largest driver of where we guided to last quarter with 52 million and then the $48 million roughly that we came in at was the deferral of digital marketing costs in that 3 million that I talked about in the prepared remarks, so that decreased our expenses.
In the third quarter of that $1 5 million within the quarter and then the other $1 5 million with the accumulation of first quarter and second quarter. The $1 5 million was incremental to the quarter for the total of three so that reduced the expenses in third quarter.
Down to the $48 million versus the 52 that we've given guidance for fourth quarter, we are guiding up $54 million and that has to do with Eric <unk>.
<unk> optimization costs, which will be in the fourth quarter as well as continued investment in our capabilities.
Great. Thanks for the color.
Thanks, David.
Yes.
Yes.
This concludes the question and answer session.
I would like to turn the conference back over to Rob It back for any closing remarks.
Thank you operator, and thank you thanks, everyone for joining.
Stepping back the business performed exceedingly well this quarter breaking records on quarterly revenue portfolio growth total and digital originations ending receivables and quarterly low npls as we said last quarter, we expected delinquencies and losses to normalize over the next 12 months or so.
We have controlled our growth with stable credit through prudent underwriting.
We're underwriting it rigorous pre pandemic levels using our enhanced score cards as well as enhanced income and employment verification process since the start of the pandemic and using alternative data too.
Impact our decisioning.
Our new auto secured underwriting as an example, we adjusted far very early in the launch of our product because we believe in played in used car prices are up used car prices are inflated.
I'm not sure everybody else has done that and look the performance to date has been fantastic. So an example of how well our new initiatives are performing.
The first 200 auto secured loans only two are currently in a delinquency stage. So.
Net net as I as I said in the prepared remarks, we have built a growth company with a focused omni channel strategy and proven consistent execution. We are focused on digital innovation geographic expansion and new products and channels to drive our growth.
At the same time, we have derisked the business by investing heavily in our customer custom underwriting models and shifting more than 82% of the portfolio to higher quality loans at or below 36%, enabling us to maintain a stable credit profile as we grow and deliver predictable superior results for our shareholders. Thanks again for.
Joining this evening.
All the best.
This concludes today's conference call you may disconnect your lines.
Thank you for participating and have a pleasant day.
Okay.
Yes.
Okay.
Okay.