Regional Management Corp. — 2016 Form 10-K
Business context and reporting period
Fiscal year ended December 31, 2016; the filing also reports unaudited fourth-quarter results. Regional is a consumer lender serving primarily non-prime and underbanked customers through installment, automobile, and retail loans, with optional insurance products. At year-end it had 339 branches in nine states and approximately 357,800 active accounts.
Financial and operating performance
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $240.5 million | $217.3 million |
| Net income | $24.0 million | $23.4 million |
| Diluted EPS | $1.99 | $1.79 |
| Provision for credit losses | $63.0 million | $47.3 million |
| Net credit losses / average receivables | 9.0% | 8.8% |
| Operating cash flow | $99.9 million | $83.0 million |
- Revenue rose 10.7%, driven by 12.9% growth in interest and fee income, as average finance receivables increased 14.8% to $657.4 million. Interest and fee yield declined 0.6 percentage points to 33.6%.
- Net income increased 2.9%. The calculated net margin was approximately 10.0% of revenue. General and administrative expense was $118.6 million, or 18.0% of average receivables, down from 20.2% in 2015.
- Year-end finance receivables grew 14.2% to $717.8 million; the allowance was $41.3 million, or 5.7% of receivables. Delinquencies 30 days or more rose to 7.4% from 7.2%; delinquencies one day or more improved to 18.1% from 20.3%.
- Product balances shifted toward large loans: large receivables grew 60.6% to $235.3 million; small loans rose 6.0% to $358.5 million; automobile loans fell 22.1% to $90.4 million; retail loans increased 21.4% to $33.5 million.
- Cash and restricted cash were $4.4 million and $8.3 million, respectively. Cash flows were $99.9 million provided by operations, $157.4 million used in investing, and $54.2 million provided by financing; cash declined $3.2 million during the year.
- Debt was $491.7 million before unamortized issuance costs: $452.8 million under the revolving facility and $38.8 million under the amortizing loan. The revolver matures in August 2019. Reported availability differs by measure: $132.2 million unused commitment, with $58.2 million identified as eligible borrowing capacity under the borrowing base. The company reported covenant compliance at year-end.
Material changes versus prior period
- Revenue grew faster than earnings as the provision for credit losses increased 33.1% and interest expense rose 22.8%. Net credit losses increased to $59.2 million from $50.4 million.
- Large-loan expansion drove receivables and income growth. Automobile lending contracted as the company restructured that business to a centralized model.
- Management attributed improved expense efficiency to operating efficiencies and lower marketing costs. The allowance methodology changed in September 2016 to emphasize delinquency roll rates; the change reduced 2016 provision by $0.5 million and increased diluted EPS by $0.03.
- The company repurchased $25.0 million of common stock and relocated its headquarters in October 2016. CEO Peter Knitzer succeeded Michael Dunn in August 2016.
Outlook, risks, contingencies, and unusual items
- No formal earnings or revenue guidance is provided. Management expects first-quarter 2017 net credit losses to be slightly higher sequentially, citing elevated late-stage delinquencies. It expects the automobile portfolio to liquidate more slowly in 2017 and the restructuring to be substantially complete by the second quarter.
- Management plans continued branch, product, and channel growth; annual capital expenditures of approximately $4 million to $10 million; and completion of the Nortridge loan-system transition across remaining states by the end of 2017. Technology costs are expected to remain elevated during the transition.
- Key risks include credit deterioration among non-prime borrowers, direct-mail underwriting, regulatory changes and proposed CFPB rules, state and geographic concentration, variable-rate funding and refinancing needs, and operational disruption or cost overruns from the loan-system conversion. A substantial portion of collateral interests, particularly on small loans, is not perfected.
- A securities class action received final judgment in the company’s favor in January 2017, with the plaintiffs’ appeal deadline then pending. A separate purchase-price dispute was determined at $28.67 million in February 2017; the company had paid $28.1 million and accrued an additional $0.5 million at year-end. The filing reports $0.5 million accrued for ordinary-course legal matters.
- The filing includes no cash dividend plan for the foreseeable future. The independent auditor issued an unqualified opinion on the financial statements; it did not provide an audit opinion on internal control over financial reporting.
Important facts for investors to verify
- Whether late-stage delinquencies and net credit losses subsequently increased, and how performance varies by loan product.
- Actual borrowing availability under the revolver’s borrowing base, covenant headroom, and plans to refinance or extend the August 2019 maturity.
- Progress, cost, and operational effects of the Nortridge conversion, including any remaining capitalized implementation costs.
- Effects of CFPB and state regulatory developments on loan pricing, refinancing, collections, and product availability.
- Final status of any appeal in the securities case and resolution of insurance coverage allocation and other legal contingencies.