Regional Management Corp. — Q1 2023 Form 10-Q
Period: Three months ended March 31, 2023; balance-sheet figures are as of March 31, 2023 unless noted. Financial statements are unaudited. Amounts below are in U.S. dollars.
Business context
Regional Management is a consumer finance company operating as Regional Finance, with 344 branches in 19 states and 508,200 active accounts. Its core products are secured small and large installment loans; it stopped taking applications for retail loans in November 2022 and continues to service the remaining portfolio. The company cited typical first-quarter seasonality in loan demand, while noting that inflation, higher interest rates and geopolitical events have affected seasonal patterns.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 or comparison |
|---|---|---|
| Total revenue | $135.4 million | $120.8 million; up 12.0% |
| Net income | $8.7 million | $26.8 million; down 67.6% |
| Diluted EPS | $0.90 | $2.67 |
| Interest and fee income | $120.4 million | $107.6 million; average receivables grew 18.0%, while annualized yield declined to 28.5% from 30.0% |
| Provision for credit losses | $47.7 million | $30.9 million |
| General and administrative expenses | $59.3 million | $55.1 million |
| Interest expense | $16.8 million | Compared with a $0.1 million benefit in Q1 2022 |
| Net credit loss ratio | 10.1% | 8.7% |
| 30+ day contractual delinquency | 7.2% | 5.7% |
| Allowance for credit losses | $183.8 million; 11.0% of net finance receivables | $178.8 million at December 31, 2022 |
| Operating cash flow | $52.6 million | $45.8 million |
| Cash and restricted cash | $134.3 million | $131.8 million at December 31, 2022; includes $127.2 million restricted |
| Total debt | $1.330 billion gross; $1.321 billion net of issuance costs | $1.355 billion gross at December 31, 2022 |
At quarter-end, management reported $182.0 million of available liquidity, comprising $7.1 million unrestricted cash and $174.9 million of immediate facility availability. Unused revolving facility capacity, subject to borrowing-base limits, was $580.7 million. Funded debt-to-equity was 4.2 to 1.0 and the equity-to-assets ratio was 18.6%. Management reported compliance with all debt covenants. Approximately 89.4% of debt was fixed-rate; a 100-basis-point increase in rates on revolving facilities would raise annual interest expense by an estimated $1.4 million.
Material changes and management commentary
- Net income fell despite higher revenue, chiefly reflecting an $16.8 million increase in interest expense and a $16.8 million increase in credit-loss provision. The prior-year comparison included a $10.2 million fair-value benefit from interest-rate caps; the company no longer held those caps after September 2022.
- Portfolio growth was concentrated in large loans: total net finance receivables rose 15.9% year over year to $1.676 billion, with large loans up 21.5% and small loans up 4.1%. Retail loans declined 24.4%. Originations fell 7.0% year over year to $303.2 million, which management attributed to credit tightening and reallocating labor to collections.
- Management attributed higher credit losses and delinquency primarily to portfolio growth, inflation and broader macroeconomic conditions. The allowance increased by $5.0 million during the quarter. A hypothetical 10% higher weighting toward a moderate-recession scenario would have increased the allowance by $1.2 million; management cautioned this is not a forecast.
- Management said it has tightened credit models, particularly for higher-risk, higher-rate segments, and expects to continue adapting to economic conditions. It cited digital and mobile origination and servicing, branch optimization, and expansion into Arizona as operating priorities. It provided no specific numerical earnings or revenue guidance.
- Management believed operating cash flows and financing alternatives would support operations and debt maturities over the next 12 months, while warning that extensions or replacement financing for facilities and securitizations are not assured. The senior revolving facility matures in September 2024; the RMIT 2020-1 revolving period ends in September 2023.
Risks, contingencies and subsequent events
- On March 7, 2023, the CFPB notified the company that it was seeking supervisory authority. The company disputed the basis for supervision and submitted a response; the matter remained unresolved at filing. If granted, CFPB supervision could include examinations.
- The company is involved in ordinary-course legal proceedings. It said it did not expect known matters to materially adversely affect financial condition, liquidity or results, but noted that some potential losses may be difficult to estimate.
- In April 2023, the company entered into a new $75 million RMR VII warehouse facility and extended the RMR IV facility’s conversion date to May 2023. In May, the board declared a $0.30-per-share dividend, payable June 14, 2023. Future dividends remain at the board’s discretion.
- The company adopted the new loan-modification disclosure standard on January 1, 2023; adoption did not materially affect its financial statements.
Important facts for investors to verify
- Whether rising delinquency and net credit losses continue, and whether subsequent allowance changes reflect portfolio performance or revised economic forecasts.
- How funding costs and the loss of the prior-year interest-rate-cap benefit affect earnings, including refinancing plans for the September 2024 senior facility and near-term securitization revolving-period expirations.
- The outcome of the CFPB’s supervisory-authority process and any resulting examination, compliance costs or other consequences.
- Whether loan growth, originations, yields and credit quality develop as management’s tightening and digital growth initiatives intend; confirm the effect of the retail-loan wind-down and Arizona expansion.
- Whether the reported $182.0 million immediate liquidity remains available under borrowing-base and facility terms, and whether future dividends remain supportable.