Regional Management Corp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. Financial statements are unaudited; amounts below are in millions of dollars unless stated otherwise. The company provides consumer installment and purchase loans, related insurance, and ancillary products through a 213-office network in seven states.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $35.5 | $26.7 | $99.0 | $75.8 |
| Net income | $7.0 | $5.2 | $18.7 | $14.8 |
| Diluted EPS | $0.55 | $0.54 | $1.60 | $1.55 |
| Net margin | 19.7% | 19.4% | 18.9% | 19.6% |
- Growth and earnings: Q3 revenue rose 32.8% and net income 34.8% year over year; nine-month revenue rose 30.7% and net income 26.2%. Growth reflected larger average receivables and branch expansion. Average loan yield declined to 33.4% from 34.5% in Q3 and to 33.7% from 34.6% year to date.
- Credit costs and asset quality: Loan-loss provision was $7.4 million in Q3 and $18.9 million year to date, up 61.6% and 59.1%, respectively, primarily reflecting portfolio growth. Annualized net charge-offs were 6.5% in Q3 and 6.3% year to date, compared with 6.0% in each 2011 comparison. At September 30, allowance was $22.1 million, or 5.6% of receivables, versus $19.3 million, or 6.3%, at year-end 2011. Delinquency was 6.3% of receivables, versus 6.5% at year-end; loans over 90 days delinquent were 2.1%, versus 1.7% at year-end.
- Operating costs and margins: Q3 general and administrative expenses were $14.3 million, or 40.3% of revenue, versus $10.3 million, or 38.4%. Nine-month expenses were $40.4 million, or 40.7% of revenue, versus $30.7 million, or 40.4%. Nine-month net margin declined to 18.9% from 19.6%, in part as provision expense grew faster than revenue.
- Cash flow: For the first nine months, operating cash flow was $40.0 million (2011: $26.2 million); investing cash outflow was $108.2 million (2011: $50.0 million), reflecting loan originations and the Alabama acquisition; financing cash inflow was $67.7 million (2011: $25.8 million). Cash ended at $4.4 million, down from $4.8 million at December 31, 2011.
- Balance sheet and funding: Total assets were $394.3 million, including net finance receivables of $374.8 million, compared with $304.2 million and $287.3 million, respectively, at year-end 2011. Total liabilities were $270.6 million and stockholders’ equity $123.7 million, compared with $239.3 million and $52.9 million. Revolving credit debt was $258.3 million; other notes payable were $1.4 million. The $325 million revolving facility matures July 2015, is secured principally by receivables, and had covenants with which the company reported compliance. Cash availability under the borrowing base is not clearly stated in the filing text.
Material changes versus comparable periods
- Finance receivables grew to $396.9 million from $306.6 million at December 31, 2011; the increase includes organic originations and the Alabama acquisition. Same-store receivables grew 27.2% year over year.
- The company acquired 23 Alabama branches, merging four into existing offices, for 19 net new offices. The acquisition included $28.0 million of loans; purchase-price allocation and intangible-asset valuation were incomplete at quarter-end.
- The April 2 IPO issued 3.15 million shares at $15 per share. The company reported $39.8 million of net common-stock proceeds in financing cash flow, repaid $25.8 million of mezzanine debt, and reduced revolving borrowings with IPO proceeds. Shares outstanding increased to 12.49 million from 9.34 million at year-end.
- Q3 total interest expense fell to $2.7 million from $3.3 million, as mezzanine interest ended after repayment. Nine-month total interest expense was $8.6 million versus $9.0 million. The company also terminated sponsor advisory and consulting agreements upon the IPO.
Outlook, commentary, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management said it expects the efficiency ratio to improve as operating expenses are leveraged, while noting public-company costs will limit that improvement.
- Management described seasonal lending patterns: demand typically peaks in the fourth quarter and is lowest in the first quarter. The company intends to grow receivables while managing portfolio risk and continuing product diversification.
- Interest-rate risk remains: most borrowings are floating-rate, while customer loan rates are less affected by market-rate changes. A 100-basis-point LIBOR increase was estimated to add $992,000 of annual interest expense at the stated assumptions. Interest-rate caps cover $150 million of borrowings, with a 6% strike, and mature in March 2014.
- Key risks include credit losses and estimation uncertainty in the allowance, economic conditions and collateral values, funding costs and covenant restrictions, seasonal cash needs, and state and federal regulation. The CFPB may issue rules affecting the business. Routine legal proceedings were disclosed; management did not expect them to materially adversely affect the company.
- After quarter-end, CFO Robert Barry’s retirement arrangements included six months of base-salary severance at an annual base of $225,000, other benefits, and accelerated vesting of half his March 2012 options, subject to the agreement’s terms.
Important facts for investors to verify
- Whether rising charge-offs, delinquency and bankruptcy balances warrant changes to reserves as the loan portfolio expands; the allowance depends on management estimates.
- The final purchase-price allocation for the Alabama acquisition and its contribution to receivables, revenue, and expenses.
- Revolver availability under the borrowing base, compliance with covenants, and sensitivity of funding costs to interest-rate changes.
- Whether management achieves the expected operating leverage despite higher provisions, branch growth costs and public-company expenses.
- The full cost and accounting impact of the CFO retirement agreement and related option treatment.