Regional Management Corp. — FY 2012 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2012; the filing also provides unaudited quarterly results. Regional is a specialty consumer lender serving primarily non-prime and underbanked customers. At year-end it operated 221 branches in seven states, serving more than 245,000 active accounts. Its products include installment, auto-purchase, and furniture/appliance loans, plus optional insurance.
Financial and operating metrics
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $136.0 million | $105.2 million |
| Interest and fee income | $119.2 million | $91.3 million |
| Net income | $25.4 million | $21.2 million |
| Diluted EPS | $2.12 | $2.21 |
| Net margin | 18.6% | 20.2% |
| Finance receivables at year-end | $437.6 million | $306.6 million |
| Net charge-offs / average receivables | 6.5% | 6.3% |
| Allowance / finance receivables | 5.4% | 6.3% |
| Operating cash flow | $57.6 million | $41.0 million |
Provision for credit losses was $27.8 million, or 20.4% of revenue, versus $17.9 million, or 17.0%, in 2011. General and administrative expenses were $55.3 million; the efficiency ratio increased to 40.6% from 38.6%. Pretax income was $39.9 million (29.4% of revenue), compared with $33.4 million (31.8%).
Year-end cash was $3.3 million. Revolver debt was $292.4 million against a $325.0 million facility, with $32.6 million of remaining availability based on the borrowing base. The facility matures in July 2015; the company reported covenant compliance. Investing cash use was $159.5 million, reflecting loan growth and the Alabama acquisition; financing provided $100.3 million. Total assets were $435.0 million and stockholders’ equity was $130.6 million.
Fourth-quarter revenue was $37.0 million versus $29.4 million in Q4 2011; net income was $6.6 million versus $6.4 million.
Material changes versus prior period
- Revenue rose 29.3% and net income rose 19.4%, driven by portfolio expansion, new branches, and the Alabama acquisition. Average finance receivables grew 36.2%; year-end receivables increased 42.7%.
- Interest and fee income increased 30.6%, although average loan yield declined from 34.6% to 33.2%, partly reflecting growth in lower-yield auto and retail financing.
- Credit-loss provision increased 55.5%. Net charge-offs rose to 6.5% from 6.3%, and receivables more than 90 days delinquent increased to 2.5% from 1.7%.
- Diluted EPS decreased despite higher net income, reflecting the share count increase following the IPO. The company issued 3.15 million shares in April 2012 and received approximately $39.8 million net proceeds, used in part to repay mezzanine debt.
- The company acquired 23 Alabama branches, merged four into existing offices, and retained 19 net new locations. It opened or acquired 51 net branches during 2012.
Outlook, commentary, risks and unusual items
Management planned to open 35–45 new branches in 2013, with estimated capital expenditures of $2.1–$2.7 million, and expected gradual efficiency-ratio improvement as the branch base scales. No earnings or revenue guidance was provided. Management cited growth across existing branches and lending channels as priorities.
- Key risks include credit deterioration among non-prime borrowers, rapid expansion and employee turnover, dependence on live-check mailings and dealer/retailer relationships, and concentration in a limited number of states.
- Regulatory changes, including potential CFPB oversight or rules affecting lending and refinancing, could constrain products or profitability. The revolver is floating-rate, secured by substantially all finance receivables, and subject to restrictive covenants; interest-rate caps on $150 million of borrowings expire in March 2014.
- Legal proceedings arise in the ordinary course. Management did not expect them, individually or collectively, to materially affect financial condition, liquidity, or results; accruals were recorded for probable and estimable matters.
- The 2012 IPO repaid $25.8 million of related-party mezzanine debt and ended sponsor advisory and stockholder consulting agreements. Related-party termination fees and acquisition-related costs affected reported expenses.
- The audit opinion was unqualified. The filing did not include management’s internal-control assessment or auditor attestation under the transition relief for newly public companies.
Important facts for investors to verify
- Whether rising delinquencies and charge-offs persist as the rapidly expanded loan portfolio seasons, and whether the allowance remains adequate.
- How the lower portfolio yield and higher credit-loss and operating expenses affect future profitability and efficiency.
- Revolver availability under borrowing-base and covenant conditions, refinancing plans ahead of the July 2015 maturity, and exposure to higher interest rates.
- Execution and returns on the planned 2013 branch openings, integration of the Alabama acquisition, and growth in indirect auto and furniture/appliance lending.
- Developments in CFPB and state regulation, litigation, and the company’s internal-control reporting after the newly public company transition period.