Regional Management Corp. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016 unless noted. Dollar amounts below are in millions unless stated otherwise.
Business context
Regional Management is a consumer finance company offering small and large installment loans, automobile and retail loans, and optional insurance products. It operated 344 branches in nine states at quarter-end and opened five branches during the quarter. Management notes that loan demand and delinquencies are seasonal; first-quarter demand is typically lower for core small and large loans.
Financial performance and position
- Revenue: $65.8, up 16.1% year over year. Interest and fee income was $59.3 (+15.5%), insurance income net was $3.8 (+29.5%), and other income was $2.8 (+12.3%). Average finance receivables rose 14.9% to $709.3.
- Earnings: Net income was $7.6, up 47.5%; diluted EPS was $0.65 versus $0.40. Pretax income was $10.0. The reported effective tax rate fell to 23.8% from 38.3%, including a $1.5 tax benefit from share-based awards.
- Margins and costs: Annualized total revenue yield on average receivables was 37.1% versus 36.7%; provision for credit losses was 10.8% versus 8.9%. General and administrative expense was $31.5, up 5.5%, while the annualized receivable efficiency ratio improved to 17.7% from 19.3%. Interest expense was $5.2, up 10.7%.
- Credit performance: Provision for credit losses rose 38.7% to $19.1; annualized net credit losses were 10.9% of average receivables versus 9.7%. The allowance was $41.0, or 5.9% of receivables, compared with 5.7% at year-end. Contractual delinquencies of 30 days or more were 6.5%, versus 6.2% a year earlier; delinquency of one day or more was 15.7%, versus 16.7% a year earlier.
- Cash flow: Operating cash flow was $28.8, investing cash flow was $0.8, and financing cash outflow was $30.5. Cash declined $0.9 to $3.5. Financing outflows included $22.1 of net revolving-facility payments and $6.6 of amortizing-loan payments.
- Balance sheet and funding: Net finance receivables were $654.0, down from $676.5 at year-end; total assets were $690.4. Gross long-term debt was $463.0 ($460.9 net of issuance costs), down from $491.7 gross. The $585 facility matures in August 2019. Although the filing lists $154.2 of unused facility amount subject to borrowing-base limits, management reports $64.0 of eligible capacity available to borrow. The company said it was in compliance with debt covenants.
Material changes versus comparable periods
- Year-over-year receivables grew 14.4% to $695.0: large loans increased 49.3% and small loans 8.1%; automobile loans declined 19.2%. Quarter over quarter, total receivables fell 3.2%, reflecting seasonal repayments and portfolio activity.
- Revenue growth was driven mainly by receivables growth, particularly large loans. Higher credit-loss provision and G&A partially offset revenue growth; lower income taxes contributed to higher net income.
- Net credit losses increased, but management attributed approximately $1.0 of Q1 losses and related reserve effects to a temporary shift in insurance claims during a provider transition. The allowance also reflects continued seasoning of the large-loan portfolio.
- Management said the efficiency ratio improved with scale. It also reported higher personnel and occupancy costs, including incentive compensation, branch expansion, and technology-system conversion spending.
Outlook, risks, and unusual items
- No specific full-year revenue or earnings guidance is provided. Management expects net credit losses in Q2 and Q3 2017 to be lower than Q1, citing tighter credit policies and improved early- and late-stage delinquencies; it expects total provision to remain at or near its current level due partly to portfolio growth.
- Management expects annual capital expenditures of approximately $4–$10 and believes operating cash flow and borrowing availability will fund expected needs for the next 12 months. It plans continued branch expansion and expects to convert remaining states to its new loan-management system by year-end 2017; technology costs are expected to remain elevated.
- Funding and interest-rate risks include variable-rate revolving debt, borrowing-base and covenant restrictions, and refinancing needs ahead of the August 2019 facility maturity. A 100-basis-point LIBOR increase was estimated to add about $3.9 annually to interest expense at the quarter-end debt balance, before considering hedges. Interest-rate caps cover $200 of notional borrowings at a 2.50% LIBOR strike.
- A securities class action received final judgment for the defendants in January 2017, but plaintiffs appealed in March. The company intends to defend the case; its insurer denied coverage for certain claims and acknowledged coverage for others subject to reservation of rights. Other ordinary-course legal matters are disclosed; management does not expect them to materially affect the company, though loss estimates may be difficult.
- The company adopted new share-based compensation tax accounting in 2017, producing a $1.5 tax benefit in the quarter and potentially greater tax-rate volatility. A future expected-credit-loss accounting standard could significantly affect the allowance and provision; the company was evaluating its impact.
- Management identified no material changes to reported risk factors. It noted seasonal swings, consumer-credit and collection risks, regulatory and legal expense exposure, and uncertainty in credit-loss estimates.
Important facts for investors to verify
- Whether the temporary insurance-claims classification effect recedes and how credit losses, delinquency, and allowance coverage develop as the large-loan portfolio seasons.
- The distinction between $154.2 of unused facility amount subject to borrowing-base limits and $64.0 of currently eligible borrowing capacity, and any changes in covenant or refinancing conditions.
- How much reported earnings benefited from the $1.5 share-award tax benefit, and the effect of future tax-accounting volatility.
- Progress on the insurance-provider transition, loan-system rollout, branch expansion, and associated costs; also monitor the securities-litigation appeal and coverage allocation.