Regional Management Corp. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; unaudited. Dollar amounts below are in millions unless otherwise stated.
Business context
Regional Management is a specialty consumer finance company offering installment, automobile purchase and retail purchase loans, along with optional credit insurance. It operated 264 offices across eight states at quarter-end, up from 213 a year earlier. The company reported opening 41 offices and acquiring two during the first nine months of 2013. Loan demand is seasonal, typically strongest in the third and fourth quarters.
Financial and operating performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $44.5 | $35.5 | $122.4 | $99.0 |
| Net income | $7.6 | $7.0 | $21.2 | $18.7 |
| Diluted EPS | $0.59 | $0.55 | $1.65 | $1.60 |
| Provision for credit losses | $11.1 | $7.4 | $27.6 | $18.9 |
| Interest expense | $3.9 | $2.7 | $10.2 | $8.6 |
- Revenue grew 25.3% in Q3 and 23.6% year to date; net income increased 9.1% and 13.2%, respectively. Net margin declined to 17.1% from 19.7% for the quarter and to 17.3% from 18.9% year to date.
- Interest and fee income rose with portfolio growth, but average loan yield fell to 32.4% from 33.4% in Q3 and to 31.5% from 33.7% year to date. Management cited product mix and lower yields across loan categories.
- At September 30, gross finance receivables were $615.9 million and net finance receivables were $483.4 million, versus $529.6 million and $413.9 million, respectively, at December 31, 2012. The allowance for credit losses was $28.7 million, or 5.6% of finance receivables.
- Annualized net charge-offs were 6.5% of average receivables in Q3, unchanged year over year; year-to-date they were 6.5%, versus 6.3%. Receivables over 30 days delinquent rose to 7.3% of the portfolio from 6.4% a year earlier; over 90 days rose to 2.6% from 2.1%.
- General and administrative expense was $17.4 million in Q3 and $51.0 million year to date. The efficiency ratio was 39.1% in Q3 (38.1% excluding secondary-offering expenses) and 41.6% year to date (41.3% excluding those expenses).
- Operating cash flow was $49.3 million for the first nine months, versus $41.8 million. Investing used $101.0 million, primarily for net loan originations; financing provided $56.3 million. Cash ended at $7.9 million.
- Total assets were $513.1 million and stockholders’ equity $153.3 million at September 30. Revolver borrowings were $347.7 million, compared with $292.4 million at December 31, 2012. The $500 million secured revolving facility matures in May 2016; the company reported compliance with its covenants.
Material changes, outlook and risks
- Small-installment receivables increased 62.0% year over year to $256.4 million; automobile purchase receivables rose 13.4% to $181.6 million. Large-installment receivables declined 17.5% to $43.1 million, partly reflecting underwriting and product-classification changes. Retail purchase receivables increased 18.1% to $31.0 million.
- Management attributed growth to lending in existing offices and 51 additional offices since September 2012. It said it sees potential to add as many as 800 offices over time in current markets. Planned annual capital expenditures for branch growth and upkeep were approximately $2.5–$3.0 million. No specific earnings or revenue guidance was provided.
- The September secondary offering involved 4.002 million shares sold by existing shareholders at $27.50 per share; the company received no proceeds. It incurred approximately $0.4 million of Q3 offering-related expenses. The sale ended its NYSE “controlled company” status, with phased deadlines to meet specified board-independence requirements.
- Interest-rate exposure remains: the revolver has floating-rate borrowings, and management estimated a 100-basis-point LIBOR increase would add approximately $0.9 million to annual interest expense at the September 30 balance. Rate caps cover $150 million of borrowings and mature March 4, 2014.
- The company entered a ten-year agreement for a replacement loan-management platform and expected migration from its existing provider to take about one year. Management identified transition costs, delays, operational disruption and system adequacy as risks.
- Management disclosed ordinary-course legal matters and said it did not believe them likely to have a material adverse effect. The filing also notes a $1.2 million aggregate director compensation award in October 2013, expected to result in approximately $1.2 million of Q4 expense. Disclosure controls were deemed effective.
Key facts for investors to verify
- Whether higher delinquencies and credit-loss provisions persist as the loan portfolio grows, and how allowance coverage and charge-offs evolve.
- Whether portfolio expansion and new offices can offset lower yields and higher operating and funding costs while sustaining profitability.
- Revolver availability under its borrowing base and covenants, refinancing plans ahead of the May 2016 maturity, and sensitivity to interest rates after the caps expire.
- Progress, cost and operational performance of the loan-system migration, plus compliance with the NYSE governance-transition deadlines.
- The effects of seasonality and the timing of loan growth on liquidity and cash requirements.