Regional Management (RM) Q1 2019 Earnings Call Transcript

Regional Management (RM 1.78%)
Q1 2019 Earnings Call
May. 08, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by. This is the conference operator. Welcome to the Regional Management first-quarter 2019 earnings conference call. [Operator instructions] I would now like to turn the conference over to Garrett Edson, senior VP, ICR.

Please go ahead.

Garrett Edson -- Senior Vice President, ICR

Thank you, and good afternoon. By now, everyone should have access to our earnings announcement and slide presentation, which was released prior to this call, which may also be found on our website at regionalmanagement.com. Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements, which are based on the expectations, estimates and projections of management as of today. The forward-looking statements in our discussion are subject to various assumptions, risks, uncertainties and other factors that are difficult to predict and which could cause actual results to differ materially from those expressed or implied in the forward-looking statements.

These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks and uncertainties that could impact the future operating results and financial condition of Regional Management. We disclaim any intentions or obligations to update or revise any forward-looking statements, except to the extent required by applicable law. I would now like to introduce Peter Knitzer, president and CEO of Regional Management Corp.

Peter Knitzer -- President and Chief Executive Officer

Thanks, Garrett, and welcome to our first-quarter 2019 earnings call. As always, I want to thank everyone for participating this afternoon and for your continued interest in our company. I'm here with our executive vice president and CFO, Don Thomas, who will speak later on the call. For those of you with access to a computer or mobile device, we've once again posted a supplemental presentation on our website at regionalmanagement.com to provide additional color to our remarks.

We opened 2019 with another quarter of double-digit receivable and top-line growth speaking to the inherent strength of our underlying business. In addition, we completed the implementation of our custom scorecards and remain disciplined in managing our expenses. For the first quarter, we reported diluted EPS of $0.67 versus $0.72 in the prior-year period. While we continued our streak of robust double-digit year-over-year receivables growth, let me provide some context for the reduction in overall year-over-year results.

As we noted on our fourth-quarter call, we initiated credit tightening actions and have been implementing custom underwriting scorecards in our branches. By the end of the first quarter of 2019, we have completed the custom scorecard rollout across the entire branch network. Given the benign macro environment, had we left the prior credit underwriting criteria in place, our near-term earnings would have benefited significantly from our continued strong underlying trends. However, in the interest of prudent risk management, we felt the best long-term decision for the company was to use our increased analytic capabilities enabled by our NLS software system to improve credit performance, no matter what macro environment we could be facing in the future.

As a result of the credit tightening and scorecard implementation, in the near term, the calling of lower credit quality customers has put a slight downward pressure on both yields and growth and modest upward pressure on delinquencies. This is because some of our lower credit quality customers who previously would have been eligible for renewals are either no longer being extended credit, or being extended a lesser amount of credit under the new scorecard criteria. Early reads on the performance of the new custom scorecards is very positive. Also, with excellent execution in our branches, April's results show improvements versus the first quarter.

The insurance income line also experienced some noise, excluding the effect of the non-file shift that we discussed on our fourth-quarter call. First, we experienced higher-than-average claims expense on certain insurance products, such as life insurance. We would expect a reversion to the mean in the coming quarters. Second, the mix of traffic through our branches experienced an uncharacteristically high percentage of customers who are ineligible for insurance products.

Hereto, we would expect the mix of insurance-eligible customers to normalize toward the historical averages in the coming quarters. In spite of some near-term headwinds that will persist into the second quarter, we still expect to achieve solid double-digit net income growth in the second half of 2019 compared to the net income we achieved in the second half of 2018, excluding the impact of the hurricanes. This higher net income will be driven by double-digit receivable growth, improved yields compared to the first quarter, continued operating expense leverage and slightly improved credit costs. The full benefit from the credit scorecards will come through in 2020 once almost all the loans on our books would have been underwritten by these new credit tools, which will occur by the end of 2019.

We remain confident that through increased branch productivity, marketing efficiencies and the increasing use of digital channels, we will quickly return to our historical asset revenue and net income growth trends. Our hybrid strategy of growing receivables per branch and opening new branches is central to our success. We opened two branches in the first quarter. We expect to open approximately 15 more de novos in the second half of 2019 and likely a higher amount in 2020 and beyond.

We can already see that early returns on our 2018 de novos in our new states, Missouri and Wisconsin, are looking very attractive. We continue to make progress in transforming regional from a traditional branch-based model into a true omnichannel provider, leveraging the capabilities of our analyst platform. Our goal is to serve our customers in whichever channel they choose to engage with us. The percentage of new borrower originations that comes through digital channels is growing nicely.

With all digitally sourced loans underwritten in our branches. We also plan to launch a revamped website, a new customer portal during 2019, including access on mobile devices, all geared toward enhancing the customer experience. In addition to our omnichannel efforts, we continue to take advantage of the increased capabilities from our investment in NLS to drive a better customer and employee experience, improved expense efficiency and higher employee sales productivity over time. All of these factors will result in higher receivables per branch and translate into greater operating expense leverage.

On the funding side, our capital structure is as strong as it's been in the company's history. We completed two securitizations in the past 12 months and have $433 million or 57% unused capacity on our two credit lines relative to our $912 million of loans at the end of the first quarter. This provides us with significant capacity for future growth. Finally, we believe that the current market price of our stock significantly understates the value of the company based on our strong financial performance, capital position and future prospects.

As a result, the board of directors has authorized a $25 million share repurchase program over the next 24 months, which is just over 8% of the shares outstanding at current market prices. This program represents an attractive investment opportunity, benefiting both the company and our long-term shareholders, while still providing us with ample capital to grow our operations. I'll now turn the call over to Don to provide additional color on the financials.

Don Thomas -- Executive Vice President and Chief Financial Officer

Thanks, Peter. Turning to Slide 3 in the supplemental presentation, and I'll take you through an overview of earnings for the quarter. Regional's first quarter saw us continued to generate double-digit increases in receivables and revenues. It was the 16th consecutive quarter for receivables and 11th for revenues.

Our hybrid growth strategy produced a $110 million or 13.6% year-over-year increase in our average finance receivables, supporting revenue growth of 12.6% from the prior-year period. Interest and fee income and the insurance line are always seasonally impacted in Q1 by higher net charge-offs because at the time of charge-offs, we reversed accrued interest and insurance premiums through these revenue lines. With higher net charge-offs in the first quarter, we saw larger reversal of these accruals. This negative impact on yield will decline post hurricane and is also lower in all other quarters where our charge-offs are at seasonally lower levels.

The accrual reversal impact on the insurance line is in addition to the couple of impacts on the insurance line that Peter noted in his comments. We also note our total provision for credit losses, which includes adjustments of the loan-loss reserve rose approximately 20% year over year with about a third of the increase due to the change in business practice to lower our utilization of non-file insurance that we had noted on our previous earnings call. Excluding this change, the increase in the provision for credit losses was relatively aligned with our portfolio growth. G&A expenses were up 10% in the quarter but as an annualized percentage of average finance receivables, they improved 0.5% to 16.5%, compared to the 17% for the prior-year period.

De novo expenses account for about $1.1 million of the year-over-year increase and higher existing branch labor to support loan growth was an additional $1.6 million. Our marketing, audit expense and lender custodian fees for the two securitization transactions we have completed, increased G&A expense by another $0.6 million. Just a reminder that our operating expense ratio is generally better than the second half of the year than in the first half of the year. And inclusive of these items, the first-quarter net income result of $0.67 per share was lower than the prior year.

While we expect continued double-digit receivable growth in the second quarter, our second-quarter net income is typically flat with the first quarter. Our second-quarter growth will manifest itself in our results starting in the third quarter. As Peter noted, we expect a double-digit increase in net income for the second half of 2019 as compared to the prior year, excluding the impact of the hurricane. Flipping to Slide 4.

Our core small and large loan business grew 19% or $138 million versus the prior-year period. The total portfolio growth was up only 13% due to the continuing liquidation of the auto portfolio. At the current rate of liquidation, that portfolio should run off in about 12 months. For the core loan portfolios, year-over-year growth in small loans was $61 million or 17%, and our large loan portfolio grew $77 million or 21%.

Turning to Slide 5. Our interest and fee income increased 12.4% year over year, again mostly attributable to the 13% increase in financial receivables. Interest and fee yield declined 40 basis points from the prior year primarily due to the impact of interest reversals from charge-offs that I mentioned earlier in my comments. Total revenue yield decreased 30 basis points from the prior-year period primarily attributable to the decline in interest and fee yield.

As a reminder, beginning in the fourth quarter of '18, the company lowered its utilization of non-file insurance, which increases insurance income and net credit losses, but has no impact on net income. Moving now to Slide 6. Our annualized net credit loss rate as a percentage of average finance receivables for the first quarter of 2019 was 10.9%, an increase of 0.7% from the prior-year period. Approximately 0.4% of the increase in net credit loss rate is attributable to the business practice change to lower our utilization of non-file insurance.

Peter already covered the implementation of custom credit scorecards, which underwrite branch small and large small cost loans. At March 31, 2019, roughly 25% of core loans on our books were underwritten on the new scorecards. This will increase to around 40% by June 2019. And by year-end, most of the portfolio will reflect the benefits of our improved underwriting standards.

In addition, after completion of testing, we implemented a new risk and response models for our marketing campaigns in January 2019. These campaigns originate convenience check loans. Early reads on both the custom scorecards and marketing risk and response model initiatives are good. And we expect some improvement by the end of 2019 in delinquency and net credit losses with a greater impact from them in 2020 and beyond.

Flipping to Slide 7. The allowance as a percentage of finance receivables came down 0.1% in the first quarter primarily due to a decrease in the hurricane portion of the total reserve. We expect the allowance will decrease again in the second quarter as of the hurricane reserve will be fully depleted at that time. With improved loss results from the new marketing risk and response model and from the custom credit scorecards, we see the potential for the reserve to come down further by the end of 2019.

As you know, the new accounting standard for loan-loss reserves is effective January 1, 2020, for us. We have obtained a license for new software, loaded data and will be running multiple models starting in the second quarter. The new standard will have a material impact on our financial statements, but it will not present any problems with our debt covenants or in the funding of our business. Turning to Slide 8.

On the delinquency front, our 30-plus day and 90-plus day delinquency levels at March 31, 2019, stood at 7% and 3.5%, respectively. Our 30-plus day delinquencies increased 50 basis points on a year-over-year basis and decreased 70 basis points sequentially, which is in line with our normal seasonality. 90-plus day delinquencies increased 20 basis points on a year-over-year basis and were flat sequentially. While delinquency levels at the end of the first-quarter 2019 were above where they stood at the end of the prior-year period, we saw 30-plus day delinquencies had improved to 6.6% at the end of April.

Flipping to Slide 9. G&A expenses of $38.2 million in the first quarter of 2019 rose $3.6 million from the prior-year period, a little bit better than our initial expectations. For the second quarter of 2019, we expect G&A to be about $4 million higher year over year with most of the increase related to personnel costs. On a year-over-year basis in Q1, our G&A expense as a percentage of average finance receivables decreased 50 basis points to 16.5% versus 17% in 1Q 2018.

We expect to gain more operating leverage as we continue to control expenses and grow receivables. Turning to Slide 10. Interest expense of $9.7 million was $2.5 million higher in the first quarter of 2019 compared to the prior-year period, primarily driven by higher interest rates and greater long-term debt amounts outstanding due to finance receivable growth. With no additional rate increases on the Fed's radar in 2019, we expect interest comparisons to prior year to become more favorable in the second half of the year.

Further, as of March 31, 2019, 47% of the company's outstanding debt was fixed-rate debt and won't increase based on Fed action. The company remains firmly positioned for future growth as its diversified sources of funding contained $433 million of unused capacity at the end of the first quarter of 2019. That concludes my remarks, and I'll now turn the call back to Peter to wrap up.

Peter Knitzer -- President and Chief Executive Officer

Thanks, Don. To sum up, we had several significant positive takeaways from the first quarter, including continued top-line double-digit growth driven by our core portfolio, the completion of scorecard implementation, and disciplined expense management. As I mentioned in my opening remarks, while first-quarter results were impacted by our credit tightening decisions, we believe that our actions will set us up nicely to deliver strong results in the second half of 2019 and in the future, thus increasing long-term shareholder value. Thanks for your time and interest.

I'd like to now open up the call for questions. Operator, could you please open up the line?

Questions & Answers:

Operator

[Operator instructions] The first question is from Sanjay Sakhrani with KBW. Please go ahead.

Unknown speaker

Hey, guys. This is Maja in for Sanjay. I just had a couple of questions on the second quarter. You guys have mentioned that some of the near-term headwinds will persist into next quarter.

Are you mostly talking about the -- on the originations growth and the yields because of the custom scorecards? And then in the back half of the year, how do you expect those will perform? Should we expect a pickup in both originations and yields?

Peter Knitzer -- President and Chief Executive Officer

Hi, Maja. It's Peter. How are you? 

Unknown speaker

Good.

Peter Knitzer -- President and Chief Executive Officer

Thanks for your question. As we discussed on our fourth-quarter call, whenever you tighten credit, you see increase in delinquencies and credit losses, and that has an impact on yield as well. One of the things that I didn't mention in my opening remarks is that -- I said that the scorecards are working well, but there's evidence of that in early payment defaults, which are lower than they've been in the time that I've been here, and even in the time that folks on the call and in the room had been here. So that gives us a lot of comfort that the decisions we've made in terms of migrating during a benign environment to better tools will help the company over the long term.

In terms of the second quarter, we're going to see growth as we do in every quarter starting after the first one with the liquidations. So we expect a reasonable growth into the second quarter and third quarter as demand picks up.

Don Thomas -- Executive Vice President and Chief Financial Officer

I think there's another portion of the question as well that Maja asked and that was around yield expectations, and so I want to answer that for you. So moving ahead from the first quarter, we get a little further away from the highest charge-off time periods where we see the highest interest reversals. So yield does move higher in second quarter, and we see improvement in the net credit loss rate. So we see some improvements in some of the metrics.

We do pick up the additional cost of growth being in provisioning for the loan loss reserve. And that's the reason that our second-quarter net income tends to be flattish in first quarter. And I think we have noted somewhere in our comments, but from a yield perspective, it does move up.

Operator

Thanks. The next question comes from David Scharf with JMP Securities. Please go ahead.

David Scharf -- JMP Securities -- Analyst

Hi, good afternoon. Thanks for taking my questions. Peter, wondering if you can maybe provide a little more backdrop in terms of what you're seeing in your applicant pool in terms of the tightened underwriting. Because I understand at a high level that the new custom scorecards are at the end of the day, sort of spitting out a different answer, if you will, on both new borrowers and whether or not to renew existing borrowers.

But in the context of what still seems to be a pretty stable macro environment, and as you just noted, 75% of the loans on the books are from the old underwriting. Yet you're seeing the lowest level of early payment defaults ever. What precisely is being flagged by these new scorecards that would offset what seems to be an environment where there aren't any so-called red flags or warning signs?

Peter Knitzer -- President and Chief Executive Officer

Thanks, David. So we view the health of our customers still very strong, and we are in a benign environment. So our through-the-door population is doing well. Let me just clarify in terms of early payment defaults.

That is for those customers who have been underwritten by the new credit scorecards, not the general population. The reason we decided to do this in a benign environment is whenever you have better tools, you have greater separation between what I would call those customers who are going to perform well and those customers who are going to possibly going to charge off. So our volumes should be relatively stable. What you're finding is we can offer more credit to good customers because of the scorecards are pretty powerful and over time, less credit or no credit to those who are not doing well in the scorecard.

So the customers are healthy. We have new tools and the customers who have been underwritten using these new tools are performing very well in the early stages, which is sort of what we have at this juncture. We have scorecards out in different states over different periods. We introduced the scorecards in January to South Carolina and Texas, our two largest states.

So what we've seen from previous states is that early payment defaults were good. And even in South Carolina and Texas, the early reads from January are also very good.

David Scharf -- JMP Securities -- Analyst

Got it. And as we think about the growth trajectory, should we be thinking about sort of the new scorecards, the new underwriting parameters as sort of a transitional period for this whole year when we get to sort of early 2020 when 100% of the book or close to it has anniversary-ed and would have been underwritten based on these new scoring models, that we should return, presuming a similar macro environment, return to the same type of net interest income growth that we've seen recently? Is this just sort of on anniversarying, wait 12 months till we lap this phenomenon?

Peter Knitzer -- President and Chief Executive Officer

No, that's not the case. We expect in the second half to have good growth in our net income. We also set the scorecards such that they're volume neutral. So typically in the second quarter, we start seeing growth.

We expect that in the second and third quarters, which are our highest-growth periods. We don't expect there to be a decrease in our volume in receivables throughout the year. What we are seeing is that through the second quarter you will have, whenever you tighten, some increase seasonally in delinquency and in net credit losses. But as Don said, they will decrease as they normally do, just at a little higher level.

So as I mentioned on the call, we'll have sort of a flattish second quarter, which is typical for our business. Then you'll see in the third quarter, once we've gotten the growth from the second quarter in net income, growing in a consistent pattern that it's grown over the past several years.

David Scharf -- JMP Securities -- Analyst

Got it. That's helpful. And then just last quick question on insurance. You noted a higher mix of branch traffic that didn't qualify for various products.

So is this completely unrelated to the new scoring, somewhat of an anomaly? Is that starting to reverse itself in April?

Peter Knitzer -- President and Chief Executive Officer

Totally unrelated to the scorecards, which is a mix of business that in different states, folks unqualified for certain insurance products. I haven't seen that since I've been here. So I think it was an anomaly that should not repeat itself.

David Scharf -- JMP Securities -- Analyst

Got it. Great. Thank you very much.

Peter Knitzer -- President and Chief Executive Officer

Thanks, David.

Operator

The next question is from John Rowan with Janney. Please go ahead.

John Rowan -- Janney -- Analyst

Good evening, guys. Just to make sure I understand the G&A guidance. So the G&A guidance is 4 -- plus $4 million year over year in 2Q, correct?

Don Thomas -- Executive Vice President and Chief Financial Officer

That's correct.

John Rowan -- Janney -- Analyst

Now is that a run rate or should we see -- I mean we're going to ask you in sort of the back half of the year? Or we're going to continue to see a $4 million year-over-year delta in the back half of the year? Or is it slightly less, given that some of these expenses for personnel and everything started picking up in the back half of 2018?

Don Thomas -- Executive Vice President and Chief Financial Officer

It's the latter. Some of them will start overlapping, more so in the fourth quarter than the third quarter.

John Rowan -- Janney -- Analyst

OK. And then I think in the past, you've given us some commentary around the provision expense and what your expectation is there. I'm not sure if you gave it or I missed it, but I just want to see if that was available.

Don Thomas -- Executive Vice President and Chief Financial Officer

Yeah, we were talking about the allowance as a percentage of ending receivables and had noted that we still have a loan loss reserve that includes a hurricane-related portion. That came down from December to March. And we should see that come down again as we get to the end of June, all of the hurricane-related losses will have run through the back end to charged off by the end of June. So that would be the first time period where the allowance will be back to its non-hurricane level.

It has been running just a little bit higher because of slightly elevated delinquency that we saw here at the end of December and at the end of March. So maybe it doesn't get all the way back down to where it has been, but it does come back down before the end of the year. [Inaudible]

John Rowan -- Janney -- Analyst

Maybe just another way how much of -- how many basis points of your allowance is hurricane related? How much to back out?

Don Thomas -- Executive Vice President and Chief Financial Officer

Yes, it's about 20 basis points, two-tenths of a percent. It's $2 million then.

John Rowan -- Janney -- Analyst

And then just last question, how much of the marketing do you guys do with live checks? And is there any -- are you hearing anything about legislation? I know there is a bill last year kind of purporting to pull back on live checks. I'm just curious what your take is, if there's any pending regulatory risk there and how much of your marketing goes through that channel. And that's it for me. Thank you.

Peter Knitzer -- President and Chief Executive Officer

Thanks a lot. We do use live checks and we use a lot of different channels. We've increased our digital channels in terms of originations, and we also have originations through our branches. There was that pending legislation or legislation introduced in the very end of 2018.

We haven't heard anything crop up, but we're also testing new sources in addition to live checks that we think are going to be very effective. And I think it's a good idea that test, as you know, my belief with test and learn. So we continue to test alternatives against live checks and against every channel that we have. So we feel pretty good that there are alternatives out there.

We haven't heard anything about the legislation being reraised thus far this year.

John Rowan -- Janney -- Analyst

OK. 

Peter Knitzer -- President and Chief Executive Officer

Thanks, John.

Operator

[Operator instructions] The next question is from Giuliano Bologna of BTIG. Please go ahead.

Giuliano Bologna -- BTIG -- Analyst

Good afternoon. Thanks for taking my questions. It would be great to delve in a little bit on the change in underwriting and the additional of the client base that's rolling off. Is there a way of quantifying the yield impact that that cohort has on your yields? And how much should unwind as the underwriting model rolls through?

Peter Knitzer -- President and Chief Executive Officer

We can't have that much precision around it, but what I will say is when you think about the overall net credit margin, which incorporates both yield and credit losses and costs of funds, we do see that this will be somewhat of an improvement over time, always on a seasonal basis, by maintaining higher credit quality customers. Now one of the carriers to that is we may have more larger loans, which will put a little yield pressure on but by and large, you're going to have a higher credit quality customer, which will help the overall performance of the business.

Giuliano Bologna -- BTIG -- Analyst

That makes sense. And then thinking about the expense side, you noted some of the de novo expenses. How should we think about the de novo expenses as they roll through for the rest of the year and as you try to open new branches?

Don Thomas -- Executive Vice President and Chief Financial Officer

Yeah, we've opened a couple of branches already in the first quarter of this year. I think some of those were rollover from last year's program. We're going to open more branches. Those are going to be in the second half of the year in about the third and fourth quarter.

That will help you in terms of timing of the expense recognition.

Giuliano Bologna -- BTIG -- Analyst

That make sense and that works. Well, I appreciate it and thanks for taking my questions. 

Don Thomas -- Executive Vice President and Chief Financial Officer

Thanks so much.

Operator

The next question is from Bill Dezellem of Tieton Capital. Please go ahead.

Bill Dezellem -- Tieton Capital -- Analyst

Thank you. First of all, would you please discuss the other expense line item and the increase that you experienced there?

Don Thomas -- Executive Vice President and Chief Financial Officer

Yes, that's the year over year, right, Bill?

Bill Dezellem -- Tieton Capital -- Analyst

That's correct.

Don Thomas -- Executive Vice President and Chief Financial Officer

Yes, so it was up $1.7 million year over year. And so there are several categories, so bear with me. I'll list them for you. But in the area of combination of legal and judgment expense, we were up about $500,000 year over year.

Beyond that from a branch perspective, they had higher collection costs with higher delinquency in that collection process of around $330,000. We had higher audit costs to complete our annual audit with our external auditors, $170,000. I mentioned we had higher lender custodian fees for the securitization transaction that we completed. That's another $200,000.

And then we get down into increased taxes and licenses of $115,000 and some other items that are too small to mention here. So it's a variety of things, Bill. I hope that's somewhat helpful for you.

Bill Dezellem -- Tieton Capital -- Analyst

So even though it was $1.7 million, there wasn't really any one item that jumped out. Several small $300,000 and under sort of items, if I heard that right?

Don Thomas -- Executive Vice President and Chief Financial Officer

That's right.

Bill Dezellem -- Tieton Capital -- Analyst

OK. Thank you. And then I would like to come back, and I hope I'm not beating a dead horse here, and talk about the custom scorecard in the second quarter in particular. You did mention that you're seeing the benefits from the custom scorecard developing, and at a normal seasonal pattern is for the Q2 to be basically flat with Q1 from an earnings perspective.

But if you're seeing the benefits from the custom scorecard, wouldn't that indicate that there is a possibility that you'll be seeing a benefit roll through into Q2? And if that's not correct, could you walk through what I'm missing, please?

Peter Knitzer -- President and Chief Executive Officer

Sure, Bill. Thanks for the question. So the benefits that we're seeing are in the early stages. When I think of early payment defaults, that comes in the first couple of months.

And so that's an indicator of future losses. Losses, we take contractual losses at 180 days. So we started rolling out some of the scorecards in the fall and we rolled that in the last two states, South Carolina and Texas in the beginning of the year. So you're going to see a decrease in losses from a seasonal standpoint, but they won't come down as much as they normally would as these customers who have been underwritten by scorecards who have not necessarily been given more money or have not been approved or as much money will cycle through and will have a slightly elevated credit profile relative to normal seasonal trends.

As we get into the back half of 2019, you'll see the full benefit as both cycle through the third and fourth quarter where the true benefit for the entire portfolio by the end of the year will be underwritten by the new custom scorecard. So real benefits will come in the back half of the year. As I said earlier, really short-term pains for long-term gain. And we feel as though this is a good trade-off.

We'll end up with a much better credit quality portfolio. Even though as someone mentioned it's benign environment, that's the best time, in my view, for managing assets, to take prudent steps where you're continuing your volume as we plan to do based on our score cut-offs but improving your overall credit profile.

Bill Dezellem -- Tieton Capital -- Analyst

Thank you. And then lastly, you all have initiated several strategic initiatives over the last two to four years. It seems like you somewhat consistently had some very big projects on your plate. Those are winding down, so what's next?

Peter Knitzer -- President and Chief Executive Officer

So I've mentioned before that we're going to continue to invest in digital. I think you may recall that a couple of years ago, we didn't even have electronic payments, and customers had to come to our branches and either give us a check or cash. Well, cash is now down to 20% and electronic payments are above 60%. It's not only an added convenience, it also helps from a cash management standpoint.

We're going to continue to build out things like the customer portal, making customers able to deal with us online as well as in person because different customers like to interact with you in different ways. So there's still a lot of development work that we can do in the digital front. We also are leveraging NLS. We converted some paragated NLS.

We finished that conversion at the very beginning of 2018, but a lot of the functionality, we're still building out. So while we did that conversion, we're still investing in technological capabilities that will help really propel us further. So as an example, we're improving the workflows that our employees are using in the branches. And what that does is it makes it easier for them to not just underwrite a loan, but it helps shorten the amount of time that a customer is sitting there in order to have that loan decision.

Some of these benefits are behind the scenes. So if I were to categorize some of the initiatives we talked about, the scorecards, digital, continued process improvements in using NLS. The other thing that I'd be remiss if I didn't mention, which helps us from a -- just an overall marketing standpoint is prior to NLS, we had absolutely no application data. And what I mean by that is we weren't able to store those customers who applied, but were declined.

We only knew the customers that we actually booked. So now with NLS, we have this rich data of folks who may have applied. They may have been approved, but then declined us. That gives us an opportunity to go back to them and say, hey, we know you didn't take the loan at this time.

Tell us why. Maybe we can help you with a different type of loan, help you consolidate loans from other creditors. So there's a lot of work that is done on NLS, on digital, and with the scorecards that we're continuously improving.

Bill Dezellem -- Tieton Capital -- Analyst

Thank you both.

Peter Knitzer -- President and Chief Executive Officer

Thanks, Bill.

Operator

There are no further questions at this time. I would like to turn the conference back over to Peter Knitzer, president and CEO of Regional Management Corp. for any closing remarks.

Peter Knitzer -- President and Chief Executive Officer

Thank you, operator. I want to thank everybody for their time and interest this afternoon, and I look forward to speaking with you shortly. Thanks again. Bye now.

Operator

[Operator signoff]

Duration: 52 minutes

Call participants:

Garrett Edson -- Senior Vice President, ICR

Peter Knitzer -- President and Chief Executive Officer

Don Thomas -- Executive Vice President and Chief Financial Officer

Unknown speaker

David Scharf -- JMP Securities -- Analyst

John Rowan -- Janney -- Analyst

Giuliano Bologna -- BTIG -- Analyst

Bill Dezellem -- Tieton Capital -- Analyst

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