Regional Management Corp. — 2019 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; unaudited. Dollar amounts below are in millions unless stated otherwise. Regional is a consumer finance company operating 358 branches in 11 states, with 421,200 active accounts. Its core products are small and large installment loans.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Total revenue | $91.7 | $77.9 | $257.7 | $223.0 |
| Net income | $12.6 | $7.4 | $29.0 | $24.6 |
| Diluted EPS | $1.08 | $0.61 | $2.44 | $2.03 |
| Provision for credit losses | $24.5 | $23.6 | $73.6 | $63.4 |
| Interest expense | $10.3 | $8.7 | $29.8 | $23.8 |
- Q3 interest and fee income rose 15.2% to $83.1 million, principally on 16.3% growth in average receivables; average yield declined 0.3 percentage points to 32.9%. Q3 net income increased 68.8%. For the first nine months, revenue rose 15.6% and net income rose 18.2%.
- At September 30, gross finance receivables were $1,404.2 million and net finance receivables were $981.3 million, after $362.0 million of unearned charges and a $60.9 million credit-loss allowance. Total assets were $1,086.2 million; stockholders’ equity was $296.7 million.
- Core small and large loan receivables grew 21.7% year over year, led by large loans (+35.0%). Automobile receivables continued to run off after originations ceased in 2017.
- Q3 G&A was $40.2 million, up 12.0%, while the operating expense ratio improved to 15.9% from 16.5%. The efficiency ratio was 43.8% versus 46.0%. Net income was 5.0% of average receivables on the company’s annualized presentation.
- Q3 30-plus-day contractual delinquency was 6.6%, down from 7.1% a year earlier. Annualized net credit losses were 8.2%, up from 7.7%; the allowance was 5.8% of receivables, compared with 6.2% a year earlier.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $114.9 million, investing cash outflow was $185.9 million—primarily net loan originations—and financing cash inflow was $66.6 million. Cash and restricted cash ended at $45.7 million, including $2.0 million unrestricted cash.
- Gross long-term debt was $743.8 million ($736.0 million net of issuance costs), up from $660.5 million gross at year-end 2018. Funded debt-to-equity was 2.5-to-1; the company reported compliance with debt covenants. Unused revolving-facility amounts, subject to borrowing bases, totaled $311.3 million; eligible capacity under the senior facility was $126.3 million.
- In September, the senior revolving facility was amended to $640 million and extended to September 2022. The company reported that 38.9% of long-term debt was fixed-rate. Its estimate was that a 100-basis-point LIBOR increase would add about $4.5 million in annual interest expense before approximately $0.3 million of annual interest-cap mitigation.
- Lease accounting adoption added $25.7 million of lease assets and $27.7 million of lease liabilities at quarter-end; the company reported no income-statement impact from adoption.
Changes, outlook and risks
- Growth in receivables drove higher revenue, but also higher credit-loss provisions, operating costs and interest expense. The company attributed improved insurance income partly to reduced use of non-file insurance; management cautioned this shifts costs substantially between insurance expense and net credit losses rather than eliminating them.
- Management expects large-loan growth to continue, with a potential longer-term reduction in overall interest and fee yield as product mix changes. It expects future interest and fee income growth to depend primarily on receivables growth and believes the operating expense ratio can decline with growth and expense control. No specific earnings or revenue guidance was provided.
- Management expects annual technology and branch-related expenditures of approximately $9–$12 million and said operating cash flow and debt facilities should fund the business for the next 12 months. It also noted refinancing and funding risks, including the need to extend or address the senior facility at maturity and uncertainty about future facility extensions or securitizations.
- The company said CECL adoption, effective in 2020, is expected to have a material adverse financial-statement effect: a higher allowance, higher deferred tax assets and a one-time reduction to retained earnings, net of tax. The impact was still being quantified; management stated cash flows and existing debt covenants would not change.
- Subsequent to quarter-end, the warehouse facility was extended and repriced; the $8.6 million amortizing loan was prepaid and terminated; and a $130 million asset-backed securitization was completed. The company also completed its $25 million repurchase program in October, repurchasing 938,000 shares in total. Ordinary-course legal proceedings were not expected by management to have a material adverse effect, though outcomes remain uncertain.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material changes to the risk factors disclosed in its 2018 Form 10-K.
Important facts for investors to verify
- Whether rapid large-loan growth and the changing product mix sustain revenue while affecting yields and credit performance.
- Trends in net credit losses, delinquency and allowance coverage, particularly given the shift away from non-file insurance and seasonal second-half delinquency patterns.
- The quantified CECL transition impact and the resulting opening allowance and retained-earnings adjustment.
- Facility availability, borrowing-base capacity, refinancing needs, variable-rate exposure and the effects of the post-quarter financing transactions and repurchases.
- Whether branch growth and technology spending deliver the expected operating leverage, and whether legal or regulatory matters produce costs beyond current estimates.