Regional Management Corp. — 2019 Q1 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018 unless noted. Unaudited. The company provides consumer installment loans and related insurance through 360 branches in 11 states, with 396,400 active accounts.
Financial performance and condition
- Revenue: $81.7 million, up 12.6% year over year. Interest and fee income was $74.3 million (+12.4%); insurance income, net, was $4.1 million (+21.4%); other income was $3.3 million (+7.4%).
- Profit: Income before taxes was $10.5 million versus $11.3 million; net income was $8.1 million, down 6.2%. Diluted EPS was $0.67 versus $0.72. Net margin was approximately 9.9% versus 11.9%.
- Credit costs and margins: Provision for credit losses was $23.3 million (+19.6%). Annualized net credit losses were 10.9% of average receivables versus 10.2%; provision was 10.1% versus 9.6%. Interest and fee yield declined to 32.1% from 32.5%. General and administrative expenses were $38.2 million; the annualized receivable efficiency ratio improved to 16.5% from 17.0%.
- Cash flow: Operating cash flow was $30.7 million versus $31.8 million. Investing used $6.8 million and financing used $32.8 million. Cash and restricted cash together ended at $41.2 million ($2.3 million unrestricted cash and $38.9 million restricted).
- Balance sheet and debt: Total assets were $953.5 million; net finance receivables were $855.9 million; allowance for credit losses was $56.4 million, or 6.2% of receivables. Long-term debt was $628.8 million gross ($620.4 million net of issuance costs), down from $660.5 million gross at year-end. Stockholders’ equity was $287.8 million; debt-to-equity was 2.3:1.
- Funding capacity: The filing reports $59.6 million of eligible borrowing capacity under the senior revolver, subject to borrowing-base limits, and $433.4 million of unused revolving-facility amounts subject to the borrowing base. The company said it believed operating cash flow and borrowing facilities would fund operations for the next 12 months.
Material changes versus Q1 2018
- Average finance receivables rose 13.6% to $924.9 million, driving revenue growth; period-end receivables were up 13.3% year over year. Core small and large loan balances grew 17.0% and 21.1%, respectively, while the run-off auto portfolio declined 57.9%.
- Revenue growth was more than offset in earnings by higher credit-loss provision (+$3.8 million), general and administrative expenses (+$3.6 million), and interest expense (+$2.5 million). Interest expense rose 35.4%; average cost of debt increased to 6.11% from 5.14%.
- Contractual delinquency was 7.0% versus 6.5%; the allowance ratio rose to 6.2% from 5.9%. Management attributed higher delinquency in part to tighter underwriting and maturation of the large-loan portfolio. Delinquency improved from 7.7% at year-end, consistent with usual first-quarter seasonality.
- Net credit losses included $0.9 million related to the 2018 hurricanes; $2.0 million of incremental hurricane allowance remained at quarter-end.
- Cash and restricted cash fell $8.9 million from year-end, while gross debt declined $31.7 million. The company adopted lease accounting in January 2019, recording $24.1 million of lease assets and liabilities at transition; this had no income-statement impact.
Outlook, commentary, risks, and unusual items
- Management expects loan growth to remain the main driver of interest and fee income. It expects large-loan growth to continue, which may reduce overall yield as product mix shifts; it also expects credit tightening to increase delinquency and losses in the short term but reduce them over time. Custom credit scorecards had been implemented in all 11 states by March 2019.
- The company expects annual technology and branch-network expenditures of approximately $9–$12 million and expects its efficiency ratio to decline over time. No specific earnings or revenue guidance was provided.
- Seasonality matters: loan demand is generally lowest in Q1, while delinquency tends to be lowest in Q1 and rise later in the year. Management stated that it expected higher debt needs in connection with the newly authorized share repurchase program.
- In May 2019, after quarter-end, the board authorized repurchases of up to $25 million through May 6, 2021. Repurchases are discretionary and intended to be funded with a combination of cash and debt.
- Credit, funding, and rate risks include potential deterioration in loan performance, refinancing needs, and variable-rate debt exposure. The senior revolver matures in June 2020; the warehouse facility’s revolving period ends in February 2020. A 100-basis-point LIBOR increase was estimated to add about $3.3 million of annual interest expense, partly offset by about $0.7 million from interest-rate caps. The company was in compliance with debt covenants at quarter-end and was addressing the expected phaseout of LIBOR.
- The company expects the forthcoming expected-credit-loss accounting standard, effective for it after December 15, 2019, to have a material adverse effect on its financial statements; the impact was still being quantified. It also cited elevated legal and compliance costs. Ordinary-course legal proceedings were disclosed, with management not expecting a material adverse effect; the filing notes some potential losses cannot be estimated clearly.
Investor facts to verify
- Whether rising net credit losses, delinquency, and allowance coverage stabilize as underwriting changes and the large-loan portfolio matures.
- Whether loan growth can offset declining yields, higher funding costs, and operating-expense growth sufficiently to restore earnings growth.
- Available borrowing capacity under borrowing-base and covenant constraints, and progress on the 2020 revolver and warehouse-facility maturities.
- The quantified impact of the expected-credit-loss accounting standard and any material developments in legal matters.
- Whether share repurchases proceed, their funding mix, and their effect on leverage and liquidity.