Regional Management Corp. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are to December 31, 2013 unless otherwise noted. Financial statements are unaudited. Amounts below are in millions unless stated otherwise.
Business context
Regional Management is a specialty consumer lender offering installment, automobile-purchase and retail-purchase loans, plus optional credit insurance. It operated 281 offices in eight states at quarter-end and opened 17 offices during Q1. Its portfolio totaled $501.7 million in finance receivables. Management noted that loan demand is typically lowest in Q1 and strongest in the third and fourth quarters.
Financial performance and position
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior date |
|---|---|---|
| Total revenue | $49.6; up 28.4% | $38.6 in Q1 2013 |
| Net income | $5.6; diluted EPS $0.43 | $6.8; diluted EPS $0.53 in Q1 2013 |
| Net income margin | 11.3% | 17.5% in Q1 2013 |
| Provision for credit losses | $16.9; 34.2% of revenue | $8.1; 20.9% of revenue in Q1 2013 |
| Net charge-offs | $12.7; annualized 9.7% of average receivables | $7.1; annualized 6.4% in Q1 2013 |
| General and administrative expenses | $19.9; efficiency ratio 40.1% | $16.7; 43.2% in Q1 2013 |
| Operating cash flow | $25.1 | $16.8 in Q1 2013 |
| Cash | $6.3 | $4.1 at December 31, 2013 |
| Senior revolving credit facility | $310.3 outstanding; $189.7 unused capacity | $362.8 outstanding at December 31, 2013 |
| Total assets / stockholders’ equity | $488.6 / $167.2 | $533.9 / $161.2 at December 31, 2013 |
Interest and fee income was $44.1 million, up 29.5%, supported by 19.8% growth in average finance receivables and an increase in average annualized yield from 31.0% to 33.5%. Interest expense increased to $3.8 million from $3.1 million. Income before taxes was $9.0 million, versus $10.8 million; the effective tax rate was 37.49%, compared with 37.15%.
Net finance receivables were $467.4 million, down from $514.6 million at year-end, as gross receivables declined to $601.5 million from $658.2 million and the allowance rose to $34.3 million from $30.1 million. The allowance equaled 6.8% of receivables at March 31, versus 5.5% at December 31 and 5.7% a year earlier. Total contractual delinquency was 7.3%, compared with 8.0% at year-end and 6.1% a year earlier.
Cash flow from investing activities was $29.3 million, principally reflecting net repayments of finance receivables; financing activities used $52.2 million, mainly from net repayments on the revolving facility. The company reported $1.9 million of restricted cash securing an insurance-related letter of credit, presented in other assets.
Material changes and unusual items
- Revenue grew substantially, but net income fell 17.1%, primarily because provision for credit losses more than doubled amid elevated delinquencies and charge-offs.
- Small installment receivables rose 41.4% year over year to $255.1 million. Large installment receivables fell 9.0%; automobile and retail purchase balances were broadly steady to lower. Management attributed the mix partly to a strategic emphasis on higher-yielding small installment loans.
- A February 2014 paid-time-off policy change resulted in a $1.4 million reversal of personnel expense in Q1, contributing to the lower reported efficiency ratio. The improvement should be considered in light of this one-time benefit.
- The filing includes immaterial revisions to previously reported Q1 2013 results: revised net income was $6.764 million rather than $6.928 million, a reduction of $164,000. The company said the revisions reflect recording items in the proper period.
- The company identified significant deficiencies involving franchise-tax expense, compensated-absence accruals and insurance-premium recognition; it stated that necessary corrections were implemented and the deficiencies remediated. Management concluded disclosure controls were effective as of March 31, 2014.
Outlook, risks and contingencies
- Management expected elevated net charge-offs to continue for the next several months, citing higher accounts per employee and challenges servicing portfolio growth. It said personnel costs may rise to maintain appropriate staffing.
- No formal earnings or revenue guidance was provided. Management stated that operating cash flow and facility borrowings should fund expected needs for the next 12 months and the foreseeable future. Planned annual capital expenditures for branch expansion and maintenance were approximately $2 million to $4 million.
- The $500 million revolving facility matures in May 2016, has a borrowing base tied to eligible receivables and credit quality, and includes restrictive covenants. The company reported covenant compliance and said it intends to extend the facility or otherwise address maturity repayment. It cautioned that additional borrowing capacity may not be available on acceptable terms.
- Interest-rate caps expired unused on March 4, 2014; management intended to arrange a replacement interest-rate management transaction during 2014. The filing estimated that a 100-basis-point LIBOR increase, given the stated floor and quarter-end balance, would add approximately $776,000 of annual interest expense.
- Seasonality, credit quality, collections, economic conditions in operating markets, collateral values, funding availability and regulation are material risks. The company reported ordinary-course lawsuits and did not expect them to have a material adverse effect; it reported no material changes to the risk factors in its 2013 Form 10-K.
Important facts for investors to verify
- Whether the elevated charge-off and delinquency trends persisted, and whether reserve coverage remained adequate as receivable mix and portfolio growth changed.
- How much of Q1 profitability and the efficiency-ratio improvement depended on the $1.4 million PTO liability reversal.
- Whether branch expansion and staffing kept pace with account growth and improved servicing capacity.
- Availability, borrowing-base capacity, covenant compliance and refinancing plans for the revolving facility ahead of its May 2016 maturity.
- Implementation of the planned interest-rate risk-management arrangement and the company’s exposure to funding-cost increases.
- The effects of the disclosed financial-statement revisions and remediation of accounting-control deficiencies; the filing refers to the 2013 Form 10-K for additional revision details.