Regional Management Corp. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report; it also reports fourth-quarter results. Regional is a consumer finance company serving primarily non-prime and underbanked customers through installment, automobile and retail loans, and optional insurance products. It operated 342 branches in nine states and reported approximately 371,600 active accounts.
Financial results and condition
- Revenue: $272.5 million, up 13.3% from $240.5 million in 2016. Interest and fee income was $249.0 million; net insurance income was $13.1 million.
- Earnings: Net income was $30.0 million, up 24.7%; diluted EPS was $2.54 versus $1.99. Pretax income rose to $40.3 million from $38.9 million. The effective tax rate fell to 25.6% from 38.3%, helped by a $3.1 million Tax Act benefit and tax benefits from share-based awards and R&D credits.
- Margins and costs: Revenue was 36.6% of average receivables, unchanged from 2016. Credit-loss provision rose to 10.4% of average receivables from 9.6%; G&A was 17.6%, down from 18.0%; pretax income was 5.4%, down from 5.9%.
- Portfolio and credit: Year-end finance receivables grew 13.9% to $817.5 million; average receivables increased 13.2% to $744.2 million. Core small and large loans grew 21.8%, led by large loans (+47.5%). Net credit losses were $69.7 million, or 9.4% of average receivables, versus $59.2 million and 9.0% in 2016. Delinquency was 7.5% of receivables versus 7.4%; the allowance was $48.9 million, or 6.0% of receivables, versus $41.3 million, or 5.7%.
- Cash flow: Operating activities provided $115.4 million; investing activities used $188.4 million, including $169.4 million of net receivable originations; financing activities provided $73.8 million. Cash at year-end was $5.2 million.
- Debt and liquidity: Long-term debt was $571.5 million gross ($566.5 million net of issuance costs), compared with $491.7 million gross in 2016. Debt included $452.1 million under the senior revolving facility, $66.1 million under the warehouse facility, and $53.4 million in an amortizing loan. The senior facility matures in June 2020; the warehouse facility converts to amortization in December 2018 and terminates in December 2019. The company reported $46.8 million of eligible capacity under the senior facility and said it was in covenant compliance. Management expected operating cash flow and debt facilities to cover needs for the next 12 months.
Changes, outlook and notable items
- Large-loan growth drove much of the increase in receivables and interest income; management expected large loans to continue growing. Automobile receivables contracted 32.1%, and the company stopped originating automobile loans in November 2017, intending to service the remaining portfolio.
- Net credit losses and the provision increased faster than revenue. Management cited portfolio growth, a temporary $4.4 million shift in insurance claims into credit losses, and hurricane-related losses. The year-end allowance included $2.8 million for hurricane impacts. Hurricanes were estimated to reduce 2017 originations by $3.0 million.
- Management reported that Texas system-conversion effects temporarily elevated delinquency and expected levels to normalize as employees gained familiarity with the platform. It also cited positive results from a new centralized late-stage collections team and reduced lending to selected underperforming segments.
- Management planned continued growth in core lending, branches, direct mail, digital sourcing and retail partnerships. It estimated annual technology and branch-related expenditures of $8–$12 million. No numerical earnings or revenue guidance was provided; the company estimated an approximately 25% effective tax rate for 2018.
- Fourth-quarter 2017 revenue was $72.1 million and net income was $10.9 million, including a $3.1 million Tax Act-related tax benefit. Full-year results also included a $3.0 million hurricane allowance and a $1.0 million recovery from a bulk sale of charged-off bankruptcy accounts.
- The Tax Act reduced the federal corporate rate to 21%; the company recorded a provisional $3.1 million tax benefit and said tax accounting would be completed in 2018. Adoption of the expected-credit-loss accounting standard, effective for the company in 2020, was expected by management to materially adversely affect its financial statements; the impact was still being quantified.
- Risks include credit quality and borrower sensitivity to economic conditions, reliance on borrowings and refinancing, variable-rate funding costs, extensive state and federal regulation, third-party and technology dependencies, and branch staffing turnover. A securities class action had been dismissed and the Second Circuit affirmed the denial of further amendment in January 2018; a deadline for a petition for Supreme Court review remained pending as of the filing. The company said other ordinary-course matters were not expected to materially affect its financial condition, liquidity or results.
- Auditors gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. No cash dividends were paid in 2017, and the company had no plans to pay them in the foreseeable future.
Key investor verification points
- Track whether large-loan expansion can be sustained without further deterioration in delinquencies, loss rates or allowance coverage.
- Assess how much of earnings growth came from recurring operations versus the Tax Act benefit and other unusual items; verify the final tax accounting and 2018 effective rate.
- Monitor liquidity, borrowing-base availability, covenant headroom, facility extensions/refinancing and sensitivity to higher rates. Management estimated a 100-basis-point LIBOR increase would add about $6.1 million in annual borrowing expense before considering hedges.
- Check whether the reported hurricane and system-conversion effects on credit performance and originations subsequently normalized.
- Follow the remaining automobile portfolio runoff, the warehouse facility’s 2018 conversion and extension plans, and the pending securities-litigation review deadline.