Regional Management Corp. — Q1 2016 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2016, compared with Q1 2015. Regional Management is a specialty consumer lender offering installment, automobile and retail loans, principally through a 339-branch network across nine states; it opened eight branches in the quarter. Results are seasonal: management says loan demand is usually weakest in Q1 and strongest in Q3 and Q4.
Financial performance and position
- Revenue and earnings: Revenue rose 7.9% to $56.7 million, led by interest and fee income, up 9.0% to $51.3 million. Net income increased 26.8% to $5.2 million; diluted EPS was $0.40 versus $0.31. Net income equaled 9.1% of revenue versus 7.8%.
- Credit costs and operating expenses: Provision for credit losses increased 42.0% to $13.8 million. General and administrative expenses fell 8.6% to $29.8 million. The revenue efficiency ratio improved to 52.6% from 62.1%; the receivable efficiency ratio improved to 19.3% from 24.4%. Interest expense rose 30.7% to $4.7 million.
- Portfolio and credit quality: Finance receivables were $607.4 million at quarter-end, up 15.5% year over year but down 3.4% from December 31, 2015. Average receivables grew 15.7% year over year to $617.5 million. Annualized interest-and-fee yield declined to 33.2% from 35.3%. Delinquencies 30 or more days past due were 6.2% of receivables, versus 6.3% a year earlier and 7.2% at year-end. Net charge-offs were $15.0 million, up 13.1%; allowance was $36.2 million, or 6.0% of receivables.
- Cash flow: Operating activities provided $20.3 million, compared with $20.4 million. Investing activities provided $3.2 million, mainly reflecting net repayments of receivables; financing activities used $23.7 million, including $8.9 million of share repurchases. Cash ended the quarter at $7.4 million, versus $2.1 million at March 31, 2015.
- Balance sheet and liquidity: Total assets were $609.7 million and stockholders’ equity $201.9 million. Net long-term debt was $394.1 million, comprising $331.8 million net under the revolving facility and $62.3 million net under the asset-backed amortizing loan. The company reported $79.5 million of borrowing capacity under the revolver, subject to borrowing-base limits, and compliance with debt covenants. Restricted cash was $10.8 million.
Material changes and management commentary
- Year-over-year receivables growth reflected large loans, up 156.2% to $162.3 million, and branch small loans, up 22.2% to $148.7 million. Automobile loans fell 27.6% to $106.3 million as the company restructured that business toward a centralized model; management expected most of the restructuring to be complete in Q3 2016. Convenience-check receivables declined 4.8%, partly as customers moved to large loans.
- Management attributed higher interest and fee income primarily to receivables growth, partly offset by lower yields. It said small-loan and convenience-check yields had declined as customers took larger, longer-term loans and anticipated yields would remain flat due to demand for larger loan amounts.
- Credit provision rose in part because Q1 2015 benefited from an allowance release related to lower-credit-quality convenience-check customers. Management cited underwriting and servicing changes begun in late 2014 and 2015, and said it would continue monitoring and adjusting guidelines as appropriate.
- The company authorized up to $25 million of share repurchases through December 31, 2017; it repurchased approximately 572,000 shares for $8.9 million during Q1. Management said it intended to fund the program with cash and debt.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management expected operating cash flow and available borrowings to fund planned branch growth and operations for at least the next 12 months, while noting that additional borrowing capacity may not be available on reasonable terms if needed. It planned annual capital expenditures of approximately $3 million to $6 million and intended to address the revolver’s September 2018 maturity at least a year in advance.
- Risks include consumer-credit losses, economic and collateral-value changes, seasonality, variable-rate funding costs, and the ability to renew or expand financing. The $538 million revolving facility is subject to a borrowing base and restrictive covenants. Interest-rate caps cover $200 million of notional borrowings at a 2.50% one-month LIBOR strike.
- The company began deploying Nortridge loan-management software in eight new Virginia branches and expected a full transition from competitor-owned ParaData software in late 2016 or early 2017. Management warned that transition delays, cost overruns or system disruption could affect operations; some transition costs have been capitalized.
- Management expected 2016 changes to the insurance provider and product premiums could affect insurance revenue or costs. It also expected technology, occupancy, compliance and legal costs to rise over time.
- A securities class action was dismissed in full on March 30, 2016, with plaintiffs allowed until May 23, 2016 to seek leave to amend. The company reported a $0.5 million accrual for legal matters; some potential losses could not be reasonably estimated. The primary insurer denied coverage for certain claims and acknowledged coverage for others subject to a reservation of rights.
- Management concluded disclosure controls were effective as of March 31, 2016; it reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether credit-loss provision and net charge-offs remain elevated, particularly as the loan portfolio and product mix change.
- How large-loan growth, declining yields and the automobile-loan restructuring affect portfolio returns and credit quality.
- Actual revolver availability under the borrowing base, covenant headroom and plans for the September 2018 maturity.
- Execution, cost and operational continuity of the Nortridge transition, including the treatment of capitalized implementation costs.
- Further developments in the securities litigation, insurance coverage and any resulting losses beyond the recorded accrual.
- Repurchase pace and funding, alongside liquidity needs for lending, branch expansion and technology investment.