Regional Management Corp. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 25, 2021. The company is a consumer installment lender operating as Regional Finance, with 365 branches in 11 states and approximately 410,300 active accounts at year-end. It primarily serves near-prime and non-prime borrowers through small, large, and retail loans, plus optional insurance products.
Financial results and key metrics
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Total revenue | $373.9 million | $355.7 million | +5.1% |
| Interest and fee income | $335.2 million | $321.2 million | +4.4% |
| Provision for credit losses | $123.8 million | $99.6 million | +24.3% |
| General and administrative expenses | $176.3 million | $157.0 million | +12.3% |
| Interest expense | $37.9 million | $40.1 million | -5.7% |
| Income before taxes | $35.9 million | $59.0 million | -39.1% |
| Net income | $26.7 million | $44.7 million | -40.2% |
| Diluted EPS | $2.40 | $3.80 | -36.8% |
- Net margin was approximately 7.1%, versus 12.6% in 2019. Operating expense ratio rose to 16.4% from 15.6%; interest and fee yield declined to 31.2% from 31.8% of average net receivables.
- Average net finance receivables increased 6.5% to approximately $1.074 billion. Year-end net finance receivables were $1.136 billion, up 0.3%. Large loans grew 13.2% to $715.2 million, while small loans declined 13.8% to $403.1 million.
- Net credit losses were $96.1 million, approximately 8.9% of average net receivables, compared with 9.5% in 2019. Contractual delinquency improved to 5.3% at year-end from 7.0%.
- The allowance for credit losses was $150.0 million, or 13.2% of net receivables. It included a $30.4 million COVID-related reserve.
- Operating cash flow was $172.6 million, versus $165.1 million. Investing used $98.8 million, mainly for net loan originations; financing used $58.3 million. Cash was $8.1 million, with an additional $63.8 million of restricted cash.
- Gross long-term debt was $768.9 million (net of issuance costs: $762.2 million); stockholders’ equity was $272.1 million. Funded debt-to-equity was 2.8:1. The company reported $194.4 million of immediate liquidity and $438.1 million of unused revolving-facility capacity, subject to borrowing-base and covenant conditions.
Prior-period comparison and fourth quarter
- Revenue increased, but earnings fell as credit-loss provision and operating expenses grew faster. The company attributed the higher provision primarily to the $30.4 million COVID reserve and higher portfolio losses; the average cost of debt fell to 5.19% from 5.77%.
- For Q4 2020, revenue was $97.4 million and net income was $14.3 million, compared with $98.0 million and $15.7 million in Q4 2019. Q4 2020 diluted EPS was $1.28, versus $1.38. Q4 provision for credit losses was $24.7 million.
- COVID disruption reduced loan demand in Q2; originations rebounded in the second half. Full-year net originations declined 16.3% to $1.068 billion. Year-end receivables increased $76.7 million in Q4, according to management.
Outlook, risks, and notable items
- No specific earnings or financial-target guidance is provided. Management expected demand to recover further as the economy reopened, while noting that stimulus could temporarily reduce borrowing demand and that unemployment, collections, defaults, and reserve estimates remained uncertain.
- Growth plans included continued digital and remote origination investment, increased marketing, expansion into Illinois in Q2 2021, and entry into additional states thereafter. Management also expected large loans to make up a larger portfolio share, potentially lowering overall yield.
- Key risks include borrower credit and repayment capacity, COVID-related economic effects, CECL forecast sensitivity, state and federal consumer-lending regulation, geographic concentration, competition, variable-rate funding and LIBOR transition, refinancing and securitization access, and reliance on technology and vendors.
- CECL adoption on January 1, 2020 increased the allowance by $60.1 million and reduced retained earnings by $45.9 million after tax. The adoption changed accounting estimates and presentation, not cash flows.
- Other unusual costs included $3.1 million of executive-transition costs, $0.7 million of system-outage costs, $1.2 million of COVID-related expenses, and $0.8 million of severance. A January 2020 technology event disrupted loan origination and some payment processing for about seven business days.
- After year-end, the company completed a $248.7 million securitization at a 2.08% weighted-average coupon, prepaid and terminated its RMIT 2018-2 securitization, and amended its senior revolving facility to provide additional flexibility for shareholder returns. The company also declared a $0.20 quarterly dividend; future dividends remain discretionary.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. The auditor issued unqualified opinions on the financial statements and internal controls; the allowance for credit losses was identified as a critical audit matter.
Important facts for investors to verify
- Whether low reported delinquency persists as pandemic assistance and stimulus effects fade, and whether the $150.0 million allowance adequately reflects eventual losses.
- How originations, portfolio mix, yields, and credit performance develop, particularly for the faster-growing large-loan portfolio and newer digital channels.
- Liquidity availability under borrowing-base and covenant limits, upcoming facility and securitization maturities, and the terms of subsequent funding transactions.
- Whether planned geographic expansion and technology investments deliver growth and operating leverage without weakening underwriting or controls.
- Dividend and repurchase capacity after considering debt covenants, liquidity needs, and the company’s credit-loss outlook.