Regional Management Corp. — Q3 2017 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2017, compared with the same 2016 periods. Regional Management is a consumer finance company operating 344 branches in nine states, offering small, large, automobile, and retail loans, plus optional insurance. Small and large installment loans are its core products.
Financial performance and position
- Q3 revenue: $69.2 million, up 10.8% year over year. Interest and fee income was $63.6 million; insurance income, net, $3.1 million; and other income, $2.5 million.
- Q3 earnings: Net income was $5.3 million, down 18.0%; diluted EPS was $0.45 versus $0.56. Income before taxes was $8.5 million versus $10.5 million. Net income was 2.8% of average receivables versus 3.8%; total revenue yield was 36.7% versus 37.0%.
- Nine-month results: Revenue was $200.4 million, up 13.5%; net income was $19.1 million, up 8.6%; diluted EPS was $1.62 versus $1.44. Revenue yield was 36.8% versus 36.7%, while net income was 3.5% of average receivables versus 3.7%.
- Credit costs and portfolio: Q3 provision for credit losses was $20.2 million, up 22.8%; nine-month provision was $57.9 million, up 32.8%. Net credit losses were $14.8 million in Q3 and $51.7 million year to date. The allowance was $47.4 million, or 6.1% of receivables, versus $39.1 million and 5.6% a year earlier. Total contractual delinquency improved to 6.8% from 7.1%; 1-day-and-over delinquency was 17.5% versus 18.2%.
- Receivables and growth: Finance receivables reached $774.9 million, up 11.3% year over year. Core small and large loans totaled $671.9 million, up 18.6%; large loans rose 42.2% to $308.6 million. Automobile loans fell 26.2% to $71.7 million.
- Expenses and funding cost: Q3 general and administrative expense was $33.8 million, up 11.1%; its annualized ratio to average receivables was 18.0% versus 18.1%. Q3 interest expense increased 30.1% to $6.7 million, and the average cost of revolving facilities rose to 5.17% from 4.43%.
- Cash flow and liquidity: Nine-month operating cash flow was $83.2 million, investing cash flow was negative $123.4 million, and financing cash flow was positive $40.9 million. Cash was $5.2 million at quarter-end, with restricted cash of $13.8 million. Management said operating cash flow and borrowing facilities should fund the business for the next 12 months, including receivables growth and new-branch losses.
- Debt: Gross long-term debt was $538.4 million ($533.1 million net of issuance costs), compared with $491.7 million gross at year-end 2016. Debt included $461.0 million under the senior revolving facility, $55.8 million under a new warehouse facility, and $21.6 million under an amortizing loan. Eligible remaining capacity under the senior facility was $58.4 million; the filing separately reports $246.2 million of unused facility amount subject to borrowing-base limits. The company reported covenant compliance.
Material changes versus comparable periods
- Q3 revenue growth was driven mainly by an 11.8% increase in average receivables, while earnings declined as credit-loss provision, G&A, and interest expense rose. Q3 net income fell $1.2 million year over year.
- For the first nine months, higher revenue and lower income taxes more than offset increased credit provision, G&A, and interest expense, raising net income by $1.5 million.
- Large-loan growth drove a material shift in portfolio mix. Management expects continued large-loan growth to modestly lower overall interest and fee yield over time. The company plans to stop originating automobile loans in November 2017 while continuing to own and service existing loans.
- The senior revolving facility was amended in June 2017: availability increased from $585 million to $638 million and maturity extended to June 2020. A new $125 million warehouse facility, expandable to $150 million, began funding large loans.
Outlook, commentary, risks, and unusual items
- Hurricanes: The company added $3.0 million to its allowance for estimated hurricane-related losses, reducing Q3 net income by $1.9 million, or $0.16 per diluted share. Management estimated a $3.0 million negative impact on Q3 originations. Free payment extensions reduced reported delinquency, so the quarter-end delinquency comparison may not fully reflect underlying payment performance.
- Other credit and insurance items: A temporary insurance-carrier transition shifted claims into net credit losses ($1.0 million in Q3; $3.6 million year to date). A $1.0 million bulk sale of previously charged-off bankruptcy accounts was recorded as a recovery. Management said tighter lending in underperforming segments and a centralized collections operation were supporting credit performance.
- Operating plans: The company opened five net new branches in the first nine months and was converting to a new loan origination and servicing system; 80% of loans were on the new system. It expects annual technology and branch-related expenditures of approximately $7 million to $14 million.
- Interest-rate risk: Borrowings are partly variable-rate. Management estimated a 100-basis-point LIBOR increase would add approximately $5.6 million to annual interest expense on the LIBOR-based borrowings at quarter-end balances. Interest-rate caps cover $250 million of notional borrowings, with a 2.50% one-month LIBOR strike.
- Legal contingency: A securities class action dismissed at the district-court level was on appeal; oral argument was scheduled for November 17, 2017. The company said it could not estimate a reasonably possible loss or range. The insurer denied coverage for certain claims and acknowledged coverage for others subject to reservation of rights. Management said ordinary-course legal matters were not expected to materially affect financial condition, liquidity, or results.
- Accounting and tax: Management expects the expected-credit-loss standard, effective for the company after December 15, 2019, to have a material financial-statement effect; the impact was still being quantified. Share-award tax benefits reduced the nine-month effective tax rate to 32.9% from 38.3%.
- No formal earnings or revenue guidance is provided in the filing. Management’s statements about expected growth, funding adequacy, and future costs are forward-looking and subject to risks.
Most important facts for investors to verify
- Whether hurricane-related payment extensions and the $3.0 million reserve adequately reflect subsequent collections and credit losses.
- Whether rising provision expense and allowance coverage remain adequate as the large-loan portfolio expands; assess delinquency and net-loss trends after the effects of payment extensions, insurance-claim reclassification, and the bulk-sale recovery.
- Available borrowing capacity under borrowing-base tests, refinancing plans for the senior and warehouse facilities, and the effect of variable rates on funding costs.
- Progress and costs of the loan-system conversion, branch investment, and planned cessation of automobile-loan originations.
- Developments in the securities-litigation appeal, potential exposure, and insurance coverage allocation.