Regional Management Corp. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unaudited consolidated results; dollar amounts below are in millions unless noted. Regional Management is a specialty consumer lender operating 293 branches in eight states and offering installment, auto-purchase, retail-purchase, and related insurance products.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $47.4 | $39.2 | $97.0 | $77.8 |
| Provision for credit losses | $13.6 | $8.4 | $30.6 | $16.5 |
| General and administrative expenses | $23.2 | $17.3 | $43.1 | $34.0 |
| Income before taxes | $7.1 | $10.2 | $16.0 | $21.0 |
| Net income | $4.4 | $6.4 | $10.0 | $13.2 |
| Diluted EPS | $0.34 | $0.50 | $0.77 | $1.03 |
- Revenue rose 21.1% in Q2 and 24.7% for the first half, driven by larger average receivables and improved average loan yield. Interest and fee income increased 23.0% and 26.2%, respectively.
- Profit declined despite revenue growth: net income fell 31.1% in Q2 and 23.9% in the first half. Credit-loss provision rose 62.0% in Q2 and 85.5% in the first half, chiefly reflecting higher net charge-offs following elevated delinquencies. Net margin was 9.3% in Q2 versus 16.3% a year earlier, and 10.3% for the first half versus 16.9%.
- Annualized net charge-offs were 10.5% of average receivables in Q2 and 10.1% for the first half, versus 6.6% and 6.5% in the comparable 2013 periods. The allowance was $34.6 million, or 6.7% of receivables, versus $30.1 million, or 5.5%, at year-end 2013.
- G&A expense was 48.9% of revenue in Q2 and 44.4% for the first half, compared with 44.3% and 43.7%. Management cited branch expansion, staffing, health-care and consulting costs, and implementation of a new loan-management system.
- At June 30, total assets were $504.0 million, net finance receivables $483.4 million, cash $3.6 million, and stockholders’ equity $171.9 million. Net finance receivables declined from $514.6 million at December 31, 2013.
- Senior revolving credit debt was $324.6 million, down from $362.8 million at year-end. The company reported $175.4 million of unused facility capacity and compliance with debt covenants. The facility matures in May 2016.
- For the first half, operating cash flow was $39.0 million versus $30.6 million; investing cash use was $1.5 million versus $40.8 million; and financing cash use was $38.0 million versus $9.8 million. Cash declined $0.6 million to $3.6 million.
Material changes and management commentary
- Receivables increased 12.0% year over year to $518.0 million, while the mix shifted toward small installment loans. Small-loan balances grew 33.1%; auto-purchase balances declined 4.8%, and retail-purchase balances declined 10.3%. Management said it favored higher-yielding small loans over more competitive auto lending and sought to improve portfolio yield.
- Total contractual delinquency was 6.6% at June 30, down from 8.0% at December 31, 2013; receivables 90 days or more past due were 2.4%, versus 3.2% at year-end. Management attributed prior loss pressure partly to high accounts per employee and said staffing ratios had been reduced; it expected net charge-off rates to improve in the second half as delinquencies returned closer to historical levels.
- The company opened 12 branches in Q2 and 29 in the first half; it had 293 branches at June 30, compared with 263 a year earlier. Management anticipates annual branch-related capital expenditures of approximately $3–$6 million.
- A revised paid-time-off policy produced a $1.4 million reversal of personnel expense in Q1 2014. The filing also notes immaterial revisions to 2013 comparative financial statements; the revised figures are used in this summary.
- Management expected the new loan-management system’s costs in Q3 2014 to reduce diluted EPS by $0.03–$0.04. It also expected personnel costs to rise as the company staffs branches and builds administrative capacity.
Outlook, risks, and contingencies
- No formal earnings or revenue guidance is provided. Management said operating cash flow and facility borrowings should fund expected needs for the next 12 months and the foreseeable future, while noting that future increases in borrowing capacity may be needed and cannot be assured.
- The revolving facility bears floating-rate interest. Existing interest-rate caps expired unused in March 2014; management was evaluating replacement hedges. The filing estimates that a 100-basis-point LIBOR increase, based on the June 30 balance and stated rate assumptions, would add approximately $811,000 of annual interest expense.
- A securities class-action suit filed May 30, 2014 concerns the September and December 2013 secondary offerings and seeks unspecified damages. The company disputes the claims and intends to defend itself; the loss amount is not clearly estimable in the filing. Other ordinary-course legal matters are also disclosed.
- Loan demand and cash needs are seasonal, typically stronger in the third and fourth quarters. Credit quality, collection effectiveness, economic conditions, collateral values, regulation, and funding availability are material risks.
Most important facts for investors to verify
- Whether the elevated provision and charge-off rates improve as management projected, and how delinquency trends develop.
- Whether receivables growth and the higher-yielding product mix translate into sustained earnings after credit costs and operating expenses.
- Whether the company maintains adequate liquidity, covenant compliance, and access to borrowing capacity ahead of the May 2016 facility maturity.
- The actual Q3 loan-system costs and the impact of branch expansion and staffing on efficiency.
- Developments in the securities class action and any further information affecting potential exposure.