Regional Management Corp. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012 unless otherwise noted. Financial statements are unaudited. Regional Management is a consumer finance company offering installment, auto-purchase, furniture and appliance loans, and optional insurance. It operated 232 offices in seven states at quarter-end and opened 11 offices during the quarter.
Financial performance and condition
- Revenue: $38.6 million, up 22.3% from $31.5 million in Q1 2012. Interest and fee income rose 25.8% to $34.0 million; insurance income was $2.9 million and other income was $1.6 million.
- Profit: Net income was $6.9 million, up 35.3% from $5.1 million. Diluted EPS was $0.54 versus $0.53; basic EPS was $0.55 in both periods. Net margin was 18.0%, compared with 16.2%.
- Expenses and margins: Credit-loss provision rose 43.4% to $8.1 million, equal to 20.9% of revenue versus 17.8%. General and administrative expenses increased 28.4% to $16.4 million; the efficiency ratio rose to 42.6% from 40.6%. Total expenses were $27.6 million, or 71.4% of revenue, versus $23.4 million, or 74.2%.
- Portfolio and credit quality: Net finance receivables were $405.8 million at March 31, down from $413.9 million at year-end. Gross finance receivables were $430.4 million, versus $437.6 million. The allowance was $24.6 million, or 5.7% of receivables, up from $23.6 million, or 5.4%, at year-end. Annualized net charge-offs were 6.5% of average receivables versus 6.4% in Q1 2012. Delinquencies over 90 days were 2.6% of receivables, up from 2.3% a year earlier.
- Cash flow: Operating activities provided $16.8 million, compared with $12.5 million in Q1 2012. Investing activities used $0.9 million, versus $19.4 million, which included a $28.4 million business-combination payment. Financing activities used $18.3 million, primarily reflecting revolver repayments. Cash declined $2.4 million to $0.9 million.
- Debt and liquidity: The balance sheet reports $273.0 million outstanding on the senior revolving facility at March 31, against total liabilities of $283.2 million and equity of $138.6 million. The facility provides up to $325 million, subject to an 85% eligible-receivables borrowing base, and matures in July 2015. The company reported covenant compliance. Restricted cash was $1.3 million.
- Assets and capital: Total assets were $421.8 million, down from $435.0 million at year-end. Stockholders’ equity increased to $138.6 million from $130.6 million.
Material changes and management commentary
- Growth in average finance receivables—37.2% year over year—supported higher interest and fee income, but lower loan yields partially offset the increase. Management cited average loan yield declining from 34.0% to 31.2% and composite yield declining from 39.6% to 35.3%.
- Receivables grew across auto-purchase and furniture/appliance loans, while large installment receivables declined year over year. Small installment receivables increased 65.9%, auto-purchase loans 22.1%, and furniture/appliance loans 114.8%.
- Management attributed higher credit provision to portfolio growth. It attributed higher operating costs in part to 38 additional offices versus March 2012 and costs of operating as a public company. Consulting/advisory fees and related-party mezzanine interest expense recorded in Q1 2012 were absent in Q1 2013.
- Seasonality is significant: loan demand is typically lowest in Q1 and highest in Q4, and live-check campaigns generally contribute to higher second-half volumes.
Outlook, risks and unusual items
- Management planned to open 35–45 new offices in 2013, with estimated capital expenditures of $2.1–$2.7 million. No earnings or revenue guidance was provided in the filing text.
- The floating-rate revolver exposes the company to interest-rate increases. A $150 million notional amount was covered by interest-rate caps with a 6% strike, maturing March 4, 2014. Management estimated a 100-basis-point LIBOR increase would add $683,000 to annual interest expense under the stated assumptions.
- The company cited credit-quality sensitivity to economic conditions, delinquencies, unemployment, bankruptcy levels, gasoline prices and vehicle auction values. Its loan and cash needs are subject to seasonal fluctuations.
- Various ordinary-course legal matters were pending; management did not expect them to have a material adverse effect. No material risk-factor changes were reported. The company stated there were no off-balance-sheet arrangements.
- Subsequent events: on April 3, the insurance subsidiary increased its letter of credit and cash collateral to $1.9 million. On April 5, the company acquired assets of two branches in Georgia; purchase-price allocation was still under evaluation.
Important facts for investors to verify
- Revolver balance inconsistency: The balance sheet and financing discussion report $273.0 million outstanding at March 31, but the market-risk section states $237.0 million. Confirm the correct amount in the filed statements or lender disclosures.
- Assess whether continued yield compression and rising credit-loss provision and charge-offs offset receivables growth, and monitor delinquency and allowance trends.
- Verify borrowing-base availability, covenant headroom and the company’s plan for the July 2015 facility maturity.
- Evaluate the economics and integration of planned office expansion and the Georgia branch acquisition, including realized capital spending and portfolio performance.
- Consider the impact of seasonal cash needs, low reported cash, floating-rate debt and the limited duration of the interest-rate caps.