Regional Management Corp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. Financial statements are unaudited. The company is a specialty consumer lender operating 296 branches in eight states, offering installment, auto-purchase and retail-purchase loans and related insurance.
Financial performance and position
Amounts below are in millions except per-share data. Comparative 2013 results reflect immaterial revisions described in the filing.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $53.9 | $44.3 | $150.9 | $122.1 |
| Provision for credit losses | $22.5 | $11.1 | $53.1 | $27.6 |
| General and administrative expenses | $25.3 | $17.5 | $68.4 | $51.6 |
| Income before taxes | $2.2 | $11.8 | $18.3 | $32.7 |
| Net income | $1.4 | $7.2 | $11.4 | $20.4 |
| Diluted EPS | $0.11 | $0.56 | $0.88 | $1.59 |
- Quarterly revenue rose 21.7%, but net income fell 80.7%; nine-month revenue rose 23.6%, while net income declined 44.0%. Net margin fell to 2.6% from 16.3% in Q3 and to 7.6% from 16.7% for the nine-month period.
- Interest and fee income grew with higher average receivables and yields. Average yield increased to 36.3% from 32.3% in Q3, and to 34.4% from 31.4% for nine months. Small installment lending drove much of the growth; the company reduced capital allocated to auto and retail loans.
- Credit costs rose sharply: provision was 41.8% of quarterly revenue versus 25.0% a year earlier, and 35.2% of nine-month revenue versus 22.6%. Annualized net charge-offs were 10.3% of average receivables for Q3 and 10.1% for nine months, compared with 6.5% in each 2013 period.
- At September 30, gross finance receivables were $543.4 million and net receivables $500.1 million. The allowance was $43.3 million, or 8.0% of receivables, versus $30.1 million, or 5.5%, at December 31, 2013. Contractual delinquency was 7.4%, versus 8.0% at year-end; the new charge-off policy reduced the reported September delinquency rate by 0.5 percentage points.
- Nine-month operating cash flow was $64.9 million, investing cash outflow $42.0 million, and financing cash outflow $23.2 million. Cash was $3.8 million at quarter-end, versus $4.1 million at year-end 2013.
- Total assets were $522.8 million, liabilities $349.2 million and stockholders’ equity $173.6 million. Revolving credit-facility debt was $339.3 million, down from $362.8 million at year-end.
Material changes and management commentary
- Management attributed the increased provision partly to elevated accounts per employee and a higher-than-normal proportion of lower-credit-quality loans generated by summer direct-mail campaigns. It recorded a $6.5 million allowance addition for those loans and expected elevated charge-offs for the next several months. Fourth-quarter direct-mail campaigns were adjusted.
- In September, the company changed its time-based charge-off threshold from 365 to 180 days delinquent. This resulted in a one-time $2.1 million charge-off against the existing allowance, not the provision, and made delinquency comparisons less directly comparable. The company also changed the treatment of certain confirmed bankruptcy-plan accounts; together, these changes increased provision by $318,000 and reduced nine-month net income by $199,000, or $0.02 diluted EPS.
- Receivables grew 14.0% on average year over year for the first nine months, while the period-end portfolio was nearly flat versus December 2013. Small installment loans increased as a share of the portfolio; auto and retail balances declined following capital-allocation decisions.
- The nine-month efficiency ratio rose to 45.3% from 42.2%, reflecting branch expansion, personnel and occupancy costs, health-care and consulting expenses, and a new loan-management system. System implementation costs were $1.4 million for nine months. A PTO policy change reduced first-quarter personnel expense by $1.4 million.
- Management described seasonal demand as typically strongest in the third and fourth quarters. It provided no specific financial guidance. It expected annual capital expenditures of approximately $3 million to $6 million.
Liquidity, debt and risks
- The senior revolving facility provides up to $500 million, matures in May 2016, and is secured by substantially all finance receivables and certain subsidiary equity. The company was in compliance with covenants. It reported $160.7 million of unused facility capacity, but only $60.7 million available based on eligible receivables and the applicable 83% advance rate.
- The facility’s floating-rate exposure remains relevant: interest-rate caps covering $150 million of borrowings matured unused in March 2014. Management was evaluating a replacement. A 100-basis-point LIBOR increase was estimated to raise annual interest expense by $848,000 at the reported balance and rate assumptions.
- Disclosure controls were deemed ineffective at September 30 because of a material weakness in controls over credit risk and recipient-list scrutiny for direct-mail loan originations. Management planned remediation, but could not assure effectiveness by year-end; the weakness also changed management’s conclusion about controls at June 30.
- CEO Thomas F. Fortin resigned effective October 30, 2014; director Michael R. Dunn became interim CEO. A separation agreement was expected, with terms not yet settled in the filing.
- A securities class action filed in May 2014 alleges federal securities-law violations related to the September and December 2013 secondary offerings. The company disputes the claims. It had accrued $343,000 for legal matters; potential additional losses were not clearly estimable for some proceedings.
- The $1.9 million cash collateral for an insurance letter of credit was restricted. The company identified consumer-credit performance, funding availability and refinancing, floating interest rates, regulatory costs, and the control weakness as risks.
Important facts for investors to verify
- Whether direct-mail loan performance and credit controls improved, and whether the material weakness was remediated and independently validated.
- Subsequent delinquency, net charge-off and allowance trends, accounting for the September change to the 180-day charge-off policy.
- Whether management’s expectation of elevated charge-offs for the following months was borne out, and whether revised marketing criteria reduced risk.
- The precise quarterly income-tax expense: the income statement reports $838,000, while the MD&A narrative states $1.1 million.
- Available borrowing capacity under the receivables-based borrowing limits, covenant headroom, and plans to address the May 2016 facility maturity and interest-rate exposure.
- Developments in the securities litigation, legal accruals, and the CEO transition and related separation costs.