Regional Management Corp. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited. Dollar amounts below are in millions unless stated otherwise. The company is a consumer finance lender operating 338 branches across nine states, offering installment, automobile, retail, and related insurance products.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $57.3 | $53.0 | $114.0 | $105.5 |
| Provision for credit losses | $13.4 | $12.1 | $27.2 | $21.8 |
| General and administrative expenses | $29.5 | $28.2 | $59.4 | $60.9 |
| Interest expense | $4.8 | $3.9 | $9.5 | $7.5 |
| Net income | $5.9 | $5.4 | $11.1 | $9.5 |
| Diluted EPS | $0.49 | $0.41 | $0.89 | $0.73 |
- Revenue grew 8.2% in Q2 and 8.1% year to date; net income increased 9.3% and 16.8%, respectively. Net margin was 10.3% for Q2 and 9.7% year to date.
- Interest and fee income rose 10.3% in Q2 and 9.7% year to date, principally on portfolio growth. The annualized portfolio interest-and-fee yield fell to 33.7% in Q2 from 34.7% a year earlier, and to 33.3% year to date from 34.8%.
- At June 30, finance receivables were $645.7, up 12.8% year over year; net receivables were $609.5 after a $36.2 allowance. Large loans rose 109.1% year over year to $194.9; automobile loans fell 27.8% to $100.7.
- Credit trends were mixed: 30-days-or-more delinquency was 6.8% of receivables versus 6.4% a year earlier, while one-day-or-more delinquency improved to 18.3% from 20.6%. Net charge-offs were 9.1% of average receivables year to date, compared with 9.6%; the allowance was 5.6% of receivables versus 6.0% at year-end 2015.
- General and administrative expense as a share of revenue improved to 51.5% in Q2 from 53.3%, and to 52.1% year to date from 57.7%. Year-to-date personnel costs declined, partly because the prior-year period included $2.1 of non-operating compensation costs.
- Operating cash flow was $38.4 versus $36.9 year to date; investing cash use was $47.7 versus $53.9, and financing cash provided was $4.5 versus $17.8. Cash fell to $2.8 from $7.7 at December 31, 2015.
- Total assets were $642.8; long-term debt was $441.1 gross and $438.9 net of issuance costs; stockholders’ equity was $192.9. The company repurchased 1.546 million shares for $25.0 at a weighted-average $16.17 per share.
Changes, outlook, and risks
- Growth was concentrated in large loans, supported by product expertise, marketing, and customers shifting from smaller loans. Convenience-check originations and balances declined; the automobile portfolio continued to run off during restructuring, which management expected to be mostly complete in Q3 2016.
- The revolving facility had $386.6 outstanding and matures in September 2018. The filing reports $70.6 of eligible borrowing capacity; a separate debt table shows $151.4 unused, subject to the borrowing base. The $54.6 amortizing asset-backed loan is scheduled to terminate in December 2022. The company reported compliance with debt covenants.
- Management said operating cash flow and borrowing sources should fund expected needs for the next 12 months and foreseeable future, while noting that additional borrowing capacity may not be available on reasonable terms. Planned annual capital expenditures were approximately $4–$8. The company is exploring funding diversification, including securitization.
- Management anticipated marginally lower yields on small loans and convenience checks as customers seek larger, longer-term loans. It cited expected increases in technology, compliance, legal, occupancy, and personnel costs, including a $0.7 annual occupancy increase from a new home-office lease and expected higher personnel costs in 2017 under updated overtime rules. A new loan management system was being introduced in selected branches.
- Interest-rate exposure includes variable-rate revolving debt; a 100-basis-point LIBOR increase was estimated to add $1.9 of annual interest expense at the stated balance and rate assumptions. $200.0 of interest-rate caps with a 2.50% strike provide partial protection.
- A securities class action’s second amended complaint was dismissed in March 2016, but plaintiffs’ motion to file a third amended complaint remained pending. Insurance denied coverage for certain claims and acknowledged coverage for others subject to reservation of rights. A separate acquired-receivables purchase-price dispute has a final price range of $27.9–$29.9; $28.1 had been paid. The company accrued $0.5 for legal matters overall.
- The company noted seasonal swings in loan demand, delinquencies, operating results, and cash needs. No specific earnings or revenue guidance was provided in the supplied filing text.
Important facts for investors to verify
- Whether the rising 30-day delinquency rate, credit-loss provision, and large-loan concentration affect subsequent charge-offs and allowance adequacy.
- Actual usable revolving-facility availability, borrowing-base capacity, covenant headroom, and refinancing plans ahead of the September 2018 maturity.
- Progress and costs of the automobile-business restructuring, new loan system rollout, and planned branch and technology investments.
- Resolution and potential financial exposure of the securities litigation and receivables purchase-price dispute, including insurance coverage and any additional accruals.
- Whether portfolio growth can offset lower yields and higher funding, regulatory, technology, and occupancy costs.