Regional Management Corp. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The company is a specialty consumer lender serving primarily non-prime borrowers through installment, auto-purchase, retail-purchase, and optional insurance products. It operated 264 branches in eight states at year-end, up from 221 a year earlier.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $170.6 million | $135.7 million |
| Interest and fee income | $152.3 million | $119.0 million |
| Income before taxes | $46.3 million | $39.3 million |
| Net income | $28.8 million | $24.8 million |
| Diluted EPS | $2.23 | $2.07 |
| Net cash from operations | $72.6 million | $57.7 million |
- Revenue increased 25.7% and net income increased 16.3%. Average finance receivables rose 32.2% to $477.4 million; year-end receivables were $544.7 million, up 23.9%.
- Average portfolio yield declined to 31.9% from 33.0%. Provision for credit losses rose 41.2% to $39.2 million, or 23.0% of revenue; net charge-offs were $32.7 million, 6.9% of average receivables versus 6.5% in 2012.
- Delinquency weakened: balances over 30 days past due were 8.0% of receivables versus 6.7%; over 90 days were 3.2% versus 2.5%. The allowance was $30.1 million, or 5.5% of receivables, compared with $23.6 million, or 5.4%.
- General and administrative expense was $71.0 million. The efficiency ratio increased to 41.6% from 40.9%; excluding $2.0 million of secondary-offering and director-compensation costs, management reported 40.5%.
- Interest expense was $14.1 million. Year-end cash was $4.1 million; net cash used in investing activities was $142.7 million, primarily reflecting loan originations. Financing activities provided $70.9 million.
- Senior revolving debt was $362.8 million at year-end, against a $500 million facility with a borrowing base limited to 85% of eligible receivables; reported unused capacity was $137.3 million, subject to that borrowing base. The facility matures in May 2016. The company reported compliance with covenants.
- Total assets were $533.9 million, total liabilities $372.7 million, and stockholders’ equity $161.2 million. No dividends were paid; management had no current plan to pay them.
Fourth-quarter 2013 revenue was $48.5 million and net income was $8.4 million, compared with $36.9 million and $6.5 million, respectively, in fourth-quarter 2012.
Material changes and unusual items
- Small-installment receivables rose 53.3% to $289.0 million; auto-purchase receivables grew 7.4% to $181.1 million. Large-installment receivables fell 16.7% to $43.3 million, partly reflecting underwriting of previously purchased loans and reclassification after the small-loan limit increased in some states. Retail-purchase receivables increased 3.2% to $31.3 million.
- Growth in small loans and branch expansion drove results; 43 branches were opened or acquired in 2013. Convenience-check loans represented 22.1% of originated loan value, and management said the channel’s borrowers historically pose higher default risk than branch-originated borrowers.
- The company changed its allowance methodology late in 2013 to use shorter historical loss periods, reducing the allowance by $3.9 million and increasing net income by $2.5 million, or $0.19 per diluted share. It recorded a $3.45 million pre-tax qualitative allowance increase for portfolio growth and delinquency/loss trends.
- Management identified errors in franchise taxes and other items that overstated 2010–2012 net income. It judged the corrections immaterial to prior statements and revised the comparative figures in this filing. It also disclosed significant control deficiencies relating to franchise-tax expense, compensated absences, and insurance-premium revenue, and stated corrective actions were implemented. Management concluded controls were effective at year-end; the auditor did not provide an internal-control attestation.
- Interest-rate caps on $150 million of borrowings expired unused on March 4, 2014; the company said it was evaluating replacement risk-management measures. It also planned to complete a migration to a new loan-management system in 2014.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance is provided. Management intends to continue growing existing branches, opening branches, expanding channels, and entering selected additional states, while emphasizing underwriting and credit control.
- Key risks include worsening borrower credit quality, economic weakness in concentrated operating markets, state or federal restrictions on loan pricing or products, and potential CFPB oversight or rulemaking. South Carolina, Texas, and North Carolina generated 75.1% of 2013 revenue.
- Funding and rate risks include reliance on the revolving credit facility, variable-rate borrowing costs, covenant restrictions, and refinancing the facility at or before its 2016 maturity. A 100-basis-point LIBOR increase was estimated to raise annual interest expense by $907,000 at year-end borrowing levels.
- Other disclosed execution risks include rapid branch growth and employee turnover, dependence on dealer and retailer relationships, convenience-check fraud/credit risks, and disruption or cost overruns in the planned technology-system conversion.
- The company reported ordinary-course lawsuits and said management did not expect them to materially affect financial condition, liquidity, or results. It reported no off-balance-sheet arrangements.
Investor verification priorities
- Track delinquency, charge-offs, and reserve adequacy against rapid receivables growth, including the effects of the allowance-method change.
- Verify the true availability of revolving-credit capacity under borrowing-base and covenant terms, and assess refinancing plans ahead of the May 2016 maturity.
- Monitor funding-cost exposure after the interest-rate caps expired and confirm whether replacement hedges were put in place.
- Assess execution of the 2014 loan-system conversion and the company’s remediation of the disclosed accounting-control deficiencies.
- Review regulatory developments and concentration in key states, as well as the risk profile of convenience-check originations.