Regional Management Corp. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The interim financial statements are unaudited. Regional Management is a consumer finance company operating as Regional Finance, with 347 branches in 19 states and 508,100 active accounts. It focuses on small and large installment loans and related optional insurance; it stopped accepting retail-loan applications in November 2022.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $133.5 million | $122.9 million | $268.9 million | $243.7 million |
| Provision for credit losses | $52.6 million | $45.4 million | $100.2 million | $76.3 million |
| Interest expense | $16.2 million | $7.6 million | $33.0 million | $7.5 million |
| Net income | $6.0 million | $12.0 million | $14.7 million | $38.8 million |
| Diluted EPS | $0.63 | $1.24 | $1.53 | $3.94 |
- Quarterly revenue increased 8.6%, while net income fell 49.7%. For the first half, revenue rose 10.3% and net income declined 62.0%.
- Quarterly interest and fee income rose 7.6% as average receivables grew 13.8%, but the annualized yield declined to 28.2% from 29.8%. Management attributed the yield decline to a shift toward larger, higher-quality loans and credit-related revenue reversals and nonaccrual loans, partly offset by pricing increases.
- General and administrative expense was $56.9 million in Q2, up 5.1%; its annualized ratio to average receivables improved to 13.6% from 14.7%. The efficiency ratio improved to 42.6% from 44.0%.
- Net income was 1.4% of average receivables in Q2, compared with 3.3% a year earlier; total revenue was 31.9% versus 33.4% on the same annualized basis.
- Six-month operating cash flow was $114.7 million, investing cash outflow $84.8 million, and financing cash outflow $20.3 million. Cash and restricted cash totaled $141.5 million at June 30.
Balance sheet, credit and liquidity
- Net finance receivables were $1.689 billion, up 10.7% year over year but down $10.5 million from December 31, 2022. Large loans grew 16.8% year over year to $1.238 billion; small loans declined 2.3% to $444.6 million, and retail loans declined 42.0% to $6.3 million.
- The allowance for credit losses was $181.4 million, or 10.7% of net receivables, versus $167.5 million and 11.0% a year earlier. Q2 included a $2.4 million allowance release; the comparable 2022 quarter included an $8.7 million build.
- Annualized net credit losses were 13.1% of average receivables in Q2, up from 10.0%; for the first half, they were 11.6% versus 9.4%. Contractual delinquency was 6.9% at quarter-end versus 6.2% a year earlier. Delinquency was 6.0% for large loans and 9.2% for small loans.
- Total debt was $1.345 billion and net debt $1.338 billion; stockholders’ equity was $321.5 million. Funded debt-to-equity was 4.2 to 1.0. Approximately 88.4% of debt was fixed-rate.
- Management reported $147.2 million of available liquidity, comprising unrestricted cash and immediate borrowing availability, plus $640.7 million of unused revolving-facility capacity subject to borrowing-base limits. Immediate availability to draw under the facilities was $136.9 million; unrestricted cash was $10.3 million.
- Debt covenants were met at June 30. The senior revolving facility matures in September 2024; management intends to extend it or otherwise address repayment. Certain warehouse and securitization revolving periods mature from September 2023 through September 2026.
Changes, outlook and risks
- Profitability weakened despite portfolio and revenue growth, chiefly reflecting sharply higher funding costs and credit losses. Q2 interest expense more than doubled year over year; average cost of debt increased to 4.90% from 2.65%. For the first half, average cost rose to 4.98% from 1.34%.
- Originations declined 6.4% in Q2 and 6.7% in the first half. Management cited tighter underwriting and reallocating labor to collections. Credit tightening in higher-risk customer segments has been maintained through the first half of 2023.
- Management expects operating cash flows and financing alternatives to support debt maturities and operations over the next 12 months, but cautioned that future facility extensions and additional securitizations are not assured. No specific earnings or revenue guidance was provided.
- Management cited inflation, rising interest rates, geopolitical uncertainty, and possible changes in economic forecasts or portfolio performance as risks to credit losses, liquidity and results. A hypothetical 10% increased weighting toward a moderate recession would have increased the June 30 allowance by $1.2 million; the company says this is not a forecast.
- A 100-basis-point rise in rates on revolving credit facilities outstanding at June 30 would add approximately $1.6 million to annual interest expense. The company no longer had interest-rate-cap protection as of September 2022.
- The CFPB notified the company in March 2023 that it was seeking supervisory authority. The company disputes the basis for supervision and is awaiting resolution; a decision in the CFPB’s favor could subject it to examinations.
- Legal matters arise in the ordinary course; management does not believe they will have a material adverse effect. The filing reports no material changes to the risk factors in the 2022 Form 10-K and no material internal-control changes.
- A $0.30-per-share quarterly dividend was declared in August 2023, payable September 14 to shareholders of record August 23. Future dividends remain at the board’s discretion. A $1.0 million insurance settlement received during the first half partly offset expense increases.
Important facts for investors to verify
- Whether rising delinquency and net credit losses persist, and how underwriting changes and economic forecasts affect the allowance and earnings.
- Whether receivables growth can offset lower yields, higher funding costs and elevated credit losses.
- Available borrowing capacity under borrowing-base tests, refinancing or extension plans for the September 2024 senior facility, and upcoming securitization revolving-period dates.
- The outcome and potential scope of the CFPB supervisory-authority proceeding.
- Whether liquidity, covenant compliance and cash generation continue to support dividends and planned growth.