Regional Management Corp. — Q3 2021 Form 10-Q
Business context and period: Consumer finance company operating as Regional Finance, with 372 branches in 13 states and 435,800 active accounts at September 30, 2021. It primarily provides small and large installment loans, plus retail loans and optional insurance products. This unaudited quarterly report covers the three and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods unless noted.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $111.5m | $90.5m | $308.9m | $276.5m |
| Net income | $22.2m | $11.2m | $67.9m | $12.4m |
| Diluted EPS | $2.11 | $1.01 | $6.29 | $1.11 |
| Provision for credit losses | $26.1m | $22.1m | $58.0m | $99.1m |
| General and administrative expenses | $47.8m | $43.8m | $140.0m | $131.5m |
| Interest expense | $8.8m | $9.3m | $23.8m | $28.6m |
- Q3 comparison: Revenue rose 23.1% and net income 97.7%. Higher revenue (+$20.9m) and lower interest expense (+$0.5m benefit) more than offset increased credit-loss provision (+$4.0m), G&A (+$4.0m), and taxes (+$2.4m).
- Nine-month comparison: Revenue rose 11.7% and net income increased to $67.9m from $12.4m. The improvement reflected higher revenue, a $41.1m reduction in credit-loss provision, and lower interest expense, partly offset by higher G&A and taxes.
- Revenue and operating metrics: Q3 interest and fee income was $99.4m, up 22.2%, principally from a 20.3% increase in average receivables and a 0.5 percentage-point increase in annualized yield to 32.0%. Net insurance income was $9.4m, up 37.3%. Q3 efficiency ratio was 42.8% and operating expense ratio 15.4%; annualized net credit loss ratio was 5.0%, versus 7.8% a year earlier.
- Portfolio and credit: Finance receivables were $1.314bn at September 30, up 24.0% year over year; large loans grew 34.5% to $882.5m and small loans 9.6% to $419.6m. Allowance for credit losses was $150.1m, or 11.4% of finance receivables, including $15.5m attributed to expected COVID-19 impacts. Contractual delinquency was 4.7%, flat year over year but up from 3.6% at June 30, 2021.
- Balance sheet and debt: Total assets were $1.314bn, reported debt $978.8m (net of issuance costs, $968.7m), and stockholders’ equity $277.5m. Funded debt-to-equity was 3.5:1 and equity was 21.1% of assets. Cash was $8.1m and restricted cash $104.0m. Management reported $194.0m of immediate liquidity and $721.6m of unused revolving-facility capacity, subject to borrowing-base requirements.
- Cash flow, nine months: Operating activities provided $136.0m; investing activities used $230.5m, largely for $226.3m of net finance-receivable originations; financing activities provided $134.7m. Cash and restricted cash ended at $112.1m. The company repurchased $56.0m of stock and paid $7.2m of cash dividends.
Material changes and management commentary
- Originations increased 34.6% in Q3 to $420.7m and 43.6% for the first nine months to $1.033bn. Growth, particularly in large loans, drove receivables and interest income higher.
- Credit-loss provision fell substantially year to date versus 2020, which included the CECL adoption impact and COVID-related reserve build. In 2021, the allowance included a $14.9m COVID reserve release over nine months and a $15.0m general build associated with portfolio change. Management’s forecast assumed 7% unemployment at year-end 2021.
- Management cited tightened underwriting, stronger credit performance, and stimulus-supported customer conditions; it also linked the recent rise in delinquency to declining pandemic-related government stimulus. It warned that changed economic forecasts or portfolio performance could materially change the allowance and provision.
- The company opened branches in Illinois and Utah in 2021 and expected to enter five to seven additional states by the end of 2022. After quarter-end, it closed 31 branches in October and November as part of branch-network optimization.
- Funding included $249m and $200m asset-backed note offerings completed earlier in 2021. After quarter-end, the company completed a further $125m securitization, with a fixed 3.875% rate. Management said operating cash flow and borrowing capacity should fund the business for the next 12 months, while noting refinancing and funding availability are not assured.
Outlook, risks, contingencies, and unusual items
- No specific earnings or revenue guidance was provided. Management described continued portfolio growth and expansion, with large-loan growth expected to continue; it cautioned that product mix could reduce overall interest and fee yield over time.
- The senior revolving credit facility matures in September 2022; management intended to extend it or take other appropriate action. Warehouse and securitization revolving periods have varying maturities. The company was in compliance with debt covenants at September 30, 2021.
- Interest-rate exposure includes variable-rate facilities and fixed-rate customer loans. About 77.6% of debt was fixed-rate. The filing estimates a 100-basis-point increase in facility reference rates would add approximately $1.0m of annual interest expense before the stated effect of interest-rate caps; it estimates cap coverage would reduce expense by approximately $2.5m annually.
- A significant risk is convenience-check origination: the check-issuing bank notified the company it plans to exit that business. The company was transitioning issuers but gave no assurance of a timely, complete transition. Disruption could affect loan originations; the filing also cites underwriting, fraud, data/privacy, and third-party processing risks.
- COVID-19 effects remain uncertain, including possible changes in demand, delinquency, economic forecasts, and customer assistance. The company also cited temporary branch closures due to quarantine measures.
- The company disclosed ordinary-course legal proceedings and stated management did not expect them, when resolved, to materially adversely affect financial condition, liquidity, or results. It also described possible legal losses that may be difficult to estimate. No other material risk-factor changes were reported apart from the convenience-check risk.
- Shareholder returns included a $50m repurchase authorization; $56.0m of shares were repurchased in the first nine months, including $22.0m in Q3. The board declared a $0.25-per-share dividend after quarter-end, payable December 15, 2021; future dividends remain discretionary.
Important facts for investors to verify
- Progress and terms of the replacement convenience-check issuer, and any impact on originations, acquisition costs, or credit quality.
- Whether delinquency and net credit losses rise as stimulus effects fade, and whether the $150.1m allowance and $15.5m COVID-related reserve remain adequate under updated forecasts.
- Availability and cost of funding, the September 2022 senior-facility maturity plan, borrowing-base capacity, and future securitization access.
- Receivables growth, especially large-loan mix, and its impact on yield, risk, operating leverage, and branch economics; also verify the effects of the 31 post-quarter branch closures.
- Use of capital for growth, repurchases, and dividends, including compliance with debt covenants and the board’s discretion over future distributions.