Regional Management Corp. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited interim results; dollar amounts below are in millions unless stated otherwise.
Business context
Regional Management provides consumer installment loans and optional insurance, operating as Regional Finance in 19 states through 347 branches and online channels. At quarter-end it reported 530,400 active accounts. Small and large loans are its core products; the company stopped accepting retail-loan applications in November 2022 and continues servicing the remaining portfolio. Net finance receivables were $1,751.0 million, up 8.9% year over year, led by 13.9% growth in large loans.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $140.9 | $131.5 | $409.7 | $375.2 |
| Provision for credit losses | $50.9 | $48.1 | $151.1 | $124.3 |
| General and administrative expenses | $62.1 | $58.2 | $178.3 | $167.4 |
| Interest expense | $16.9 | $11.9 | $50.0 | $19.4 |
| Net income | $8.8 | $10.1 | $23.5 | $48.8 |
| Diluted EPS | $0.91 | $1.06 | $2.45 | $5.01 |
Q3 interest and fee income was $125.0 million; its annualized yield was 29.0%, down 0.6 percentage points year over year. Average net finance receivables rose 10.0%. The annualized operating expense ratio was 14.4% (14.9% prior year), while net income was 2.0% of average net finance receivables (2.6% prior year). For the nine months, total revenue grew 9.2%, but net income declined 51.8%; interest expense rose 157.9% and provision for credit losses increased 21.6%.
Credit performance: The allowance for credit losses was $184.9 million, or 10.6% of net finance receivables, versus 11.2% a year earlier. Contractual delinquency was 7.3%, up from 7.2%. Q3 annualized net credit losses were 11.0% of average receivables versus 9.1%; the nine-month rate was 11.4% versus 9.3%. Management attributed higher losses mainly to portfolio growth and the macroeconomic environment.
Cash flow and liquidity: Nine-month operating cash flow was $182.3 million, investing cash outflow $194.1 million, and financing cash inflow $4.5 million. Cash and restricted cash totaled $124.4 million at September 30, down $7.4 million from year-end; unrestricted cash was $7.4 million. Management reported $171.8 million of immediate availability under revolving facilities and $179.2 million of available liquidity including unrestricted cash. Unused revolving-facility capacity was $613.1 million, subject to borrowing-base limits.
Debt and capital: Gross debt was $1,372.7 million ($1,367.1 million net of issuance costs), compared with $1,355.4 million gross at year-end. Funded debt-to-equity was 4.2:1 and equity was 18.7% of assets. Management reported compliance with all debt covenants. Approximately 86.6% of debt was fixed-rate; a 100-basis-point increase in revolving borrowing rates would add an estimated $1.8 million of annual interest expense. The quarterly dividend was $0.30 per share; a further $0.30 dividend was declared in November for payment in December.
Changes, outlook, and risks
- Revenue growth was supported by a larger loan book, while the average interest and fee yield declined as the mix shifted toward larger, higher-quality loans and credit conditions affected reversals and nonaccrual loans. Price increases partly offset the yield pressure.
- Higher funding costs materially weighed on earnings: Q3 average cost of debt was 5.00% versus 3.93% a year earlier; the nine-month average was 4.98% versus 2.25%. The prior-year comparison also included a $13.1 million gain from interest-rate-cap fair-value changes.
- Management said it maintained tighter underwriting in higher-risk segments amid inflation, rising interest rates, and geopolitical uncertainty. A hypothetical allowance stress using 10% more weighting toward slower near-term growth would increase reserves by $1.1 million; this is not management’s forecast.
- No numerical earnings or revenue guidance was provided. Management expects operating cash flows and financing alternatives to support operations and debt maturities over the next 12 months, but noted that future facility extensions and securitizations are not assured.
- The senior revolving credit facility matures in September 2024; management intends to extend it or take other appropriate action. Other funding arrangements also have revolving-period milestones, including the RMIT 2021-1 securitization in February 2024. Variable-rate costs, refinancing access, credit losses, and seasonal delinquency patterns are key risks.
- The CFPB is considering whether to establish supervisory authority over the company. Regional Management disputes the basis for supervision and is awaiting resolution. The filing also describes ordinary-course legal proceedings; management does not expect them to have a material adverse effect. No material change to previously disclosed risk factors was reported.
Most important facts for investors to verify
- Whether delinquency and net credit loss trends continue to worsen, and whether the 10.6% allowance remains adequate as economic assumptions change.
- Whether portfolio growth and pricing can offset rising funding costs and pressure on loan yields and earnings.
- Available liquidity in practice, including borrowing-base constraints and the distinction between unrestricted and restricted cash.
- Refinancing or extension plans for the September 2024 senior facility and upcoming securitization or warehouse-facility milestones.
- The outcome of the CFPB supervisory-authority process and any material developments in legal or regulatory matters.