Business context and reporting period
Regional Management Corp. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The company provides consumer loans, related insurance, and servicing through a 316-branch network in eight states. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance and condition
- Second quarter: Revenue was $53.0 million, up 11.7% year over year; net income was $5.4 million, up 22.5%. Diluted EPS was $0.41 versus $0.34. Net margin was 10.2% versus 9.3%.
- First half: Revenue was $105.5 million, up 8.8%; net income was $9.5 million, down 5.3%. Diluted EPS was $0.73 versus $0.77. Net margin was 9.0% versus 10.3%.
- Revenue and yields: First-half interest and fee income rose 8.8% to $94.7 million, reflecting 5.0% growth in average receivables and a 1.2 percentage-point increase in annualized yield to 34.8%. Second-quarter total revenue yield was 38.5%, compared with 37.4% a year earlier.
- Credit costs and portfolio quality: First-half provision for credit losses fell to $21.8 million from $30.6 million; annualized net charge-offs were 9.6% of average receivables versus 10.1%. At June 30, total receivables were $572.5 million, up 10.5% year over year. The allowance was $36.2 million, or 6.3% of receivables, versus 6.7% a year earlier. Contractual delinquency was 6.4% versus 6.6%; accounts one or more days past due were 20.6% versus 23.6%.
- Expenses and margins: First-half general and administrative expenses increased 41.2% to $60.9 million. The revenue efficiency ratio rose to 57.7% from 44.4%, and the annualized receivable efficiency ratio to 22.4% from 16.6%. First-half pretax margin declined to 14.5% from 16.5%.
- Cash flow: For the first half, operating cash flow was $36.9 million, compared with $39.0 million; investing cash outflow was $53.9 million, mainly reflecting higher net loan originations; financing cash inflow was $17.8 million, primarily from increased revolver borrowings. Cash ended at $4.8 million.
- Debt and liquidity: Revolver borrowings were $359.5 million at June 30, up from $324.6 million a year earlier. The facility had $140.5 million of unused capacity; the company reported compliance with covenants. Total assets were $561.0 million and stockholders’ equity was $190.8 million. The revolving facility matures in May 2016.
Material changes versus comparable periods
- Second-quarter earnings improved chiefly because provision for credit losses declined, while revenue grew with the loan portfolio. First-half earnings nevertheless decreased as sharply higher operating expenses more than offset revenue growth and lower credit provision.
- Growth was concentrated in branch small loans and large loans: large-loan receivables rose 116.8% year over year to $93.2 million. Automobile receivables fell 18.7% to $139.6 million as management constrained capital in that competitive segment; retail receivables declined 10.7%.
- Net loans originated in the first half increased 25.3% to $400.8 million. The company opened 23 net additional branches year over year and 10 during the second quarter.
- Management attributed higher costs to network expansion, staffing, marketing, consulting and legal costs, and compensation-related items. First-half personnel expense included $2.1 million of non-operating compensation-related costs, including a CEO restricted-stock grant and a former vice chairman retirement agreement.
Outlook, risks, contingencies and unusual items
- Management said it planned to open at least 25–30 branches in 2015, believed there was potential for up to 700 additional branches in favorable markets, and expected annual branch-related capital expenditures of approximately $3–$6 million. It stated that operating cash flow and revolver borrowings should fund expected needs for the next 12 months and foreseeable future.
- The company identified seasonal demand, typically stronger in the third and fourth quarters, as a source of fluctuations in loan volume, operating results and cash needs. It expects branch small-loan yields to decline marginally as customers seek larger balances and longer maturities.
- Management intended to seek an extension of the revolving facility’s May 2016 maturity or take other appropriate action. Refinancing and future borrowing availability remain risks; management noted there is no assurance that additional capacity will be available on reasonable terms.
- In April 2015, the company purchased interest-rate caps on $150 million of notional borrowings, with a 2.5% one-month LIBOR strike and April 2018 maturity. Management estimated a 100-basis-point LIBOR increase would add $899,000 in annual interest expense using the stated March 31 balance and LIBOR assumptions.
- A securities class action remains pending, with motions to dismiss under consideration. The company disputes the claims; its insurer denied coverage for Securities Act claims and acknowledged coverage for Exchange Act claims subject to a reservation of rights. The company had accrued $523,000 for legal matters; ultimate losses may differ, and some exposures could not be reasonably estimated.
- Management changed the estimated effective life of large loans from ten to eleven months, adding $0.4 million to the allowance in the first half. The company also recognized $1.53 million of expense for a fully vested CEO stock grant. Management reported effective disclosure controls and no material change in internal control over financial reporting; it reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether operating expenses and efficiency ratios improve as newer branches mature, and how much costs reflect recurring versus non-operating items.
- Whether lower credit-loss provisions and improved delinquency measures persist as receivables grow, especially in large loans and automobile loans.
- Progress toward extending or refinancing the May 2016 credit facility maturity, covenant headroom, and actual borrowing availability.
- Developments in the securities litigation, insurance coverage allocation, and potential exposure beyond the recorded legal accrual.
- Execution of the branch-opening plan, related capital needs, and the effects of seasonality and changing loan-product mix on yields and cash flows.