Regional Management Corp. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited consolidated financial statements; dollar amounts below are in millions unless noted.
Business context
Regional Management is a consumer finance company offering small, large, and retail installment loans and optional insurance products. At quarter-end it operated 338 branches in 17 states and reported 505,700 active accounts. Net finance receivables were $1.608 billion, up 22.3% from September 30, 2021. In September, the company decided to stop originating retail loans effective November 2022 and focus on its core small- and large-loan products.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $131.5 | $111.5 | $375.2 | $308.9 |
| Provision for credit losses | $48.1 | $26.1 | $124.3 | $58.0 |
| General and administrative expenses | $58.2 | $47.8 | $167.4 | $140.0 |
| Interest expense | $11.9 | $8.8 | $19.4 | $23.8 |
| Net income | $10.1 | $22.2 | $48.8 | $67.9 |
| Diluted EPS | $1.06 | $2.11 | $5.01 | $6.29 |
- Revenue and yield: Q3 interest and fee income was $116.0 million. Average net finance receivables grew 26.1% year over year, while annualized interest and fee yield declined to 29.6% from 32.0%. The nine-month yield was 29.8%, versus 31.6%.
- Profitability: Q3 net income fell 54.7%; the filing attributes the decline chiefly to higher credit-loss provision and operating expenses, partly offset by revenue growth. Net income as a percentage of average net finance receivables, annualized, was 2.6% for Q3 versus 7.2%. The operating expense ratio was 14.9% versus 15.4%.
- Credit and portfolio: At September 30, the allowance for credit losses was $179.8 million, or 11.2% of net finance receivables, including $19.0 million for estimated future macroeconomic impacts. Contractual delinquency was 7.2%, up from 4.7% a year earlier. Q3 annualized net credit loss ratio was 9.1%, compared with 5.0%.
- Cash flow: For the first nine months, operating cash flow was $164.3 million, investing cash outflow was $295.7 million, and financing cash inflow was $99.3 million. Cash and restricted cash ended the period at $117.0 million, including $3.1 million of unrestricted cash.
- Debt and liquidity: Gross debt was $1.241 billion ($1.231 billion net of issuance costs), compared with $1.108 billion gross at year-end 2021. Funded debt-to-equity was 4.0-to-1. The company reported $181.2 million of available liquidity and $565.0 million of unused revolving-facility capacity, subject to borrowing-base limits. It was in compliance with debt covenants.
- Capital and returns: Stockholders’ equity was $308.5 million. The company paid $0.90 per share in dividends during the first nine months and repurchased $20.6 million of stock during that period.
Material changes versus prior comparable periods
- Q3 revenue increased 17.9%, but net income declined 54.7%; for the first nine months, revenue rose 21.5% while net income fell 28.1%.
- Q3 provision for credit losses rose 84.2% year over year. The nine-month provision more than doubled, increasing 114.3%, reflecting higher net credit losses and allowance growth.
- Q3 net credit losses increased 132.3% to $35.8 million. Delinquency and losses rose as credit performance normalized and inflation affected some customers.
- Net finance receivables grew $293.4 million year over year, led by large loans, which increased 26.3%. Branch count decreased 9.1% to 338, while receivables per branch increased 34.6%.
- The company sold all interest-rate caps during 2022 and had no cap protection at September 30. It amended three credit facilities to transition from LIBOR to SOFR-based benchmarks effective October 1, 2022.
Outlook, commentary, risks, and unusual items
- Management outlook: Management said operating cash flows and financing alternatives should provide sufficient funding for maturities and operations over the next 12 months. It also described continued digital investment, branch optimization, and planned entry into one or two additional states over the following four months. The filing gives no quantified earnings or revenue guidance.
- Economic and credit risks: Management cited inflation, higher interest rates, geopolitical uncertainty, and pandemic-related uncertainty. It said higher-risk customer segments were particularly affected, and that it had tightened credit models and eliminated one digital affiliate and two direct-mail segments. The company noted that changing forecasts or credit performance could require further allowance and provision adjustments.
- Interest-rate exposure: A 100-basis-point increase in rates on revolving facilities outstanding at September 30 would increase annual interest expense by approximately $2.4 million, based on balances and rates at that date. The company no longer held interest-rate caps.
- Funding and contingencies: Warehouse and securitization revolving periods have maturities beginning in November 2022; management cautioned that extensions or future securitization funding are not assured. Ordinary-course legal proceedings are ongoing; management did not expect them to have a material adverse effect. The filing says there were no material changes to the previously reported risk factors.
- Subsequent events: In October 2022, the company completed a $200 million asset-backed note offering at a weighted-average rate of 7.51%. In November, it announced a $0.30-per-share dividend payable in December, subject to the Board’s continuing discretion.
Important facts for investors to verify
- Whether rising delinquency and net credit losses continue, and how actual losses compare with the $179.8 million allowance and its $19.0 million macroeconomic component.
- Whether portfolio growth, underwriting changes, and the exit from higher-risk acquisition segments improve credit performance without materially slowing originations or reducing yield.
- Availability, pricing, and refinancing prospects for revolving and warehouse funding, including the November 2022 facility transition and the October 2022 securitization’s 7.51% weighted-average rate.
- The effect of losing interest-rate-cap protection and of benchmark-rate changes on funding costs and earnings.
- Execution and costs associated with retail-loan discontinuation, branch optimization, digital investment, and expansion into new states.