Regional Management Corp. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. Amounts are in U.S. dollars. Regional Management is a consumer finance company operating 340 branches in nine states, primarily offering small and large installment loans. It stopped originating automobile loans in November 2017.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $72.4 million | $65.3 million | $145.0 million | $131.2 million |
| Net income | $8.5 million | $6.1 million | $17.1 million | $13.8 million |
| Diluted EPS | $0.70 | $0.52 | $1.42 | $1.17 |
| Provision for credit losses | $20.2 million | $18.6 million | $39.7 million | $37.7 million |
| General and administrative expense | $33.2 million | $31.6 million | $67.8 million | $63.1 million |
| Interest expense | $7.9 million | $5.2 million | $15.1 million | $10.4 million |
- Q2 revenue rose 10.8% year over year and net income rose 38.3%; six-month revenue rose 10.6% and net income rose 24.4%.
- Growth in average receivables drove higher interest and fee income, while yields declined: total interest-and-fee yield was 32.7% in Q2 versus 33.8% a year earlier, and 32.6% for the first half versus 33.5%.
- Reported net income as a percentage of average receivables was 4.1% for Q2 versus 3.5%; for the first half, 4.2% versus 3.9%. General and administrative expense as a percentage of average receivables improved to 16.2% from 17.9% in Q2 and to 16.6% from 17.8% for the first half.
- At June 30, gross finance receivables were $1.122 billion; net finance receivables were $798.8 million after the $48.5 million allowance. Total assets were $868.2 million, total liabilities $609.7 million, and stockholders’ equity $258.5 million.
- Long-term debt was $595.8 million gross ($588.3 million net of issuance costs), compared with $571.5 million gross at year-end 2017. Cash was $2.8 million and restricted cash $26.4 million. Revolving-facility availability was subject to borrowing-base limits; the senior facility had $67.1 million of eligible borrowing capacity reported.
- For the first half, operating cash flow was $60.1 million, investing cash outflow $72.8 million, and financing cash inflow $19.9 million. Cash and restricted cash ended at $29.2 million.
Material changes and operating trends
- Receivables increased 16.6% year over year to $847.2 million. Core small and large loans grew 26.0% combined; large loans grew 46.3%. The automobile portfolio fell 50.6% as it runs off after originations ceased.
- Q2 contractual delinquency improved to 6.3% of receivables from 6.5% a year earlier. Annualized net credit losses were 9.5% in Q2 versus 9.9%, and 9.8% for the first half versus 10.4%. Management attributed improvement partly to tighter credit actions and centralized late-stage collections. Hurricane-related losses remained in current-period net losses; the allowance no longer included a separate hurricane increment.
- Interest expense increased substantially, reflecting higher average debt, rising rates, unused fees, and debt-issuance cost amortization. The average cost of combined revolving facilities was 5.61% in Q2 versus 4.41% and 5.36% for the first half versus 4.37%.
- The federal corporate tax-rate reduction contributed to lower effective tax rates: 23.5% for Q2 and 23.6% for the first half, versus 37.9% and 30.8%, respectively. Management estimated an approximately 25% effective tax rate for full-year 2018.
Outlook, risks and unusual items
- Management expects receivables growth to remain the primary driver of future interest and fee income, while continued large-loan mix growth may reduce overall yield. It expects the receivable efficiency ratio to decline over time as the portfolio grows and expense growth is controlled.
- Management stated operating cash flow and debt-facility borrowings should fund the business for the next 12 months. It expected annual technology and branch-related expenditures of approximately $7–$10 million. No earnings-per-share or revenue guidance was provided.
- Funding risks include the warehouse facility’s conversion to an amortizing loan in December 2018 and termination in December 2019, and the senior revolving facility’s June 2020 maturity. Management intended to seek an extension of the warehouse facility and address the senior facility maturity in advance. Future securitizations or refinancing may be unavailable or more costly.
- The company completed its first $150 million securitization in June 2018, with a 3.93% weighted-average interest rate and a revolving period through June 2020. The filing warns that securitization-market access, servicing events, rating-agency actions, and repurchase or indemnification obligations could affect liquidity and costs.
- Interest-rate exposure remains material: a 100-basis-point increase in LIBOR was estimated to increase annual interest expense by about $4.1 million on LIBOR-based borrowings. $400 million of borrowings were covered by interest-rate caps; management reported 97.8% of debt fixed-rate or covered by caps.
- The company reported compliance with debt covenants. It accrued $0.2 million for legal matters; management did not expect pending proceedings to materially harm results, but noted outcomes and losses can be difficult to estimate. The filing identifies expected-credit-loss accounting (effective after 2019) as potentially materially adverse and says operating-lease accounting may affect debt covenants.
- Seasonality affects loan demand, delinquencies, operating results, and cash needs. The consumer-finance business is subject to extensive federal, state, and local regulation; insurance claims severity and availability of insurance providers are additional risks.
Important facts for investors to verify
- Reconcile debt disclosures: the debt note lists senior revolving debt of $383.2 million, while the market-risk section reports $533.2 million outstanding under that facility. Confirm the correct figure and whether the latter includes other borrowings.
- Confirm available liquidity by facility, including the borrowing-base conditions behind reported unused capacity and the timing and terms of any warehouse extension or senior-facility refinancing.
- Track credit performance as the portfolio expands: delinquency and charge-offs by product, allowance adequacy, hurricane-related losses, and the rising severity of non-file insurance claims.
- Assess whether portfolio growth can offset falling yields and higher funding costs, and whether the expected tax rate and expense-efficiency improvements are sustained.
- Monitor the potential effects of expected-credit-loss and lease-accounting standards, regulatory developments, legal matters, and securitization-related repurchase or servicing obligations.