Regional Management Corp. quarterly report, Q2 FY2017

Regional Management Corp. — Q2 2017 Form 10-Q

Reporting period: Three and six months ended June 30, 2017. Unaudited results; amounts below are in millions unless stated otherwise. Regional Management provides consumer loans and related optional insurance through 347 branches in nine states.

Financial performance

MetricQ2 2017Q2 2016Six months 2017Six months 2016
Revenue$65.3$57.3$131.2$114.0
Provision for credit losses$18.6$13.4$37.7$27.2
Income before taxes$9.9$9.6$19.9$18.0
Net income$6.1$5.9$13.8$11.1
Diluted EPS$0.52$0.49$1.17$0.89
  • Q2 revenue rose 14.0% year over year, primarily reflecting 13.3% growth in average finance receivables; the total revenue yield was 36.9% versus 36.7%.
  • Q2 net income increased 3.8%; higher revenue was largely offset by higher credit-loss provision and operating expenses. Net income was down $1.5 million sequentially from Q1 2017.
  • For the first half, net income rose 24.2%. The effective tax rate declined to 30.8% from 38.3%, including $1.5 million in tax benefits from share-based awards; management said these benefits reduced the rate by 7.5 percentage points.
  • Q2 G&A was $31.6 million, with its ratio to average receivables improving to 17.9% from 18.9%. First-half ratio improved to 17.8% from 19.1%.
  • Operating cash flow for the first half was $51.1 million; investing cash use was $53.0 million and financing cash provided was $1.2 million. Cash ended at $3.7 million, versus $4.4 million at year-end 2016. Restricted cash was $10.6 million.

Portfolio, credit quality and balance sheet

  • Finance receivables were $726.8 million at June 30, up 12.5% from $645.7 million a year earlier and 4.6% from March 31. Core small and large loans totaled $616.7 million, up 19.8% year over year; large loans grew 37.5%. Automobile loans fell 20.7%, reflecting a business restructuring.
  • Q2 provision for credit losses rose 38.9% year over year to $18.6 million, or 10.5% of average receivables versus 8.6%. Net credit losses were $17.6 million; the annualized net-loss rate was 9.9%, including a temporary 0.9 percentage-point effect from insurance claims recorded as credit losses during a carrier transition.
  • The allowance was $42.0 million, or 5.8% of receivables, compared with $36.2 million and 5.6% a year earlier. Delinquencies 30 days or more were 6.5% versus 6.8%; accounts at least one day past due were 17.5% versus 18.3%. Large-loan delinquency and allowance coverage increased as that portfolio grew and seasoned.
  • Total debt was $497.0 million gross ($491.5 million net of issuance costs), compared with $491.7 million gross at year-end. Stockholders’ equity was $221.4 million; total assets were $727.5 million.

Funding, outlook and risks

  • In June, the company amended its senior revolving facility, increasing availability from $585 million to $638 million and extending maturity to June 2020, with an accordion to $700 million. Borrowings were $446.6 million; disclosed borrowing-base availability was $62.3 million.
  • The company also established a $125 million revolving warehouse facility, expandable to $150 million, secured by large-loan receivables. Borrowings were $24.0 million and disclosed capacity was $101.0 million. The facility converts to an amortizing loan in December 2018 and terminates in December 2019. The existing auto-loan amortizing facility had $26.4 million outstanding.
  • Management stated operating cash flow and borrowing facilities should fund expected growth and needs for the next 12 months. It expected annual capital expenditures of approximately $4 million to $10 million and continued branch expansion; eight net new branches opened in the first half. No specific earnings or revenue guidance was provided.
  • Management cited seasonal loan demand and rising delinquency through the year. It reported tighter lending in underperforming segments and a developing centralized collections team, with Q2 net credit losses down $1.8 million sequentially. The new loan system was operating in five states, covering 46% of loans; technology costs were expected to remain elevated in 2017.
  • Variable-rate debt exposes results to interest rates: management estimated a 100-basis-point LIBOR increase would add about $4.7 million to annual interest expense at June 30 balances. Interest-rate caps cover $250 million of notional borrowings, subject to stated maturities.
  • Debt agreements impose financial and operational covenants, including limits on distributions and other activities. The company reported covenant compliance at June 30, but warned that failure to meet warehouse-system transition milestones could reduce advance rates or trigger early amortization. It intends to address the senior facility maturity well before June 2020.
  • A securities class action dismissed in the company’s favor is on appeal. The company cannot estimate a reasonably possible loss range; its insurer denied coverage for certain claims and reserved rights on others. Management said ordinary-course legal matters were not expected to materially affect financial condition, liquidity or results, while noting uncertainty.

Most important facts for investors to verify

  • Whether portfolio growth, especially large-loan growth, can be sustained without further deterioration in loss rates, delinquency or allowance adequacy.
  • How much of reported credit-loss growth reflects portfolio expansion and the temporary insurance-claims accounting shift, versus underlying borrower performance.
  • Actual borrowing-base availability and liquidity under both revolving facilities, including restrictions on restricted cash and collateral.
  • Progress, cost and lender milestones for the loan-system conversion, and the effect on warehouse-facility terms.
  • Developments in the securities-litigation appeal, insurance coverage allocation, and any changes to the company’s estimate of exposure.