Regional Management Corp. quarterly report, Q1 FY2018

Regional Management Corp. — Q1 2018 Form 10-Q

Reporting period: Three months ended March 31, 2018; financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise. Regional Management is a consumer finance company operating 341 branches across nine states, offering small, large, retail and automobile loans, plus optional insurance. The company stopped originating automobile loans in November 2017 and is focusing growth on its small- and large-loan products.

Financial performance

Metric	Q1 2018	Q1 2017	Change
Total revenue	$72.6	$65.8	+10.3%
Interest and fee income	$66.2	$59.3	+11.6%
Provision for credit losses	$19.5	$19.1	+2.0%
General and administrative expenses	$34.6	$31.5	+10.0%
Interest expense	$7.2	$5.2	+37.7%
Income before income taxes	$11.3	$10.0	+13.2%
Net income	$8.6	$7.6	+13.2%
Diluted earnings per share	$0.72	$0.65	+$0.07

Average finance receivables rose 14.8% to $814.5 million, while interest and fee yield declined to 32.5% from 33.4%. Management attributed higher interest and fee income primarily to portfolio growth, partly offset by lower yield.
Net credit losses were $20.7 million, or 10.2% of average receivables on an annualized basis, compared with $19.4 million, or 10.9%, a year earlier. Contractual delinquency was 6.5% at both March 31, 2018 and March 31, 2017.
The allowance for credit losses was $47.8 million, or 5.9% of receivables, versus $41.0 million and 5.9% a year earlier. It included $1.8 million of remaining incremental hurricane-related allowance.
G&A was 17.0% of average receivables versus 17.7%. Personnel expense increased 16.8%, reflecting added technology and collections staff, branch staffing and incentive costs.
Effective tax rate was 23.8%, unchanged from Q1 2017. Management estimated an approximately 25% effective rate for 2018 following the Tax Act.

Balance sheet, cash flow and funding

At March 31, 2018, total assets were $814.8 million, net finance receivables $757.2 million, cash $3.2 million, and restricted cash $19.1 million. Total assets were $829.5 million at year-end 2017.
Long-term debt was $550.4 million gross and $545.9 million net of issuance costs, down from $571.5 million gross at December 31, 2017. Stockholders’ equity was $249.0 million.
Operating cash flow was $31.8 million, compared with $28.8 million in Q1 2017. Investing activities used $9.8 million, primarily reflecting net finance receivable originations; financing activities used $21.7 million. Cash and restricted cash totaled $22.3 million at quarter-end.
The senior revolving facility had $416.1 million outstanding and $56.3 million of eligible borrowing capacity; the warehouse facility had $91.6 million outstanding; the amortizing loan had $42.6 million outstanding. The company reported compliance with debt covenants.
Variable-rate borrowings create rate exposure: management estimated a 100-basis-point LIBOR increase would add approximately $5.1 million in annual interest expense at quarter-end balances. Existing caps covered $250 million of notional debt; the company bought additional caps with $300 million notional in April 2018.

Material changes and management outlook

Total finance receivables increased 15.8% year over year to $805.0 million. Core small- and large-loan receivables grew 25.3%; large loans rose 50.1% to $363.9 million. Automobile loans fell 43.3% to $48.7 million as the portfolio runs off.
Interest expense grew faster than revenue, up 37.7%, reflecting higher average debt, rising rates, unused line fees and debt issuance cost amortization. The average cost of revolving facilities rose to 5.14% from 4.37%.
Management expects large loans to remain the fastest-growing product, while noting that a higher large-loan mix is expected to reduce overall interest and fee yield. It expects annualized net credit loss performance to benefit from its centralized late-stage collections department during 2018.
Management expects the receivable efficiency ratio to decline over time as the portfolio grows and expense growth is controlled. It expects approximately $7–$10 million in annual expenditures for technology infrastructure and branch expansion/maintenance, and stated operating cash flows and available borrowing should fund the business for the next 12 months.
Management intends to address the senior facility’s June 2020 maturity at least a year in advance and seek an extension of the warehouse facility before December 2018. It cautioned that future funding sources may be more expensive and additional funding may not be available on reasonable terms.
Seasonality matters: loan demand is generally lowest in Q1 and higher in Q2–Q4; delinquencies typically rise over the course of the year. The company consolidated one branch during the quarter.

Risks, contingencies and unusual items

The company expects adoption of the expected-credit-loss accounting standard, effective for it after December 15, 2019, to have a material adverse effect; the impact was still being quantified.
Implementation of the lease accounting standard is expected to affect debt covenants; the company was working with lenders on the implications.
The company cited uncertainty around non-file insurance claims and future availability or terms. A carrier transition shifted $0.6 million of claims into net credit losses in Q1 2018, compared with $1.0 million in Q1 2017.
Legal matters in the ordinary course remain; $0.2 million was accrued at March 31, 2018. A securities class action was fully resolved after the plaintiffs did not pursue a further appeal. Management did not expect other pending matters to have a material adverse effect, while noting some losses may be difficult to estimate.
Tax Act accounting amounts recorded at year-end 2017 were provisional and expected to be completed in 2018. The filing reports no material effect from adopting the new revenue recognition standard.

Important facts for investors to verify

Whether receivables growth—especially large-loan growth—continues without weakening delinquency, loss rates or yields.
Whether higher funding costs and variable-rate debt are offset by growth, and whether facility extensions/refinancing are completed on acceptable terms.
The eventual impact of the expected-credit-loss standard on the allowance, earnings and capital, and any related covenant effects from lease accounting.
Progress on reducing non-file insurance claim costs and the remaining hurricane-related allowance.
Whether management’s 2018 tax-rate estimate and annual technology/branch expenditure expectations remain on track.