Regional Management Corp. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2020; comparisons are with the third quarter and nine months ended September 30, 2019. Amounts are in U.S. dollars; financial statement figures are generally in millions unless noted.
Business context
Regional Management is a consumer finance company operating as Regional Finance, with 368 branches in 11 states and approximately 397,900 active accounts. It offers small, large and retail installment loans, plus optional insurance products. Small and large installment loans are its core products; it stopped originating automobile purchase loans in 2017.
Financial and operating results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $90.5 | $91.7 | $276.5 | $257.7 |
| Net income | $11.2 | $12.6 | $12.4 | $29.0 |
| Diluted earnings per share | $1.01 | $1.08 | $1.11 | $2.44 |
| Provision for credit losses | $22.1 | $24.5 | $99.1 | $73.6 |
| General and administrative expenses | $43.8 | $40.2 | $131.5 | $116.1 |
| Interest expense | $9.3 | $10.3 | $28.6 | $29.8 |
- Q3 profitability and margins: Net income fell 10.6% year over year. Annualized interest-and-fee yield was 31.5%, down from 32.1%; the operating expense ratio was 17.0%, up from 15.5%; and the net credit loss ratio was 7.8%, down from 8.1%. Net income was 12.4% of revenue.
- Year-to-date profitability: Net income declined 57.4%, despite revenue growth of 7.3%. The annualized operating expense ratio rose to 16.4% from 15.8%; the net credit loss ratio was 9.7% in both periods.
- Revenue mix: Q3 interest and fee income declined 2.1% to $81.3 million, while net insurance income increased 34.9% to $6.9 million and other income declined 32.9% to $2.4 million. For the nine months, interest and fee income rose 6.4% and insurance income rose 43.4%.
- Portfolio and credit: Net finance receivables were $1.060 billion at September 30, down 0.7% year over year but up $36.9 million, or 3.6%, from June 30. Large loans rose 14.1% year over year; small loans fell 15.7%. Contractual delinquency of 30 or more days was 4.7%, versus 6.5% a year earlier. The allowance was $144.0 million, or 13.6% of receivables, including $31.9 million of COVID-related reserves.
- Cash flow: For the first nine months, operating cash flow was $125.1 million, investing cash outflow was $6.6 million and financing cash outflow was $112.5 million. Cash and restricted cash totaled $62.5 million at quarter-end, including $4.3 million of unrestricted cash.
- Debt and liquidity: Long-term debt was $700.1 million gross, or $691.5 million net of issuance costs, versus $808.2 million gross at year-end 2019. Management reported $193.4 million of immediate liquidity and $506.8 million of unused revolving-facility capacity, subject to borrowing-base limits. Funded debt-to-equity was 2.6-to-1; the company was in compliance with debt covenants.
Changes, outlook and risks
- CECL adoption: Effective January 1, 2020, the new expected-credit-loss standard increased the allowance by $60.1 million and reduced retained earnings by $45.9 million after tax. The adoption was noncash and did not breach debt covenants. COVID-related reserves added $31.9 million during the first nine months; portfolio liquidation reduced the base allowance by $10.2 million.
- COVID-19 and operating outlook: Originations and demand fell sharply in the second quarter and partially recovered in the third; September originations were $109.4 million, up 6.9% year over year. Management does not expect typical portfolio growth in Q4 2020 and expects the operating expense ratio to remain elevated until receivables return to pre-pandemic levels. It expects increased marketing spend in Q4. No earnings or revenue guidance was provided.
- Credit outlook: Management’s forecast assumed elevated unemployment in 2020, declining gradually to 9% by the end of 2021. It cautioned that further changes in economic assumptions, assistance-program effectiveness or borrower performance could alter reserves and credit-loss expense. Future collections slowdowns and defaults remain risks.
- Funding and rates: A $180 million asset-backed securitization closed in September 2020, with a three-year revolving period and 2.85% weighted-average coupon. Management stated liquidity should be sufficient through 2021 without accessing the securitization market. About 62.9% of long-term debt was fixed-rate; variable-rate facilities reference LIBOR, which was expected to be phased out by the end of 2021.
- Unusual costs and management changes: Year-to-date expenses included $3.1 million of executive transition costs, $0.7 million of system outage costs, $1.0 million of COVID-related customer communications and protective measures, and $0.8 million of severance. The filing describes several senior leadership changes; the incoming CFO was expected to start around November 23, 2020.
- Subsequent events: In October, the company amended its senior revolving facility and RMIT 2019-1 documents. The Board authorized up to $30 million of share repurchases through October 22, 2022 and declared an initial quarterly dividend of $0.20 per share, payable December 4, 2020. Future repurchases and dividends are discretionary and subject to liquidity, debt covenants and other restrictions.
- Other disclosures: Management reported effective disclosure controls and no material change in internal control over financial reporting. The company is involved in ordinary-course legal proceedings and said it did not expect them to have a material adverse effect; outcomes remain uncertain.
Key facts for investors to verify
- Whether low reported delinquency persists as government support and borrower assistance effects evolve, and whether the $31.9 million COVID reserve proves adequate.
- Whether portfolio growth, originations and loan mix recover as expected, and how growth affects yield, operating costs and credit performance.
- Availability of revolving-facility capacity under borrowing-base conditions, upcoming facility and securitization revolving-period dates, and LIBOR-transition terms.
- Whether the announced dividend and share repurchase program proceed within liquidity and contractual constraints.
- The effect of leadership transitions and identified nonrecurring expenses on future operating performance.