Regional Management Corp. (RM) Earnings Call Transcript & Summary

Good afternoon, everyone, and thanks for joining us. I'm Moshe Orenbuch. I cover the specialty finance sector here at Crédit Suisse. We're very pleased to have with us Rob Beck and Hart Rana of Regional Management. Rob is the CEO; and Harp, the CFO. And they both have been with Regional Management through their -- since transition and improvements, having spent much of their time at Citi Group prior to that. But without further ado, I'm going to hand it over to Rob who's got some opening comments and after that we'll do left fireside chat. And if members of the audience want to ask questions, I believe there's a link you can click on -- you -- or alternatively, you could e-mail them to me at moshe.orenbuch@credit-suisse.com, if you could remember all that. So with that, over to you, Rob.

Yes. Thanks, Moshe, and welcome, everyone. Thanks for taking the time to join us today. I thought I'd spend just a few seconds on the fourth quarter and then really pivot to our growth strategy and what we see in the coming years. And then Moshe, you can fire away with your questions. The fourth quarter was particularly strong for us. We earned over $14 million, $1.28 per share. ROA was 4.5%, return on equity 21%. The highlight of the quarter, besides the benign credit environment, which all industry has been experiencing and continues, in part due to the government stimulus, was really the growth in our portfolio. We grew the portfolio, $77 million in the fourth quarter or 16% sequentially. On the back of $359 million of originations. What's interesting is those originations were pretty much flat to the prior year in the fourth quarter despite the impact of the pandemic. And of the $77 million in sequential growth that we saw in the quarter, half of that came from new initiatives, which I'll touch on in a minute. And as a result, we ended the year with our core loan portfolio actually up $19 million or 1.7%, given where we were in the second quarter with the economy shutting down and the runoff of the portfolio, pretty remarkable. The last thing I would highlight in the quarter as we ended the fourth quarter having effectively underwritten 61% of our portfolio under the tighter credit standards that were introduced during the pandemic. And so that, along with the government stimulus programs that we've had and it looks like we're going to have another round, certainly should keep credit losses benign into the second half of the year. And at the same time, we've maintained a conservative stance on reserve standpoint with over $150 million of loan loss reserves compared to about $60 million of 30-plus-day delinquencies. So we feel pretty good where we're at. It's so good about our positioning that the Board approved a $30 million buyback in the fourth quarter. We've heard just about $12 million worth of shares by the end of the year. We also introduced a $0.20 per quarter dividend that was paid out in the fourth quarter. The next one will be paid out here in the coming weeks, works out to an effective yield about 2.5%. So we're very confident in the strength of our business model. We have plenty of liquidity, $150 million of available liquidity to absorb future growth. And so we feel good about where we're at. And then lastly, we tapped into the capital markets with an ABS deal, with a $250 million securitization at a coupon at 2.08%. And in doing so, we called a $130 million outstanding, securitization that was paying -- that we paid a coupon of 4.87%. So really a meaningful reduction in our cost of capital with that transaction. So as we look ahead, and that's really what I want to focus on here is even when we were in the middle of the pandemic in the second quarter when we stopped our Direct Mail program, we all got together as a leadership team, and we said, we need to focus on what we're going to do post pandemic. We had to remain optimistic, probably just as human beings that there's life after the pandemic. And we set about focusing on what the strategies would be. And so last year in the second half, we put in place a couple of new growth initiatives. One was to further expand our Direct Mail program by looking at lower response segments, where we thought, with higher stress losses, we could get attractive returns. So we started spending more money on marketing to go after those segments. We also began offering larger loans to our very best customers over 640 FICO. And while we had tightened in other segments, we started to loosen up at the end of the year. And then the third initiative we did is we started mailing in a wider geography around our branch footprint through our Direct Mail program because we had introduced remote loan closing. So we were able to close loans remotely without having customers needing to come into the branches. And those 3 initiatives drove half of the growth in the second half of the year. So as we look forward into 2021, really 3 key things we're focused on. One is our digital investments as part of our omni strategy -- omnichannel strategy. And there's various things in that. We're going to have an enhanced digital prequalification offer, both on our portal as well as integrated with our existing and new digital lead generators to allow for greater throughput. We're going to introduce a guaranteed loan offer, which we can do by a mail in addition to live checks. And then towards the end of the year, we'll have use those technologies to have a complete end-to-end digital origination process as a new channel for us to expand our reach. So with those digital capabilities, as we think about then further expansion comes the geographic expansion. So we feel that there's 25 to 30 states that are attractive for expansion. We're looking at 4 to 5 new states in the next 18 months. And Illinois will be one of those in the second quarter. Just a little bit on that. Obviously, they introduced an all-in rate cap. But that's a great opportunity for us to enter what is the sixth largest market by population, do so on a branch-light model using our digital capabilities and take advantage of what we see as some disruption going on the market as some lenders are significantly pulling back, if not exiting the market. The third strategy is expanding our auto-secured product. Some of the larger competitors, as you know, it's a meaningful part of their balance sheet. For us, it's something we haven't leaned into yet, and we plan to roll this out here in the second quarter across all our states, and we think that can be a meaningful part of our [indiscernible] going forward. Now that all sounds good, but what does it mean financially. And I haven't given any guidance in the past, and this may be [indiscernible] you'll get the guidance for me. But in 2019, we grew our receivables by $180 million. With essentially the capabilities before anything we did in the fourth quarter last year. In the fourth quarter, we grew by $77 million, as I said, and half of that came from those first 3 new initiatives. So as we step back and you say, okay, now you're going to add digital capabilities, a new digital end-to-end channel, you're going to increase your geographic size by 45% as we enter new states. And you're going to roll out an auto-secured product, which, as I said for some competitors, is a meaningful part of their balance sheet. I don't think it takes a whole lot of imagination to conclude that we should be substantially bigger business over the next few years. So I'll leave you with that, Moshe. That's kind of our plan of attack. We are very optimistic that the second half of the year is going to be strong as the economy opens up. And fortunately, I think we're positioned very well to take advantage of the opportunities as they arise.

Great. So thanks, Rob. That's terrific. And maybe to start it off, just to follow-up on what you've kind of outlined here. Given what you said about the potential that just the new states, it probably has a 45% increase, have to believe that the ability to lend in a further -- in a bigger radius around your branches with digital closing is another -- not -- certainly significant factor. And then auto, maybe to take auto for a second. I mean, what kind of ramp do you see in that? Is that something that you would be comfortable adding $25 million a year early on? Or is it more than that? Like how do you think about the gating factors as you launch new product, a brand-new product like that?

Yes. Well, we've had this product in place, and we started piling it more aggressively in the fourth quarter in a couple more states. I'm not concerned about ramping that up and have any real limitation on it. And here's why. We really see that as a natural life cycle product extension of our large loan product, which we tend to cap out at about $12,000 on an unsecured basis. What this allows us to do is when we have the debt consolidation discussions with customers, or any discussion, and they have a title to a car or some remaining balance of -- to pay off. We're able to effectively take that car as collateral, really increase the size of the loan and think about it as increasing the LTV so that you still have effectively the unsecured portion, but now you got a car for the rest. And I think as you've seen with some of our competitors, the credit performance is quite good. And it really just opens up another area of attractive growth, which I don't really see setting any limitation on. We're going to make sure we underwrite that, obviously, at the level of appropriate credit underwriting that you would expect.

Sure. So maybe if you think about those opportunities in total, is there a gating factor? Obviously, once -- assuming that all of these are done within the appropriate credit metrics for their specific loan types, but is there a gating factor in terms of the overall balance sheet? Like how do you think about the capacity to grow? And you mentioned the ability to do securitizations and better execution. Is there any gating factor with respect to the balance sheet, either the liquidity, I mean, not liquidity, but funding or capital levels?

Yes. So from a -- I'll just take the capital level. Right now, our leverage ratio is a very conservative 2.8:1. We've maintained a very conservative balance sheet going into the crisis, and that's even with returning capital to shareholders. In terms of our available debt at the moment, as I said, that's just under $450 million that we can fund our growth, assuming we have eligible assets. And that's without tapping the securitization markets any further or doing anything else to expand our bank lines, which I think, based on the interest we saw from the securitization market, we believe there's plenty of capacity out there to access as we grow in the next few years.

Got you. That makes sense. Okay. So one of the questions that I had here was kind of to talk about the -- I would say, maybe combining a couple of questions that I was thinking of. When you think about -- first of all, how do you think about the value of the branch network in all of this? And you had been planning to add some branches. And it seems like a lot -- or a significant portion of the growth can kind of be achieved without that? So maybe just talk a little bit about how the role of the branch and how you see that going forward?

Look, we still think the branches, the physical branches, have a critical role in our franchise. We're looking at an omnichannel model where customers can interact with us, however and wherever they want, whether that's through the mobile phone or over the phone or whether it's the browser and the branch. I will tell you that there's a segment of the population that it likes interacting with us in the branches. We've done surveys and we continue to do surveys and that relationship in the branches is important to the customers. And we feel that, that relationship does help the overall performance of the business, including from a credit standpoint. So it's not a model that we're looking to throw by the wayside and pivot entirely digital. But we also recognize that many consumers like to interact at times through digital channels. And it's important to have those capabilities in place. Thus far, with our remote loan closing and extended footprint mailing, we haven't seen any material deterioration at all in credit. And so what that allows us to do is as we enter new states, whereas before, we might enter a state and say we need 50 branches. And let's take Illinois as an example, where some competitors have 80 branches. Well, if I had any branches in Illinois with the rate cap, I might be looking to close 80% of them. But now I have the opportunity to go into Illinois, plant a flag in those attractive areas where our customers exist, extend the reach a little bit with our digital capabilities and do so in a much more efficient way, drive higher volumes of revenue per branch and then pass along some of those efficiencies to customers, particularly in a state where the rates are capped.

Got you. When you think about the digital origination potential, how do you think about that in terms of customer acquisition cost in the branch? You have costs that are largely fixed, maybe not entirely, but largely fixed. And so what -- how do you anticipate that? And do you think it will be better than a traditional online-only platform? How do you think about that part of the business?

Well, look, our source of new customers, by and large, come through our Direct Mail program with the live checks and through our digital affiliates. And the historical split on that has been about 80% Direct Mail, 20% digital over the last, call it, 18 months. We actually -- because we added a new lead generator in the fourth quarter, we actually had about 29% of our originations in the fourth quarter through our digital referral program. And just keep in mind is the existing digital originations are really just referrals. They still close those loans in the branch today. So that's the source of our new customers. Without giving details, it's a very attractive acquisition cost relative to the customer set and the spreads in the business. As we pivot more to maybe a digital end-to-end, we can still leverage those Direct Mail programs and the like, but we can fulfill more in a digital way if the customer chooses to do so and do it in a more efficient way. There's also -- we'll be looking to expand into page search and other things. Obviously, those paid search channels, some of them have better returns than others. And so we'll be testing through and seeing which of those channels we think are -- give us an appropriate return on our marketing spend.

Got it. And Rob, you had mentioned that there were -- that your originations in Q4 were flat with Q4 of '19. That's certainly an incredible performance in this environment and certainly one of the better ones, if not the best in the industry. You had mentioned that, obviously, a big piece of that was the new initiatives. Could you talk about how the core business was performing? And how you see that kind of into 2021? If you were isolating that, how did that look in Q4 and into 2021?

Yes. And I don't want to mislead anyone. So the originations of $359 million was, obviously, in total, what I will -- and it was flat to '19. What I will tell you is 4 out of the last 5 months, originations were actually higher than the prior year. So October was a little soft, which is why fourth quarter was flat to prior year. When I talk about the growth initiatives of the $77 million of sequential growth and half of that being growth initiatives. So the $35 million or $36 million is what came from the new initiatives. So it wasn't half of the originations. What that shows you is the base business, and I think in the investor deck we have for this meeting, that the -- it shows this. The base business, both on the branch side and our normal typical renewal business, Direct Mail business, all performed well. And frankly, steadily from the low in April originations steadily ticked up almost every month of the quarter, except one month where I think it kind of softened in October. So the base business came back. I think it's been helped by the states we were in, where the economy has probably opened up a little bit sooner. I think it was helped by the growth initiatives as well. So that's why I get back to the core fundamentals of this business are strong, our customers are resilient. And so I'm optimistic, as the economy opens up further here in the second half of the year, that the base business will perform well, and we'll get additional lift from our new initiatives.

Yes, I did get a question come in to ask specifically about the effects of the stimulus. And as I think about this, I mean, I recognize that in 2020, when people receive their stimulus checks, they kind of did the opposite of what corporations did and they went down and they paid down debt. Is there -- as you look at the performance of your customers over this entire year, how do you think about their use of stimulus checks and then the ongoing behavior as we look towards the reopening?

Yes. Generally, what I think we saw. And of course, it kind of varied over the year, but the initial checks that came in. About 1/3 of it was saved, 1/3 of it was spent and 1/3 of it was used to pay down debt. Certainly, where we saw the impact was in the second quarter because as customers paid down debt, they also weren't spending any money and didn't need any further loans because the economy was shut down. So that's why you saw the second quarter of last year where we had runoff, which is not normal. The -- what I would say to you, though, is as we looked forward through the rest of the year, there clearly was pent-up demand for spending. The stimulus money got spent. And we saw a really nice steady rebound in loan demand from our customers. Probably the -- and you'll see this in our fourth quarter results. The area where the stimulus led to the greatest paydown was for our small loan customers versus our large loan customers. And that's really, I think, a mathematical situation where if you owe $500 and you get a big check, it's a lot easier to pay that one down and [ moving ] off. As we got the $600 checks here at the end of last year, consumer spending jumped up pretty nicely in January. And I have to say that it looks like a lot of that got spent. And while there was some pressure on loan demand, really not as much as I would have thought. I think the next [indiscernible] that will come will certainly put pressure in the near-term on demand. But I think the counterweight to that, and it's hard to predict, is how fast will the economy open up and people start spending money and burn through that stimulus dollars. But needless to say, there should continue to be very good benefits on the credit line. We ended the year at a delinquency of 5.3%, down from 7%, the prior year. I expect delinquencies to stay muted and low into the second half of the year. And look, the other thing I would say is stimulus money, not unlike some of the borrower assistance programs that we use during hurricanes, what it really does is it bridges customers to when they regain their financial footing. So whether that means that they've kind of paid down their debts and they're in a better financial situation or whether they've found employment again. So cautiously optimistic that maybe we won't see as high a level of losses coming through from COVID as customers get to the other side, regain their employment as the economy opens up, if they were unemployed. And hopefully, the reserves that we have on the books won't be needed or needed as much.

Right. And certainly, the other thing that it does is it gives you more of the portfolio originated under the current credit criteria with eyes wide open as to that situation, right?

Absolutely.

So yes. Another question that investors always ask us is, how do you -- how does one think about this current tax refund season relative to prior ones? And there's positives and negatives from the standpoint of the economy and positives and negatives from the standpoint of lenders. So maybe you just talk about that for a moment.