Regional Management Corp. Announces Fourth Quarter 2017 Results

Wednesday, February 14th, 2018

Regional Management Corp., a diversified consumer finance company, announced results for the fourth quarter and full year ended December 31, 2017.

Fourth Quarter 2017 Highlights

  • Net income for the fourth quarter of 2017 was $10.9 million, an increase of 68.3% from the prior-year period. Diluted earnings per share for the fourth quarter of 2017 was $0.92, based on a diluted share count of 11.9 million. Net income and diluted earnings per share for the fourth quarter of 2017 included a non-cash net tax benefit of $3.1 million, or $0.27 per diluted share, related to accounting adjustments recorded as a result of the recently passed Tax Cuts and Jobs Act (“new Tax Act”) and a research and development tax credit of $0.4 million, or $0.03 per diluted share.

  • Total finance receivables as of December 31, 2017 were $817.5 million, an increase of 13.9%, or $99.7 million, from the prior year, and up 5.5%, or $42.6 million, sequentially.

    • Eleventh consecutive quarter that total finance receivables have grown at least 10% over the prior-year period.

    • Total core small and large loan receivables increased $129.2 million, or 21.8%, compared to the prior-year period, and $51.1 million, or 7.6%, sequentially.

    • Large loan finance receivables of $347.2 million increased $111.9 million, or 47.5%, from the prior-year period and now represent 42.5% of the total loan portfolio. Small loan finance receivables as of December 31, 2017 were $375.8 million, an increase of 4.8% over the prior-year period.

  • Total revenue for the fourth quarter of 2017 was $72.1 million, an $8.1 million, or 12.6%, increase from the prior-year period.

    • Sixth consecutive quarter of year-over-year double-digit revenue growth.

    • Interest and fee income increased 11.3%, driven by a 13.9% increase in receivables compared to the prior-year period.

    • Comparable overall yield on a year-over-year basis.

  • Provision for credit losses for the fourth quarter of 2017 was $19.5 million, comparable with the prior-year period. Net credit losses increased $0.7 million due to the temporary shift of $0.8 million in insurance claims, offset by a $0.7 million smaller build in the allowance for credit losses.

    • Annualized net credit losses as a percentage of finance receivables were 9.0%, a decrease from 9.8% in the prior-year period.

  • 30+ day contractual delinquencies were 7.5% (0.2% of which was due to the hurricanes), a slight increase from 7.4% as of December 31, 2016 and up from 6.8% sequentially.

  • The Company successfully completed the conversion of all of its branches onto its new loan management platform in early 2018.

“We ended 2017 with a strong fourth quarter as our top line growth was driven once again by the continued growth of our core loan products,” said Peter R. Knitzer, President and Chief Executive Officer of Regional Management. “Total finance receivables, revenue, and net income (excluding tax benefits) all increased by double digits versus the fourth quarter of 2016. Importantly, we have successfully completed the system conversion of our entire branch network.”

“Over the past couple of years, we have made significant investments in our loan system, centralized collections, digital presence, and other initiatives in order to modernize our infrastructure,” continued Mr. Knitzer. “With much of the heavy lifting now completed, we enter 2018 focused on realizing the benefits of these investments to generate significant top- and bottom- line growth. During the year, we expect to continue to employ our hybrid approach to growth through further increasing our receivables per branch while reaccelerating our de novo branch expansion in the back half of the year. In addition, our enhanced credit tools already provide us with automated underwriting, and we will have new custom scorecards in place in the first half of the year. These credit enhancements, coupled with our robust centralized collections team, should help reduce net credit losses and allow our branch teams to focus more on sales and customer service. We are excited about the near- and long-term future of Regional Management, and will continue to focus on delivering long-term shareholder value.”

Fourth Quarter 2017 Results

Finance receivables outstanding at December 31, 2017 were $817.5 million, a 13.9% increase from $717.8 million in the prior year. Finance receivables increased from strong growth in both the core small and large loan portfolios.

For the fourth quarter ended December 31, 2017, the Company reported total revenue of $72.1 million, a 12.6% increase from $64.0 million in the prior-year period. Interest and fee income for the fourth quarter of 2017 was $66.4 million, an 11.3% increase from $59.7 million in the prior-year period, primarily due to an increase in the small and large loan portfolios compared to the prior-year period. Insurance income, net for the fourth quarter of 2017 was $3.1 million, a $1.5 million, or 95.9%, increase from the prior-year period. The change is inclusive of a $0.8 million, or 50.0%, increase from the prior-year period due to the transition in insurance carriers, causing some of the Company’s insurance claims to impact net credit losses instead of insurance income. This line swing had no impact on net income. Other income for the fourth quarter of 2017 was $2.7 million, a 5.1% decrease from the prior-year period.

The provision for credit losses in the fourth quarter of 2017 was $19.5 million, a slight increase compared to $19.4 million in the prior-year period. A $99.7 million increase in finance receivables and the temporary shift of $0.8 million in insurance claims expense was mostly offset by a $1.5 million build in the allowance for credit losses compared to a $2.2 million build in the fourth quarter of 2016.

Net credit losses were $18.0 million in the fourth quarter of 2017, an increase of $0.7 million over the prior-year period and consistent with portfolio growth. Net credit losses for the fourth quarter of 2017 included $0.8 million of losses attributable to the temporary shift of certain insurance claims expense into net credit losses during a transition in the Company’s insurance provider. Annualized net credit losses as a percentage of average finance receivables in the fourth quarter of 2017 were 9.0%, an improvement from 9.8% in the prior-year period.

General and administrative expenses for the fourth quarter of 2017 were $34.0 million, an increase of 18.0%, or $5.2 million, from the prior-year period. General and administrative expenses for the fourth quarter of 2017 included higher personnel costs from staffing increases in IT, centralized collections, and branches to support ongoing loan portfolio growth. Incentive expense, as well as amortization of capitalized costs for the new loan system, were also higher compared to the prior-year period. Sequentially, general and administrative expenses increased $0.2 million, or 0.5%, from the third quarter of 2017.

Interest expense was $6.8 million in the fourth quarter of 2017, compared to $5.3 million in the prior-year period. The increase in interest expense was due to higher long-term debt amounts outstanding from finance receivable growth, federal funds rate increases, larger unused lines of credit, and incremental debt issuance costs associated with upsizing the senior revolving credit facility and entering into the new warehouse credit facility. The Company’s diversified sources of funding continue to position it for long-term growth.

Income tax expense was $0.9 million in the fourth quarter of 2017, compared to $4.0 million in the prior-year period. The decrease in income tax expense was primarily due to a total non-operating benefit of $3.5 million, or $0.30 per diluted share, in the fourth quarter of 2017 related to the application of the lower federal corporate tax rate from the new Tax Act to the Company’s net deferred tax liabilities, as well as the impact of research and development tax credits.

Net income for the fourth quarter of 2017 was $10.9 million, an increase from $6.5 million in the prior-year period. Diluted earnings per share for the fourth quarter of 2017 was $0.92, an increase from $0.55 in the prior-year period. Non-operating income tax benefits contributed $0.30 per diluted share in the fourth quarter of 2017, and there were no comparable non-operating items in the fourth quarter of 2016.

Full Year 2017 Results

For the full year ended December 31, 2017, the Company reported total revenue of $272.5 million, a 13.3% increase from $240.5 million in the prior year. Interest and fee income for the full year ended December 31, 2017 was $249.0 million, a 12.7% increase from $221.0 million in the prior-year period, primarily due to an increase in the portfolios of both small and large installment loans compared to the prior year. Insurance income, net for the full year ended December 31, 2017 was $13.1 million, a 38.1% increase from the prior year, primarily attributable to the temporary shift of certain claims expense into provision for credit losses during the Company’s transition to a new insurance provider. This line swing had no impact on net income. Other income for the full year ended December 31, 2017 was $10.4 million, a 2.6% increase from the prior year.

The provision for credit losses for the full year ended December 31, 2017 was $77.3 million, compared to $63.0 million in the prior year. Net credit losses for the full year ended December 31, 2017 were $69.7 million, compared to $59.2 million in the prior year. Net credit losses for the full year 2017 included $4.4 million of losses attributable to the temporary shift of certain insurance claims expense into net credit losses during a transition in the Company’s insurance provider. Annualized net credit losses as a percentage of average finance receivables for the full year ended December 31, 2017 were 9.4% (inclusive of 0.6% attributable to a shift in insurance claims expense noted above), an increase from 9.0% in the prior year.

General and administrative expenses for the full year ended December 31, 2017 were $131.0 million, an increase of $12.3 million, or 10.4%, from the prior year. Included in the full year 2017 and 2016 results were $1.5 million and $1.6 million in loan system conversion costs, respectively. As a percentage of average net receivables, general and administrative expenses were 17.6%, down from 18.0% in the prior year.

Income tax expense for the full year ended December 31, 2017 was $10.3 million, a decrease of $4.6 million, or 31.0%, from the prior year. The decrease in income tax expense was primarily due to $3.5 million of non-operating income tax benefits in 2017.

Net income for the full year ended December 31, 2017 was $30.0 million, a 24.7% increase compared to net income of $24.0 million in the prior year. Diluted earnings per share for the full year ended December 31, 2017 was $2.54 compared to $1.99 in the prior year. The 2017 results included non-operating income tax benefits of $0.30 per diluted share, a $0.13 per diluted share tax benefit related to share-based compensation, and a bulk debt sale gain of $0.05 per diluted share. These benefits were partially offset by negative impacts of $0.18 per diluted share due to hurricanes and $0.02 per diluted share related to non-operating COO transition costs.

2018 De Novo Outlook

As of December 31, 2017, the Company’s branch network consisted of 342 locations. For the full year 2018, with the Company’s infrastructure build largely completed, the Company expects to return to a more historical level of de novo branch openings. As a result, the Company plans to open between 25 and 30 de novo branches during 2018, all of which should occur during the second half of 2018.

2018 Estimated Effective Tax Rate

As a result of the passage of the new Tax Act on December 22, 2017, the Company estimates that its effective combined federal and state income tax rate for 2018 will be approximately 25%.

Liquidity and Capital Resources

As of December 31, 2017, the Company had finance receivables of $817.5 million and outstanding long-term debt of $571.5 million (consisting of $452.1 million of long-term debt on its $638.0 million senior revolving credit facility, $66.1 million of long-term debt on its $125.0 million revolving warehouse credit facility, and $53.4 million of long-term debt on its $75.7 million amortizing loan).