Regional Management Corp. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; unaudited. Amounts below are in millions unless stated otherwise. Regional is a consumer lender operating 338 offices across nine states, offering small, large, auto and retail loans and related optional insurance.
Financial performance and key metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $62.5 | $55.1 | $176.5 | $160.6 |
| Interest and fee income | $57.4 | $49.7 | $161.3 | $144.5 |
| Provision for credit losses | $16.4 | $14.1 | $43.6 | $35.9 |
| General and administrative expenses | $30.5 | $26.2 | $89.8 | $87.0 |
| Interest expense | $5.1 | $4.3 | $14.6 | $11.9 |
| Net income | $6.5 | $6.5 | $17.6 | $16.0 |
| Diluted EPS | $0.56 | $0.50 | $1.44 | $1.22 |
- Q3 revenue grew 13.4%, while net income was essentially flat year over year. Revenue growth was offset by higher credit-loss provision, operating expenses and interest expense.
- Nine-month revenue increased 9.9% and net income increased 9.8%. Diluted EPS growth also benefited from fewer weighted-average shares following the company’s $25.0 million share repurchase.
- Q3 interest and fee yield was 34.0% versus 33.8% a year earlier; average receivables rose 14.6%. Nine-month average receivables grew 14.7%, but interest and fee yield fell to 33.5% from 34.5%, principally reflecting lower small-loan yields and product mix.
- Nine-month G&A was 50.9% of revenue versus 54.2% in 2015; annualized G&A was 18.7% of average receivables versus 20.8%. In Q3, the ratios were less favorable year over year: 48.7% and 18.1%, respectively, versus 47.5% and 17.8%.
- At September 30, gross finance receivables were $887.3 million and net finance receivables were $657.0 million, compared with $591.0 million net at December 31, 2015. Total assets were $691.3 million; stockholders’ equity was $200.1 million.
- Cash was $4.0 million and restricted cash $7.9 million. Nine-month operating cash flow was $66.6 million; investing cash use was $114.8 million, mainly reflecting net loan originations of $109.6 million. Financing provided $44.5 million; cash declined $3.7 million from year-end.
- Gross debt was $481.8 million ($479.4 million net of issuance costs), up from $411.2 million gross at year-end. It comprised $435.4 million on the revolving facility and $46.4 million on the asset-backed amortizing loan. The company reported $70.7 million of eligible revolver capacity and compliance with debt covenants.
Material changes versus comparable periods
- Total finance receivables grew 15.7% year over year. Large loans increased 81.3% to $217.1 million, while small loans rose 6.5% to $349.4 million. Auto loans declined 24.2% to $97.1 million as the business was restructured; retail loans rose 27.3% to $32.5 million.
- Q3 provision for credit losses rose 16.5% year over year, mainly with portfolio growth. Annualized net charge-offs were 8.0% of average receivables versus 8.5% in Q3 2015; for the nine months, they were 8.7% versus 9.2%.
- At September 30, 7.1% of receivables were 30 or more days past due, versus 7.3% a year earlier; 18.2% were at least one day past due, versus 22.4%. Delinquency nevertheless increased from 6.8% at June 30, 2016.
- The allowance was $39.1 million, or 5.6% of receivables, versus 6.3% at September 2015 and 6.0% at December 2015. Effective September 30, the company changed its general allowance methodology from primarily historical loss rates to delinquency roll rates. Management said this change reduced Q3 and nine-month provision by $0.5 million and increased net income by $0.3 million, or $0.03 diluted EPS.
- Q3 net insurance income fell 15.2% to $2.3 million, principally due to higher non-filing insurance claims associated with growth in large loans. Interest expense increased with higher revolver borrowings, including funding loan growth and the share repurchase.
Outlook, risks, contingencies and unusual items
- No formal earnings or revenue guidance is provided. Management stated it intends to continue growing the branch network and core loan portfolio, and believes it could add as many as 700 branches in markets where it is favorable to operate.
- Management expects annual capital expenditures of approximately $4–$8 million. A new loan-management system was being deployed, with remaining state conversions expected in Q4 2016 and the first half of 2017; technology costs were expected to remain elevated through 2017. A new headquarters lease is expected to add about $0.7 million to annual occupancy expense. Management also anticipated higher personnel expense in 2017 from expanded overtime eligibility and incentive awards.
- Management said operating cash flow and borrowing arrangements should fund expected needs for the next 12 months, while noting that future increases in revolver limits cannot be assured. The $585 million revolver matures in August 2019; management intends to extend it or take other appropriate action at least a year before maturity. Borrowing costs are variable-rate; a 100-basis-point LIBOR increase was estimated to add approximately $2.3 million of annual interest expense at the September 30 balance, with $200 million of rate caps at a 2.50% strike.
- A securities class action remains pending after the court dismissed the second amended complaint; plaintiffs’ motion to file a third amended complaint was under consideration. The company disputes the claims. Insurance denied coverage for Securities Act claims and acknowledged coverage for Exchange Act claims subject to a reservation of rights.
- A purchase-price dispute over acquired loan receivables is before an accounting firm for resolution. The final price is expected to be $27.9–$29.9 million; $28.1 million has been paid. The company reported $0.5 million accrued for legal matters overall; certain potential losses cannot be reasonably estimated.
- Other disclosed exposures include $24.4 million of future minimum operating lease commitments, restricted insurance reserves of $3.1 million and a $2.6 million cash-collateralized letter of credit. Management identified potential disruption to its centralized headquarters and data facility as a risk. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether large-loan growth and changing portfolio mix can sustain revenue while keeping delinquencies, charge-offs and allowance levels controlled.
- The impact of the new delinquency-roll-rate allowance methodology, including the $0.5 million provision reduction, on future reserves and earnings.
- Available revolver borrowing capacity under the borrowing base, covenant headroom, interest-rate exposure and the plan for the August 2019 maturity.
- Progress and costs of the loan-system rollout, branch expansion and new headquarters lease, including management’s stated expense expectations.
- Developments in the securities litigation, insurance coverage allocation and loan-receivable purchase-price dispute, including any change in reasonably estimable losses.