Regional Management Corp. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; unaudited consolidated results. Dollar amounts below are in millions unless stated otherwise.
Business context
Regional Management is a specialty consumer lender offering installment, auto-purchase, furniture and appliance loans, and related insurance. It operated 206 branches across seven states at quarter-end. In the first half, it opened 17 offices and acquired 23 Alabama branches, four of which were merged into existing locations.
Key financial and operating metrics
- Q2 revenue: $32.0, up 31.4% year over year; net income was $6.6, up 40.3%. Diluted EPS was $0.52 versus $0.50.
- First-half revenue: $63.6, up 29.5%; net income was $11.7, up 21.6%. Diluted EPS was $1.05 versus $1.01.
- Margins: Net margin was 20.6% in Q2 versus 19.4%; for the first half it was 18.5% versus 19.7%. First-half pretax margin declined to 29.4% from 30.6%.
- Loan growth and yield: Average finance receivables rose 32.6% in Q2 and 32.3% in the first half. Average portfolio yield was 34.2% in Q2 (34.6% prior year) and 34.0% in the first half (34.7% prior year).
- Credit costs: Provision for loan losses was $5.9 in Q2, up 69.3%, and $11.5 in the first half, up 57.5%. Annualized net charge-offs were 6.1% in Q2 and 6.2% for the first half, versus 5.6% and 6.0%, respectively, a year earlier. The allowance was $20.8, or 6.0% of receivables, at June 30.
- Portfolio quality: Total contractual delinquency was 6.0% at June 30 versus 6.5% at December 31, 2011; balances over 90 days delinquent were 2.0% versus 1.7%. Acquired Alabama branch delinquency figures included management estimates to align the acquired system’s data with company methods.
- Costs: First-half general and administrative expense was $26.1, with an efficiency ratio of 41.0%, improved from 41.5%. First-half total expenses rose 31.9%, faster than revenue, largely reflecting loan-loss provision and expansion-related costs.
- Cash flow: First-half operating cash flow was $25.9, investing cash outflow $50.1, and financing cash inflow $21.7. Cash declined $2.5 to $2.3. Restricted cash of approximately $1.3 was also reported in other assets.
- Balance sheet and debt: Assets were $341.1 and stockholders’ equity $116.6 at June 30, versus $304.2 and $52.9 at year-end. The revolving facility balance was $212.7 and other notes payable $1.0; mezzanine debt had been repaid. Substantially all finance receivables were pledged to the revolver. The company reported compliance with its debt covenants.
Material changes and unusual items
- The April 2 IPO sold 3.15 million shares at $15 per share. The cash flow statement reports $39.8 of net stock issuance proceeds; proceeds were used to repay $25.8 of mezzanine debt and reduce revolver borrowings. Shares outstanding increased to 12.49 million from 9.34 million at year-end.
- Revenue growth reflected a larger receivables portfolio, new branches and the Alabama acquisition. The acquisition’s purchase-price allocation was still under third-party valuation at June 30, so estimated intangible amortization could change.
- First-half interest expense included $1.0 of mezzanine interest, despite repayment at the IPO, and $1.5 of consulting and advisory fees, including termination-related charges. Related agreements ended when the IPO closed; no such fees were recorded in Q2.
- Following quarter-end, the revolving facility was amended to increase capacity from $255 to $325 and extend maturity to July 31, 2015. The unused-line fee falls to 37.5 basis points when borrowings exceed $275.
- Management said it expects efficiency to improve as expenses are leveraged, while public-company costs may temper that improvement. The filing provides no specific earnings or revenue guidance. Results are seasonal, with demand typically strongest in Q4 and weakest in Q1.
Outlook, risks and contingencies
- Credit performance and allowance estimates are sensitive to delinquency trends, unemployment, bankruptcy, collateral values and portfolio growth. Management noted that future allowance adjustments may be needed if economic conditions or portfolio performance change.
- Borrowing costs are floating-rate and LIBOR-sensitive. The company had $150 of interest-rate-cap notional protection at a 6% strike, maturing in March 2014; management estimated a 100-basis-point LIBOR increase would raise annual interest expense by $0.532 at the June 30 balance and stated the facility’s LIBOR floor affects the sensitivity.
- The company is subject to state and federal lending and insurance regulation. It identified potential CFPB rulemaking as a business risk, though it reported no known pending rules affecting the business at filing time. New risks highlighted include cyberattacks and the possible investor impact of emerging-growth-company reporting exemptions.
- Management reported routine pending legal matters and stated it did not believe them likely to have a material adverse effect. The filing reports no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether rising charge-offs and over-90-day delinquencies persist, and how acquired-branch estimates affect reported credit trends and reserve adequacy.
- The final purchase-price allocation and ongoing performance of the Alabama acquisition, including its contribution to receivables growth and credit costs.
- Post-IPO share dilution, the reconciliation of offering proceeds and expenses, and the actual reduction in interest expense after debt repayment.
- Availability under the amended revolver, borrowing-base capacity, covenant headroom and exposure to variable interest rates.
- Whether management’s anticipated efficiency gains offset branch expansion, public-company expenses and seasonality.