Regional Management Corp. — Q2 2019 Form 10-Q
Quarter and six months ended June 30, 2019. The company provides consumer installment loans and related optional insurance through 356 branches in 11 states. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions where useful. Interim statements are unaudited.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $84.3m | $72.4m | $166.0m | $145.0m |
| Provision for credit losses | $25.7m | $20.2m | $49.1m | $39.7m |
| General and administrative expense | $37.7m | $33.2m | $75.9m | $67.8m |
| Interest expense | $9.8m | $7.9m | $19.5m | $15.1m |
| Net income | $8.4m | $8.5m | $16.5m | $17.1m |
| Diluted EPS | $0.70 | $0.70 | $1.37 | $1.42 |
- At June 30, gross finance receivables were $973.4m, up 14.9% year over year; net receivables were $916.2m. Core small and large loans totaled $930.0m, up 19.7% year over year.
- Total assets were $1,019.3m; gross long-term debt was $689.3m (net of issuance costs: $682.0m); stockholders’ equity was $290.2m. Management reported funded debt-to-equity of 2.4x and an equity ratio of 28.4%.
- Cash was $0.7m and restricted cash $41.8m. For the first half, operating cash flow was $66.6m, investing cash outflow $94.7m, and financing cash inflow $20.5m. Net originations of receivables used $91.3m.
- Q2 interest-and-fee yield was 32.5%, versus 32.7%; the annualized operating expense ratio was 16.2% in both quarters. Annualized net credit losses were 10.7%, versus 9.5%; 30-plus-day contractual delinquency was 6.4%, versus 6.3%. The allowance was 5.9% of receivables, versus 5.7%.
Material changes versus comparable periods
- Q2 revenue rose 16.4%, but net income declined 1.3%; first-half revenue rose 14.5%, while net income declined 3.8%. Higher credit-loss provisions, operating costs, and interest expense offset revenue growth.
- Interest and fee income growth was principally volume-driven: average receivables increased 14.2% in Q2 and 13.9% for the first half, while yields declined 0.2 and 0.3 percentage points, respectively.
- Large loans grew 27.2% year over year and small loans 12.1%; automobile receivables fell 60.2% as the company had stopped originating auto loans in November 2017. The shift toward large loans is expected to lower the total portfolio yield over time.
- The allowance for credit losses was $57.2m, compared with $48.5m a year earlier. The company attributed increased credit losses partly to portfolio growth and the effects of tighter underwriting scorecards introduced during 2018 and implemented across all states by March 2019.
Outlook, risks, contingencies, and unusual items
- Management said operating cash flow and borrowing capacity should fund the business for the next 12 months, including receivables growth and new-branch initial losses. It expects annual technology and branch-related expenditures of approximately $9m–$12m and anticipates continued portfolio growth and efforts to reduce the operating expense ratio.
- Funding and refinancing are significant risks: the senior revolving credit facility matures in June 2020; the warehouse facility’s revolving period ends in February 2020; and the RMIT 2018-1 and 2018-2 revolving periods end in June and December 2020. The company reported $67.7m of eligible borrowing capacity under the senior facility and said it intends to address its maturity and seek a warehouse extension. It was in compliance with debt covenants at quarter-end.
- 42.5% of long-term debt was fixed-rate. Management estimated a 100-basis-point LIBOR increase would add about $4.0m to annual interest expense before interest-rate-cap protection; caps were expected to reduce that impact by about $0.6m annually. The company also noted LIBOR’s planned phaseout and intends to work with lenders on a replacement reference rate.
- The company expects adoption of the expected-credit-loss standard on January 1, 2020 to have a material adverse effect on its financial statements, including an increased allowance, increased deferred tax assets, and a one-time after-tax reduction to retained earnings. The amount was not stated clearly in this filing.
- Non-file insurance usage was reduced beginning in Q4 2018. This lowered claims expense and raised insurance income, while substantially offsetting increases in net credit losses; therefore, insurance and credit-loss movements should be considered together. The allowance no longer included the incremental hurricane reserve recorded in 2018, although hurricane-related losses remained in period results.
- The board authorized up to $25m of share repurchases through May 6, 2021. By June 30, 285,204 shares had been repurchased for $7.1m. The filing says the program may be suspended or discontinued and repurchases are subject to liquidity and debt restrictions.
- Ordinary-course legal proceedings are pending. Management did not expect them, when concluded, to materially affect financial condition, liquidity, or results, but noted that some legal exposures cannot be reasonably estimated. No material changes to the previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether rising credit losses and the larger allowance adequately reflect portfolio performance, particularly as large-loan balances expand and underwriting changes take effect.
- Progress on refinancing or extending the 2020 facility maturities, and the amount of borrowing capacity actually available under applicable borrowing-base and covenant terms.
- The quantified retained-earnings and allowance impact of the expected-credit-loss standard when the company provides further implementation disclosures.
- How much of reported insurance-income improvement reflects reduced non-file claims versus underlying insurance economics, alongside the related increase in net credit losses.
- Whether repurchases remain consistent with liquidity needs, debt covenants, and the stated funding plan.