Regional Management Corp. — FY 2018 Form 10-K
Business and period: Consumer-finance company serving primarily non-prime and near-prime borrowers through 359 branches in 11 states. The fiscal year ended December 31, 2018; quarterly figures below include Q4 2018. Its core products are small and large installment loans, alongside retail loans and optional insurance. The company reported 401,500 active accounts at year-end.
Key financial and operating metrics
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Total revenue | $306.7 million | $272.5 million | +12.6% |
| Interest and fee income | $280.1 million | $249.0 million | +12.5% |
| Provision for credit losses | $87.1 million | $77.3 million | +12.6% |
| General and administrative expenses | $140.3 million | $131.0 million | +7.1% |
| Interest expense | $33.5 million | $23.9 million | +40.0% |
| Income before taxes | $45.9 million | $40.3 million | +14.0% |
| Net income | $35.3 million | $30.0 million | +18.0% |
| Diluted earnings per share | $2.93 | $2.54 | +15.4% |
| Operating cash flow | $146.3 million | $115.4 million | +26.7% |
| Investing cash flow | $(199.2) million | $(179.9) million | Higher use of cash |
| Financing cash flow | $81.1 million | $73.8 million | Higher inflow |
Amounts in dollars. Income before taxes was 5.4% of average finance receivables and net income was 4.1%, versus 5.4% and 4.0%, respectively, in 2017. The receivable efficiency ratio (G&A divided by average receivables) improved to 16.4% from 17.6%. Average interest-and-fee yield declined to 32.8% from 33.5% as the portfolio mix shifted toward large loans.
- Portfolio: Year-end finance receivables were $932.2 million, up 14.0%. Core small and large loans totaled $875.7 million, up 21.1%; large loans rose 26.1% and small loans 16.5%. Automobile receivables fell 57.4% after originations ceased in November 2017.
- Credit quality: Net credit losses were $77.7 million, or 9.1% of average receivables, compared with $69.7 million and 9.4% in 2017. The allowance was $58.3 million, or 6.3% of receivables, versus $48.9 million, or 6.0%. Contractual delinquency rose to 7.7% from 7.5%; large-loan delinquency increased to 6.1% from 5.3%.
- Balance sheet and funding: Total assets were $956.4 million; stockholders’ equity was $279.2 million. Long-term debt was $660.5 million and debt-to-equity was 2.4:1. Cash was $3.7 million and restricted cash $46.5 million. The senior revolver had $328.1 million outstanding and $68.6 million of eligible borrowing capacity at year-end, subject to covenants and borrowing-base conditions. The company reported compliance with debt covenants.
- Q4 2018: Revenue was $83.7 million and net income was $10.8 million, compared with Q4 2017 revenue of $72.1 million and net income of $10.9 million. Q4 2018 diluted EPS was $0.90, versus $0.92.
Material changes, outlook, and notable items
- Growth was driven by receivables expansion, particularly large loans, increased marketing, customer transitions from small to large loans, and 17 net branch additions. The company entered Missouri and Wisconsin in 2018. Digital-sourced originations grew nearly 130% year over year; digital channels accounted for more than 15% of new small- and large-loan customers.
- Management plans further branch, direct-mail, and digital investment; rollout of custom credit models to all states was expected in 2019, with benefits expected in late 2019 and 2020. It cited an opportunity for as many as 700 additional branches in states where operating conditions are favorable. Planned annual technology and branch-related expenditures were approximately $9–$12 million. Management said operations cash flow and debt facilities should fund the business for the next 12 months; this is not formal earnings guidance.
- Interest expense increased as borrowing balances and rates rose; average cost of long-term debt increased to 5.66% from 4.73%. About 45.8% of debt was fixed-rate. A 100-basis-point increase in LIBOR was estimated to add about $3.6 million in annual interest expense before approximately $1.3 million of estimated annual offset from interest-rate caps.
- The company completed two asset-backed securitizations in 2018, with $150 million and $130 million of notes issued. Revolving periods end in 2020; the senior revolving credit facility matures in June 2020 and the warehouse facility has a February 2020 conversion date and February 2021 termination date. Refinancing and continued access to securitization funding are material liquidity considerations.
- Management reduced use of non-file insurance beginning in Q4 because claims costs had exceeded premiums. It expects lower insurance claims benefits to increase net credit losses by about 0.65 percentage points of average receivables over the next four quarters, with a substantially offsetting increase in insurance income and no expected material profitability effect.
- 2018 included hurricane-related credit-loss reserves, including a $3.9 million incremental allowance in Q3; the year-end hurricane-related allowance was $3.6 million. Management expected near-term effects from tighter underwriting and the maturing large-loan portfolio, while expecting tighter underwriting to improve credit performance over time. It was uncertain whether the 2018–19 federal shutdown or Tax Act-related changes to customer tax refunds would affect 2019 delinquencies and losses.
- A Q3 estimate change reducing the allowance for unearned non-refundable fees increased 2018 net income by $5.0 million ($0.41 diluted EPS). Other Q3 allowance changes for impaired loans, reduced non-file insurance claims, and hurricane exposure decreased net income by $2.1 million, $3.1 million, and $2.9 million, respectively. The company expects adoption of the expected-credit-loss standard in 2020 to have a material adverse financial-statement effect, but had not quantified it.
- Risks include borrower credit deterioration, geographic and regulatory concentration, competition, convenience-check underwriting and potential restrictions, employee turnover, cyber and third-party system risks, variable-rate funding and LIBOR transition, and securitization/refinancing risk. The CFO announced retirement, pending appointment of a successor. Ordinary-course legal proceedings were disclosed; management did not expect them to materially affect financial condition, liquidity, or results. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether delinquency, charge-offs, and allowance coverage stabilize as the large-loan portfolio seasons and stricter underwriting takes effect.
- Whether growth in receivables and earnings continues to outweigh lower portfolio yield, higher funding costs, and credit-loss expense.
- Actual usable revolver capacity, covenant headroom, and the plan for the June 2020 revolver maturity and other 2020 funding milestones.
- The net earnings impact of reduced non-file insurance use, hurricane losses, and the expected-credit-loss accounting standard.
- Whether tax-refund timing, regulatory changes affecting installment lending or convenience checks, and the CFO transition affect operations or financial results.