Regional Management Corp. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are to December 31, 2011. Dollar amounts are in millions unless otherwise stated. Regional Management provides consumer installment and purchase loans, insurance, and related services. At quarter-end it operated 194 branches across six states.
Financial performance and position
- Revenue: $31.54 million, up 27.7% from $24.70 million. Interest and fee income was $26.85 million; insurance income, net, was $2.49 million; other income was $2.20 million.
- Earnings: Net income was $5.12 million, up 3.8%; diluted EPS was $0.53 versus $0.51. Income before tax was $8.13 million. Net margin declined to 16.2% from 20.0%; pre-tax margin declined to 25.8% from 30.7%.
- Expenses and credit costs: Provision for loan losses rose 46.7% to $5.63 million. General and administrative expenses were $12.79 million; the efficiency ratio improved to 40.6% from 41.4%. Consulting and advisory fees increased to $1.45 million, including fees tied to the IPO closing.
- Loan portfolio: Finance receivables were $317.50 million, up from $306.59 million at year-end; average receivables rose 32.3% year over year to $318.56 million. Average portfolio yield fell to 33.7% from 35.0%. The allowance was $19.86 million, or 6.3% of receivables.
- Credit quality: Total delinquency was 5.8% of receivables versus 6.5% at year-end; receivables over 90 days delinquent were 2.3%, unchanged from Q1 2011. Annualized net charge-offs were 6.4% of average receivables, also unchanged year over year.
- Cash flow: Operating cash flow was $9.59 million versus $9.99 million. Investing used $16.50 million, principally reflecting the Alabama acquisition; financing provided $4.49 million. Cash ended at $2.43 million, down from $4.85 million at year-end.
- Debt and liquidity at March 31: Senior revolving debt was $209.61 million, related-party mezzanine debt $25.81 million, and other notes payable $0.89 million. The $255 million revolver had $45.4 million of remaining availability based on the borrowing base. The company reported compliance with debt covenants.
Changes, transactions, and outlook
- Revenue growth reflected portfolio expansion, five new offices, and the January acquisition of two Alabama consumer-loan businesses: 23 branches acquired, four merged into existing offices, and 19 net new offices. The reported purchase price was $29.89 million; purchase-price allocation was incomplete at quarter-end.
- Growth was accompanied by higher credit-loss provision and lower overall loan yield. Management attributed the increased provision primarily to portfolio growth; annualized net charge-off rates were level with the prior-year quarter.
- On April 2, 2012, after quarter-end, the company completed its IPO, issuing 3.15 million shares at $15 per share. It reported approximately $40.2 million in net proceeds after underwriting discounts and estimated offering costs, used to repay $25.8 million of mezzanine debt, $13.2 million of revolver borrowings, and approximately $1.1 million in agreement-termination payments. Management expected materially lower future interest expense from debt reduction. The IPO also ended the individual owners’ stock put right and sponsor/stockholder advisory arrangements.
- No specific earnings or revenue guidance is provided. Management described plans to grow receivables and branches and diversify products, while noting that public-company costs and personnel expenses could increase and weigh on the efficiency ratio. Loan demand is seasonal and typically lowest in the first quarter.
- Key risks include credit losses among non-prime borrowers, economic weakness in concentrated operating regions, interest-rate exposure on floating-rate debt, funding and covenant constraints, competition, employee turnover, acquisition integration, and extensive state and federal regulation. The filing highlights potential CFPB rulemaking; management said it was not aware of pending regulations then expected to materially affect the business.
- The company disclosed ordinary-course lawsuits and stated that management did not expect them to have a material adverse effect. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether post-IPO debt repayment and the expected reduction in interest expense translate into sustained earnings improvement.
- Credit performance and allowance adequacy as the portfolio expands, particularly by loan type and in acquired Alabama branches.
- Whether loan growth can be maintained without further yield compression or deterioration in delinquencies and charge-offs.
- Completion of the Alabama acquisition valuation and any resulting changes to acquired asset values or amortization.
- Actual liquidity and borrowing capacity under the revolver after the IPO repayments, alongside covenant compliance and interest-rate sensitivity.
- Effects of CFPB and state regulatory developments, and costs associated with operating as a public company.