Regional Management Corp. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Financial statements are unaudited; dollar amounts below are in millions unless noted.
Business context
Regional Management provides installment, automobile purchase and retail purchase loans, primarily to consumers with limited access to traditional credit. It operated 263 offices across eight states at quarter-end and opened or acquired 42 offices during the first half. Its loan portfolio is funded mainly through operating cash flows and a senior revolving credit facility.
Financial performance and condition
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $39.4 | $32.0 | $78.0 | $63.6 |
| Income before taxes | $10.6 | $10.5 | $21.6 | $18.6 |
| Net income | $6.7 | $6.6 | $13.6 | $11.7 |
| Diluted earnings per share | $0.52 | $0.52 | $1.06 | $1.05 |
| Net margin | 16.9% | 20.7% | 17.4% | 18.5% |
- Revenue drivers and yield: Q2 interest and fee income rose 23.9% to $34.9 million; average finance receivables increased 35.0%, while average loan yield declined to 31.4% from 34.2%. For the first half, interest and fee income increased 24.8% to $69.0 million, with average receivables up 36.1% and yield down to 31.2% from 34.0%.
- Credit costs: Provision for credit losses was $8.4 million in Q2, up 42.3%, and $16.5 million for the half, up 42.8%. Annualized net charge-offs were 6.7% of average receivables in Q2 versus 6.1%; for the half, 6.5% versus 6.2%. At June 30, the allowance was $25.6 million, or 5.6% of receivables. More than 30-day delinquency was 6.3% of receivables, compared with 6.1% at June 30, 2012; more than 90-day delinquency was 2.3%, versus 2.0%.
- Operating costs and margins: Q2 general and administrative expenses rose 29.5% to $17.2 million; the efficiency ratio increased to 43.6% from 41.4%. For the first half, G&A increased 28.9% to $33.6 million and the efficiency ratio rose to 43.1% from 41.0%. Management attributed the pressure to lower yields and costs of expanding branches.
- Cash flow: First-half operating cash flow was $29.1 million, versus $28.5 million. Investing used $40.3 million, including $36.4 million of net loan originations and $2.8 million of property and equipment purchases; financing provided $10.8 million. Cash declined $0.4 million to $2.9 million.
- Balance sheet and debt: At June 30, net finance receivables were $434.8 million, total assets $459.9 million, and stockholders’ equity $145.5 million. Revolver borrowings were $302.3 million, versus $292.4 million at December 31, 2012. The facility was amended to provide up to $500 million, with a May 2016 maturity and an accordion feature up to $600 million. Borrowing-base limitations apply; the filing does not state clear unused borrowing capacity. The company reported compliance with covenants. Restricted cash was $1.9 million.
Material changes, outlook and risks
- Year-over-year portfolio growth varied by product: small installment receivables increased 71.2%, automobile purchase loans 19.0%, and retail purchase loans 46.6%; large installment loans declined 17.2%. Management cited direct-mail growth, expansion in indirect auto lending and retailer relationships, and a shift from large to small loans.
- Q2 revenue rose 23.0%, but net income increased only 0.5%; for the first half, revenue grew 22.7% and net income 15.7%. Higher credit provisions and operating expenses, alongside lower yields, constrained profit growth.
- No specific earnings or revenue guidance is provided. Management plans continued branch expansion and expects annual capital expenditures of approximately $2.5–$3.0 million. It noted seasonal loan demand, typically strongest in the fourth quarter, with resulting fluctuations in operating results and cash needs.
- The floating-rate revolver exposes the company to rising interest costs. A 100-basis-point LIBOR increase was estimated to add $756,000 of annual interest expense under the stated assumptions; interest-rate caps cover $150 million of LIBOR borrowings through March 2014.
- Management cited credit performance, economic conditions, collateral values, funding costs, regulation and branch execution among relevant risks. It reported no material changes to the risk factors in its 2012 Form 10-K and no legal proceedings believed likely to have a material adverse effect. A resale registration filed August 7 may allow certain existing holders to sell up to 7,263,599 shares; the company is not selling shares and will receive no proceeds.
- Management concluded disclosure controls were effective at June 30, 2013; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether rising delinquency and charge-off rates persist, and whether the allowance remains adequate as the loan book expands.
- Whether portfolio growth can offset lower loan yields and higher credit and branch operating costs.
- Actual revolver availability under the borrowing base, covenant headroom, and the company’s plans for the May 2016 maturity.
- The impact of seasonal funding needs and interest-rate changes, including the expiration of the interest-rate caps in March 2014.
- Whether the planned branch growth produces acceptable returns; also monitor any selling-stockholder share sales under the resale registration statement.