Regional Management Corp. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; unaudited. Amounts below are in millions of dollars unless noted. Regional Management is a specialty consumer lender operating 322 branches across eight states, offering small, convenience-check, large, auto and retail loans, plus optional credit insurance.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $55.1 | $53.9 | $160.6 | $150.9 |
| Provision for credit losses | $14.1 | $22.5 | $35.9 | $53.1 |
| General and administrative expense | $26.2 | $25.3 | $87.0 | $68.4 |
| Interest expense | $4.3 | $3.8 | $11.9 | $11.2 |
| Net income | $6.5 | $1.4 | $16.0 | $11.4 |
| Diluted EPS | $0.50 | $0.11 | $1.22 | $0.88 |
- Growth and margins: Revenue rose 2.2% in Q3 and 6.4% year to date; net income increased 365.8% and 40.1%, respectively. Net margin was 11.8% in Q3 (2.6% prior year) and 10.0% year to date (7.6%). Q3’s sharp earnings increase primarily reflected the lower credit-loss provision against a high-comparison-period provision build in 2014.
- Yields and operating efficiency: Q3 interest-and-fee yield was 33.8%, down from 36.3% a year earlier; average receivables grew 9.4%. Year-to-date interest-and-fee yield was 34.5%, approximately flat with 34.4%. Year-to-date G&A was 54.2% of revenue versus 45.3%; annualized G&A as a share of average receivables was 20.8% versus 17.3%.
- Credit and portfolio: Finance receivables were $601.6, up 10.7% from September 2014; net receivables were $563.8. Allowance was $37.8, or 6.3% of receivables, compared with $43.3, or 8.0%, a year earlier. Annualized net charge-offs were 8.5% of average receivables in Q3 and 9.2% year to date. At quarter-end, 22.4% of receivables were at least one day past due and 7.3% at least 30 days past due; the latter was 6.4% in Q2 and 7.4% a year earlier.
- Cash flow and liquidity: Nine-month operating cash flow was $61.6, investing outflow $97.9, and financing inflow $37.2; cash ended at $4.9. Net originations of receivables used $94.0 of cash. The company had $379.6 outstanding under its revolving facility and reported $81.8 of eligible capacity.
- Debt and capital: In September, the company amended and restated its revolving facility, increasing stated availability from $500 to $538 and extending maturity from May 2016 to September 2018; an accordion permits expansion to $600. Borrowings carry LIBOR plus 3.00% (with a 1.00% floor) or base rate plus 2.00%. The company was covenant-compliant at quarter-end. Stockholders’ equity was $197.6.
Material changes and management commentary
- Portfolio mix shifted toward core branch small and large loans. Large-loan receivables rose 183.9% year over year to $119.7, while auto receivables fell 21.8% to $128.1 following management’s decision to constrain capital in that competitive category. Convenience-check balances decreased 7.9% to $180.5.
- Management attributed lower credit-loss provisions partly to the 2014 concentration of lower-credit-quality convenience-check originations and said those loans were being worked through. A new credit-risk function and revised underwriting guidelines were intended to improve credit quality; management noted these changes may reduce refinancing volumes.
- Year-to-date G&A increased 27.3%, with personnel expense up 35.7%. Drivers included branch and home-office expansion, $2.1 of non-operating compensation-related costs, and higher occupancy, marketing, consulting and legal costs.
- Management said it planned to open at least 25–30 branches in 2015 and believed cash from operations and facility borrowings would meet expected needs for the next 12 months and foreseeable future. It estimated annual branch-related capital expenditures of $3–$6. It expects technology costs to rise in 2016, and compliance and legal costs to continue increasing. No specific earnings or revenue guidance was provided.
- Seasonality is material: loan demand is typically highest in the third and fourth quarters, while delinquencies generally rise in the second half of the year. The company also plans to pursue sales of charged-off loan portfolios, which management expects could create a one-time income increase and higher future recoveries; timing and proceeds were not specified.
Risks, contingencies and unusual items
- The securities class action remained pending, with motions to dismiss under consideration. The company disputes the claims. Its insurer denied coverage for Securities Act claims and acknowledged potential coverage for Exchange Act claims subject to reservation of rights. The company had accrued $0.523 for legal matters; other potential losses may be difficult to estimate.
- Credit performance, allowance estimates, seasonal liquidity demands, and the concentration of funding in a secured, floating-rate revolving facility remain significant sensitivities. The company estimated a 100-basis-point LIBOR increase would add about $0.949 of annual interest expense at the quarter-end debt balance, subject to the facility’s rate floor and caps. Interest-rate caps cover $150 of notional borrowings through April 2018, with a 2.5% strike.
- The company reported no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls. It noted that interim statements are unaudited and that actual outcomes may differ from management estimates and forward-looking statements.
Investor verification priorities
- Track delinquency and charge-off trends, especially the sequential rise in total 30-days-past-due balances, and assess whether the lower allowance ratio remains adequate as the portfolio grows.
- Assess whether large-loan growth and underwriting changes sustain revenue and credit quality, while monitoring lower yields in small-loan and convenience-check products.
- Review branch expansion productivity and whether rising personnel and other operating costs improve relative to revenue and receivables.
- Confirm usable borrowing capacity under the borrowing-base and covenant terms, facility refinancing plans before September 2018, and exposure to higher interest rates.
- Follow the class action, insurance coverage allocation, accrued legal liability and any changes in potential loss estimates.