Regional Management Corp. — FY2014 Form 10-K
Business context and period. The filing covers the fiscal year ended December 31, 2014; quarterly figures below identify the fourth quarter. Regional is a specialty consumer lender serving primarily non-prime and underbanked customers through small and large installment, automobile, and retail loans, plus optional insurance products. At year-end it operated 300 branches in eight states and reported approximately 345,500 active accounts.
Financial and operating highlights
| Metric | FY2014 / Dec. 31, 2014 | FY2013 / Dec. 31, 2013 |
|---|---|---|
| Total revenue | $204.7 million | $170.6 million |
| Net income; diluted EPS | $14.8 million; $1.14 | $28.8 million; $2.23 |
| Income before tax | $23.9 million | $46.3 million |
| Provision for credit losses | $69.1 million; 13.0% of average receivables | $39.2 million; 8.2% |
| Net charge-offs | $58.6 million; 11.1% of average receivables | $32.7 million; 6.9% |
| General and administrative expense | $96.8 million; 47.3% of revenue | $71.0 million; 41.6% |
| Finance receivables, year-end | $546.2 million; allowance $40.5 million (7.4%) | $544.7 million; allowance $30.1 million (5.5%) |
| Cash from operations | $85.5 million | $72.6 million |
| Cash used in investing / financing | $64.5 million / $21.1 million | $142.7 million used / $70.9 million provided |
| Debt; cash | $341.4 million; $4.0 million cash | $362.8 million; $4.1 million cash |
Amounts are in U.S. dollars. Total revenue increased 20.0%, while net income fell 48.6%; net margin declined to 7.2% from 16.9%. Average finance receivables grew 10.9%, although year-end receivables were nearly flat. One-day-or-more delinquency was 22.6% of receivables versus 25.1% a year earlier; total contractual delinquency was 7.5% versus 8.0%.
Fourth quarter: Revenue was $53.8 million versus $48.5 million in Q4 2013; net income was $3.4 million versus $8.4 million. Credit-loss provision rose to $16.0 million from $11.6 million, and G&A expense to $28.4 million from $19.5 million.
Material changes versus prior period
- Credit deterioration was the principal earnings driver: provision expense rose 76.2%, and annual net charge-offs increased to 11.1% from 6.9% of average receivables. Management attributed the problem chiefly to servicing pressures from high account loads per employee and lower-credit-quality convenience-check campaigns in summer 2014.
- Convenience-check allowance coverage increased to 9.6% of receivables from 5.7%. Small-loan receivables, including convenience checks, were 58.5% of the portfolio at year-end.
- Interest and fee income rose 21.3%, reflecting average receivables growth and average yield rising to 34.9% from 31.9%, including statutory increases in allowable charges in North Carolina and Texas. Insurance income declined 6.9%.
- Auto receivables fell 14.8% as the company constrained capital in a competitive category; retail receivables fell 16.4%, partly because the existing loan system could not support promotional financing.
- G&A increased 36.2%, with higher branch, personnel, marketing, compliance/legal, and systems costs. The company added 36 net branches, reaching 300.
Outlook, risks, contingencies, and unusual items
- Management said it aimed to return to and improve upon historical portfolio performance in 2015. It hired a Chief Risk Officer, established a Credit Committee for direct-mail underwriting, strengthened campaign-file audits, and enhanced early-delinquency reporting. These are objectives, not quantified earnings guidance.
- The company planned continued branch growth and estimated annual capital expenditures of $3 million to $6 million. It expected operating cash flow and facility borrowings to fund needs for the next twelve months and foreseeable future, but stated that the credit facility matures in May 2016 and intended to extend it or take other appropriate action in 2015.
- The $500 million revolving facility had $341.4 million drawn and $158.6 million of stated unused capacity at year-end, subject to the borrowing base and covenants. Borrowings bear floating rates; the prior interest-rate cap expired unused in March 2014. A 100-basis-point LIBOR increase was estimated to add $854,000 of annual interest expense based on year-end debt.
- A charge-off policy change from 365 to 180 days delinquent generated a one-time $2.1 million charge-off in 2014; management said it did not affect provision expense because the accounts already had a specific allowance. Other policy changes produced a net $318,000 increase in provision in September.
- Management disclosed a material weakness in controls over credit risk in direct-mail loan origination, identified in 2014 and reported as remediated by year-end. Management concluded internal controls over financial reporting were effective at December 31, 2014; the external auditor did not attest to that conclusion.
- A securities class action seeks unspecified damages. The insurer denied coverage for Securities Act claims and acknowledged Exchange Act claim coverage subject to reservation of rights; allocation discussions were ongoing. The company accrued $497,000 for ordinary-course legal matters, but said some potential losses could not be reasonably estimated.
- Other key risks include non-prime borrower credit losses, regulatory or rate restrictions, geographic concentration, employee turnover, reliance on direct mail and third parties, refinancing and interest-rate exposure, and the planned transition to a new loan-management system. Senior leadership changed during 2014. No dividends were paid in 2012–2014, and none were planned for the foreseeable future.
Important facts for investors to verify
- Whether direct-mail underwriting and servicing changes reduce convenience-check delinquencies, charge-offs, and required loss reserves.
- Allowance adequacy and portfolio performance by loan type, especially small loans and convenience checks; review the distinction between delinquency measures and charge-offs.
- Availability and terms of refinancing or replacement financing for the revolving facility before its May 2016 maturity, and headroom under its borrowing base and covenants.
- Progress, costs, and operational risks in the GOLDPoint loan-system conversion, and whether promotional retail financing is restored.
- Developments in the securities litigation, insurance coverage allocation, and any material legal exposure beyond recorded accruals.
- Whether management’s reported remediation of the direct-mail control weakness remains effective and whether further material weaknesses are identified.