Regional Management Corp. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 13, 2020. The filing reports annual results and quarterly data, including the fourth quarter. Regional Management provides consumer installment loans primarily to non-prime and near-prime borrowers through 366 branches in 11 states.
Business context and key financial metrics
- Products include small and large installment loans, retail loans, and optional insurance. Year-end finance receivables were $1.105 billion, up 18.5% from $932.2 million. Core small and large loan receivables rose 22.3% to $1.071 billion; large loans increased 39.0%.
- 2019 total revenue was $355.7 million, up 16.0%. Interest and fee income was $321.2 million; insurance income, net, was $20.8 million; other income was $13.7 million.
- Net income was $44.7 million, up 26.6%; diluted EPS was $3.80 versus $2.93. Income before taxes was $59.0 million. Net income was 12.6% of revenue, compared with 11.5% in 2018.
- Provision for credit losses was $99.6 million; net credit losses were $95.7 million, or 9.7% of average receivables versus 9.1% in 2018. Year-end contractual delinquency improved to 7.2% from 7.7%; the allowance was $62.2 million, or 5.6% of receivables versus 6.3%.
- General and administrative expenses were $157.0 million, up 11.9%; the operating expense ratio improved to 15.9% from 16.4%. Interest expense increased 19.9% to $40.1 million.
- Operating cash flow was $165.1 million; investing cash outflow was $275.6 million, largely reflecting net loan originations; financing cash inflow was $116.9 million. Cash was $2.3 million and restricted cash was $54.2 million at year-end.
- Gross long-term debt was $808.2 million ($798.6 million net of issuance costs), up from $660.5 million. Stockholders’ equity was $302.8 million; funded debt-to-equity was 2.7x. The company reported compliance with debt covenants.
- Fourth-quarter 2019 revenue was $98.0 million and net income was $15.7 million, compared with $83.7 million and $10.8 million, respectively, in fourth-quarter 2018.
Material changes versus the prior comparable period
- Revenue growth was led by receivables expansion, especially large loans. Average receivables grew 15.5%; overall interest and fee yield edged down to 32.6% from 32.8%, partly reflecting product mix and lower small-loan yields.
- Provision for credit losses rose 14.4%, while net credit losses increased 23.2%, mainly alongside portfolio growth and reduced use of non-file insurance. Management said lower non-file insurance use shifts costs between insurance income and credit losses.
- Insurance income, net, increased 40.7%, with higher earned premiums and lower claims and direct expenses. G&A increased in dollars but declined as a share of average receivables.
- Debt increased as the company funded receivables growth and completed a $130 million securitization in October 2019. It also repaid its amortizing loan in full and repurchased approximately $25 million of stock, buying 937,911 shares at a weighted-average $26.65.
Outlook, risks and unusual items
- Management expects continued growth through existing branches, new branches, direct mail and digital channels, and large-loan originations. It expects the operating expense ratio to decline over time and estimates annual technology and branch capital expenditures of $9–$12 million. No specific earnings or revenue guidance is provided.
- Management said operating cash flows and debt facilities should fund the business for the next 12 months. Key funding risks include variable-rate borrowing, refinancing and facility renewal, covenant restrictions, securitization-market access, and the transition away from LIBOR. A 100-basis-point LIBOR increase was estimated to raise annual interest expense by about $4.0 million before cap benefits.
- Effective January 1, 2020, CECL adoption increased the allowance by approximately $60.1 million, from $62.2 million to $122.3 million, and reduced retained earnings by $46 million after tax. The filing says the adoption does not change asset cash flows or breach covenants.
- A January 2020 technology outage disrupted branch loan originations and some payment methods for approximately seven business days. The company estimated a $1.3 million net income impact in first-quarter 2020 and a further $0.3 million during the rest of 2020; it reported no data breach or data-integrity impact.
- Major risks include borrower credit deterioration in an economic downturn, geographic concentration, regulatory limits on rates and products, convenience-check underwriting and fraud exposure, employee turnover, technology and cyber risk, and insurance claims. The filing discusses proposed bills that could prohibit mailed convenience checks or impose a 36% APR cap; neither is described as enacted.
- Legal proceedings arose in the ordinary course; management did not expect them to materially affect results, liquidity, or financial condition. The filing provides no quantified aggregate exposure.
Important facts for investors to verify
- Track delinquency, net credit losses, allowance adequacy, and the effects of CECL; compare performance after adoption on a consistent basis.
- Assess whether large-loan growth, lower yields, insurance results, and credit losses support sustainable earnings and returns.
- Confirm liquidity and refinancing capacity, including borrowing-base availability and near-term securitization revolving-period dates. The filing contains differing senior-facility availability figures and inconsistent descriptions of the 2019 securitization’s terms and balances; verify against the underlying debt documents and audited notes.
- Monitor the financial and operational effects of the January 2020 system outage, as well as further technology-control and cyber-risk disclosures.
- Follow regulatory developments affecting APR limits, convenience-check mailings, consumer oversight, and insurance products.