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
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six 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.